UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) APRIL 21, 1997
CCB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 0-12358 56-1347849
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
111 CORCORAN STREET, POST OFFICE BOX 931, DURHAM, NC 27702
(Address of principal executive offices)
Registrant's telephone number, including area code (919) 683-7777
N/A
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
MERGER WITH AMERICAN FEDERAL. On February 17, 1997, Registrant and
American Federal Bank, FSB ("American Federal"), Greenville, South Carolina,
entered into a definitive agreement under which American Federal would be merged
into and with Registrant. The transaction is anticipated to close early in the
third quarter of 1997. American Federal files its Annual Report on Form 10-K and
other informational reports required to be filed under the Securities Exchange
Act of 1934 with the Office of Thrift Supervision. This Form 8-K has been filed
with the Securities and Exchange Commission (the "Commission") to make American
Federal's 1996 Annual Report on Form 10-K available to the Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
Exhibit 99.1 American Federal Bank, FSB Annual Report on Form 10-K.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
CCB FINANCIAL CORPORATION
Date: April 21, 1997 By: /s/ W. HAROLD PARKER, JR.
-------------------------
W. Harold Parker, Jr.
Senior Vice President and Controller
3
<PAGE>
OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the transition period from to
Office of Thrift Supervision Docket No. 1872
AMERICAN FEDERAL BANK, FSB
(Exact name of registrant as specified in its charter)
UNITED STATES 57-0162590 .
(State or other jurisdiction of Employer Identification No.) (IRS
incorporation or organization)
300 EAST MCBEE AVENUE, GREENVILLE, SOUTH CAROLINA 29601
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (864) 255-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $1.00 Nasdaq National Market System
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes (X)
No ( ).
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of 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. ( ).
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 14, 1997.
Common stock, $1.00 par value -- $318.3 million based upon the
closing price on March 14, 1997, using beneficial ownership of stock
rules adopted pursuant to Section 13 of the Securities Exchange Act of
1934 to exclude voting stock owned by directors and certain executive
officers, some of whom may not be held to be affiliates upon judicial
determination.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 14, 1997.
1
<PAGE>
Common Stock, $1.00 par value -- 11,031,535 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the American Federal 1996 Annual Report to
Shareholders (American Federal 1996 Annual Report) are incorporated by
reference into Parts I, II, and IV.
The Proxy Statement for registrant's 1997 Annual Meeting of
Shareholders (1997 Proxy Statement), to be filed by registrant pursuant
to Regulation 14A within 120 days of the end of the registrant's fiscal
year, is incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
American Federal Bank, FSB (American Federal or the Bank), began
in 1921 as a state-chartered mutual building and loan association,
converted to a federal savings and loan association in 1936, and
ultimately converted to a federal stock savings bank pursuant to a
mutual-to-stock conversion (the 1989 Conversion) in January, 1989.
American Federal, a federally-chartered stock savings bank
headquartered in Greenville, South Carolina, has 40 branch offices
located in the northwestern part of South Carolina. The Bank's market
includes eight Upstate counties of: Greenville, Spartanburg, Cherokee,
Oconee, Pickens, Anderson, Laurens, and Union, and four adjacent
counties in the Midlands Region of South Carolina: Greenwood,
McCormick, Saluda and Lexington. In addition, the Bank's subsidiary,
Finance South, Inc. (Finance South), operates a network of 17 consumer
finance offices located in the Upstate. Through its branch operations
and consumer finance subsidiary, the Bank provides a wide variety of
retail and commercial loan and deposit products.
At December 31, 1996, the Bank had total assets of approximately
$1.32 billion, deposits of $986.8 million, and stockholders' equity of
$115.6 million. The Bank's franchise is principally (32 of 40 branch
offices) located in the Greenville-Spartanburg-Anderson MSA, the
largest MSA in South Carolina. In addition to being a center for the
textile and apparel manufacturing industries, the Greenville area has
prospered in recent years through diversification in the service and
trade industries and within the manufacturing sector. Rubber and metal
fabricators, chemical and electronics plants, plastics operations,
computer manufacturing, and pharmaceutical manufacturing are now among
its major industries. Automotive parts manufacturing is another growing
industry since the 1994 startup of a BMW auto assembly plant in
Spartanburg. The Midlands Region of the state is characterized by
stable communities with agriculture, manufacturing, recreation and
retirement activities.
In February 1997, a definitive agreement was signed to merge with
CCB Financial Corporation ("CCB") which is headquartered in Durham,
North Carolina. Under the agreement, American Federal shareholders will
receive .445 shares of CCB common stock in exchange for each share of
American Federal common stock. This transaction, which is structured as
a tax-free pooling of interests, is valued at $325.1 million based on
the exchange ratio and the five day average closing price of CCB
through Friday, February 14, 1997, of $64.85. The transaction is
subject to regulatory and shareholder approval and is expected to be
completed by the third quarter of 1997.
2
<PAGE>
In addition to the agreement with CCB, the Bank entered into a
definitive agreement to sell substantially all of the assets of Finance
South to Kentucky Finance Co., Inc. This sale is also subject to
regulatory approval and is expected to be completed in the second
quarter of 1997.
American Federal's objective is to develop a diversified loan
portfolio that is responsive to changes in interest rates. At December
31, 1996, the Bank had $264.2 million (21.0% of earning assets)
invested in conventional (i.e., one-to-four family residential) first
mortgage loans, $338.9 million (26.9% of earning assets) invested in
consumer loans, $145.3 million (11.5% of earning assets) invested in
commercial mortgages, and $100.1 million (8.0% of earning assets)
invested in commercial loans. Also as of that date, the Bank had $342.3
million (27.2% of earning assets) invested in securities available for
sale. Substantially all of the Bank's loans are concentrated in South
Carolina and the adjoining states. See "Selected Consolidated Financial
Data" and the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the American Federal 1996 Annual Report.
The Bank's principal executive offices are located at 300 East
McBee Avenue, Greenville, South Carolina 29601, and its telephone
number is (864)255-7000.
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
1996 1995 1994 1993 1992
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA:
Total interest income $103,992 $99,558 $86,369 $79,768 $87,206
Total interest expense 50,009 50,905 39,720 34,774 45,105
Net interest income 53,983 48,653 46,649 44,994 42,101
Provision for loan losses 4,338 2,279 1,432 1,233 3,451
Noninterest income 15,661 12,968 8,852 7,601 9,330
Noninterest expenses 43,014 34,600 31,466 31,002 29,433
Income before income taxes 22,292 24,742 22,603 20,360 18,547
Income taxes 7,800 6,502 7,072 7,907 7,046
Income before extraordinary item and cumulative
effect of changes in accounting principles 14,492 18,240 15,531 12,453 11,501
Extraordinary item - (1,709) - - -
Cumulative effect of changes in accounting principles - - - (35,178) -
Net income (loss) 14,492 16,531 15,531 (22,725) 11,501
-----------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Earnings per share
Primary:
Income before extraordinary item and cumulative
effect of changes in accounting principles $1.28 $1.60 $1.37 $1.25 $1.87
Net income (loss) 1.28 1.45 1.37 (2.28) 1.87
Fully Diluted:
Income before extraordinary item and cumulative
effect of changes in accounting principles 1.28 1.60 1.37 1.19 1.48
Net income (loss) 1.28 1.45 1.37 (2.17) 1.48
Dividends per share .37 .28 .22 .10 -
Weighted average shares:
Primary: 11,287 11,425 11,308 9,967 6,577
Fully Diluted: 11,316 11,438 11,308 10,485 8,324
-----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $1,318,400 $1,345,884 $1,254,418 $1,112,009 $1,039,518
Mortgage-backed securities 310,526 437,561 453,452 368,612 167,119
Loans receivable, net 837,855 805,365 717,232 664,291 679,929
Deposits 986,780 977,957 835,364 826,820 821,158
Federal Home Loan Bank Advances 87,001 102,001 163,516 104,691 96,814
Other borrowed money 110,258 134,983 144,095 80,708 29,572
Stockholders' equity 115,592 109,792 93,358 81,735 76,065
-----------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Performance ratios:
Return on average assets 1.07% 1.28% 1.30% 1.22% 1.07%
Return on average assets excluding SAIF assessment 1.34 - - - -
Return on average stockholders' equity 13.10 16.14 17.61 17.70 16.40
Return on average stockholders' equity
excluding SAIF assessment 16.37 - - - -
Net yield on average earning assets 4.22 3.98 4.12 4.71 4.38
Average interest-earning assets to average
interest-bearing liabilities 108.63 108.12 107.65 106.37 101.53
Efficiency ratio 62.05 56.22 55.32 57.46 57.84
Efficiency ratio excluding SAIF assessment 54.03 - - - -
Asset quality ratios:
Net chargeoffs to average net loans .47 .15 .11 .16 .44
Nonperforming assets to total assets .48 .71 .50 .73 1.25
Allowance for loan losses to net loans 1.26 1.25 1.25 1.26 1.20
Allowance for loan losses to nonperforming loans 201.35 116.07 165.77 115.10 110.49
Regulatory capital ratios:
Tangible 8.08 7.42 7.57 7.35 3.41
Tier 1 leverage ratio 8.08 7.42 7.57 7.35 4.41
Tier 1 risk-based 13.26 13.10 13.97 12.92 7.16
Risk-based 14.51 14.35 15.21 14.17 8.41
-----------------------------------------------------------------------------------------------------------------
OTHER DATA:
Number of banking offices 40 41 35 33 33
Number of deposit accounts 233,530 224,169 193,294 185,241 178,066
Number of loans 64,127 88,129 51,534 44,298 43,857
</TABLE>
4
<PAGE>
MARKET
American Federal's market area currently includes the twelve
counties of Greenville, Spartanburg, Pickens, Anderson, Cherokee,
Oconee, Union, Laurens, Greenwood, McCormick, Saluda and Lexington,
South Carolina. The Greenville-Spartanburg-Anderson MSA, where 32 of
the Bank's 40 offices are located, has the largest population of any
MSA in South Carolina. The area's economy has prospered over the past
two decades through diversification in the service and trade industries
and expansion of the manufacturing sector. Additionally, rubber and
metal fabricators, chemical and electronics plants, plastics
operations, automotive parts, computer and pharmaceutical manufacturing
are now among its major industries. The location of Greenville and
Spartanburg counties, midway between Atlanta, Georgia and Charlotte,
North Carolina on Interstate 85, and a population of five million
people within a 100-mile radius, have made the area a popular location
for major warehouses and distributors, as well as corporate and
divisional headquarters for over 130 companies.
DESCRIPTION OF CAPITAL STOCK
American Federal's Charter authorizes the issuance of 50,000,000
shares of Common Stock, $1.00 par value per share, and 10,000,000
shares of serial preferred stock, which may be issued in series with
such powers, designations, and rights as may be established from time
to time by the Board of Directors.
COMMON STOCK. Holders of Common Stock possess exclusive voting
rights in American Federal, except to the extent that shares of any
series of preferred stock may have voting rights. Each holder of Common
Stock is entitled to one vote for each share held of record on all
matters submitted to a vote of holders of Common Stock. Holders of
Commpn Stock have cumulative voting rights for the election of
directors.
Holders of Common Stock are entitled to dividends if, as, and when
declared by the Board of Directors, from funds legally available
therefor, but only after payment of all required dividends on any
outstanding shares of any series of preferred stock issued in the
future. In the event of the complete liquidation or dissolution of
American Federal, the holders of Common Stock will be entitled to
receive all assets of American Federal available for distribution in
cash or in kind, after payment or provision for payment of (i) all
debts and liabilities of American Federal (including all savings
accounts and accrued interest thereon), (ii) any accrued dividend
claims, (iii) liquidation preferences of any series of preferred stock
issued in the future, and (iv) any interests in the Liquidation Account
established in the 1989 Conversion.
Shares of Common Stock are not redeemable and do not have any
conversion rights. Holders of Common Stock do not have preemptive
rights to purchase or subscribe for any additional shares of Common
Stock which may be issued.
PREFERRED STOCK. The Board of Directors of American Federal,
without further action by the stockholders, is authorized to issue
10,000,000 shares of serial preferred stock, in one or more series and
with such terms, at such times, and for such consideration as the Board
may determine. The Board's authority includes the determination or
fixing of the following matters with respect to shares of serial
preferred stock or any series thereof: (i) the designation and number
of shares of a particular series; (ii) rights as to dividends; (iii)
voting rights, if any; (iv) the terms upon which shares will be
redeemable; (v) the amount payable upon the shares in the event of
liquidation, dissolution, or winding-up of the Bank; (vi) the sinking
fund provisions, if any, for the redemption or purchase of the shares;
(vii) whether and upon what terms the shares will be convertible or
exchangeable for shares of
5
<PAGE>
any other class of stock of the Bank; and (viii) the price or other
consideration for which the shares may be issued. At December 31, 1996,
the Bank had no preferred stock outstanding.
6
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST
RATES AND INTEREST DIFFERENTIALS
The information contained under the sections captioned
"Asset/Liability Management and Changes in Financial Condition and Net
Interest Income" included in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the American Federal 1996 Annual Report, is incorporated
herein by reference. Net interest income can be analyzed in terms of the
impact of changing rates and volume. The table below demonstrates the
extent to which changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities have affected
the Bank's interest income and interest expense. Information is provided
on changes in each category attributable to (i) changes due to volume
(changes in volume multiplied by prior period rate), (ii) changes due to
rate (changes in rate multiplied by prior period volume), and (iii)
changes in rate and volume (changes in rate multiplied by changes in
volume).
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
----------------------------------------------------------------------
Increase/Decrease Due to Increase/Decrease Due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage-backed securities $ (1,095) (1,342) 52 (2,385) (53) 2,130 (4) 2,073
Loans:
Residential mortgage (1,022) 345 (16) (693) 381 127 2 510
Commercial mortgage 5 (360) - (355) 2,003 774 167 2,944
Consumer 5,679 17 3 5,699 5,448 732 179 6,359
Commercial 1,069 (255) (39) 775 515 416 77 1,008
--------------------------------------- ---------------------------------
5,731 (253) (52) 5,426 8,347 2,049 425 10,821
Other securities and
interest-bearing deposits (1) 1,483 (55) (35) 1,393 60 209 26 295
--------------------------------------- --------------------------------
Total interest income 6,119 (1,650) (35) 4,434 8,354 4,388 447 13,189
--------------------------------------- --------------------------------
Interest expense:
Deposits:
Passbooks 306 (101) (16) 189 296 65 13 374
Money market accounts (132) (7) - (139) (334) 149 (16) (201)
Certificates 1,685 67 4 1,756 2,162 5,248 549 7,959
Transaction accounts 345 (275) (49) 21 254 (92) (13) 149
--------------------------------------- ---------------------------------
2,204 (316) (61) 1,827 2,378 5,370 533 8,281
--------------------------------------- --------------------------------
Borrowings:
FHLB advances (2,821) (1,132) (96) (4,049) 591 283 12 886
Repurchase agreements and
other collateralized borrowings 1,865 (428) (111) 1,326 31 1,975 12 2,018
----------------------------------- ---------------------------------
(956) (1,560) (207) (2,723) 622 2,258 24 2,904
---------------------------------------- ---------------------------------
Total interest expense 1,248 (1,876) (268) (896) 3,000 7,628 557 11,185
---------------------------------------- ---------------------------------
Net interest income $ 4,871 226 233 5,330 5,354 (3,240) (110) 2,004
======================================== =================================
</TABLE>
(1) Includes short-term interest-bearing deposits, federal funds sold,
securities purchased under agreements to resell, securities available for sale
and FHLB and FHLMC stock.
<PAGE>
INTEREST SENSITIVITY ANALYSIS
The following table illustrates the repricing analysis of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1996. For purposes of the table, repricing characteristics of loans include
estimated annual prepayment rates. The Bank's balances in NOW and commercial
deposits have historically shown low sensitivity to movements in interest rates.
NOW accounts are grouped in deposits maturing or repricing after five years,
while the commercial deposits are shown as non-interest sensitive assets.
<TABLE>
<CAPTION>
Greater
than After 1 After 3
6 months year but years but
6 months through within within After Noninterest
or less 1 year 3 years 5 years 5 years Sensitive Total
-------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment securities (1) $ 61,267 2,867 3,990 23,961 - - 92,085
Loans and mortgage-backed securities:
Mortgage 257,839 157,524 159,202 63,100 80,194 2,192 720,051
Other 147,851 51,484 128,704 76,181 32,963 1,856 439,039
Allowance for possible loan losses - - - - - (10,710) (10,710)
-------- -------- -------- -------- ------ ------- --------
Total loans and mortgage-backed
securities 405,690 209,008 287,906 139,281 113,157 (6,662) 1,148,380
Noninterest sensitive assets (2) - - - - - 77,935 77,935
-------- -------- -------- -------- ----- ------- -------
Total assets $ 466,957 211,875 291,896 163,242 113,157 71,273 1,318,400
======= ======= ======= ======= ======= ====== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Passbook and transaction 7,224 6,610 22,136 15,249 222,328 37,607 311,154
Money market 105,178 - - - - - 105,178
Certificates 299,995 140,517 104,738 23,361 2,357 - 570,968
------- ------- ------- ------ -------- -------- --------
Total deposits 412,397 147,127 126,874 38,610 224,685 37,607 987,300
Borrowings:
FHLB advances 61,400 25,000 - - 601 - 87,001
Other borrowings 70,258 - 40,000 - - - 110,258
-------- -------- -------- -------- ------ ------- -------
Total borrowings 131,658 25,000 40,000 - 601 - 197,259
Noninterest sensitive liabilities - - - - - 18,249 18,249
Stockholders' equity - - - - - 115,592 115,592
-------- -------- -------- -------- ------- -------- --------
Total liabilities and stockholders'
equity $ 544,055 172,127 166,874 38,610 225,286 171,448 1,318,400
======= ======= ======= ======== ======= ======== =========
Interest rate sensitivity gap $ (77,099) 39,748 125,022 124,633 (112,129)
Cumulative sensitivity gap (77,099) (37,351) 87,671 212,304 100,175
Percent of gap to total assets:
Period (5.85)% 3.01 9.48 9.45 (8.50)
Cumulative (5.85) (2.83) 6.65 16.10 7.60
Percent of interest sensitive assets
to interest sensitive liabilities:
Period 85.83% 123.09 174.92 422.80 50.23
Cumulative 85.83 94.78 109.93 123.03 108.73
Percent of interest sensitive assets
to total assets:
Period 35.42% 16.07 22.14 12.38 8.58
Cumulative 35.42 51.49 73.63 86.01 94.59
</TABLE>
(1) Includes short-term interest-bearing deposits, FHLB stock and FHLMC stock.
(2) Primarily consists of non-earning cash of $38.1 million, premises and
equipment of $17.5 million, accrued interest receivable of $8.7 million, real
estate acquired in settlement of loans $954,000, and other assets of $2.9
million.
9
<PAGE>
LENDING ACTIVITIES
At December 31, 1996, American Federal's total loans, net of allowance for
possible loan losses, were $837.9 million, representing approximately 63.6% of
total assets. Consistent with management's objective to develop a diversified
loan portfolio that is responsive to changes in interest rates, the Bank has
concentrated on originating residential, commercial, consumer, and consumer
finance loans and credit lines. During 1990, American Federal began an active
program of converting residential mortgage loans into government-guaranteed
mortgage-backed securities. Securitization minimizes the credit risk and reduces
the required level of risk-based capital under the risk-based capital
regulations of the Office of Thrift Supervision (OTS). See Item 1. --
Supervision and Regulation -- OTS Capital Requirements.
With the enactment of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), the loans-to-one borrower limits applicable to
the Bank significantly changed and are now the same as those applicable to
national banks. At December 31, 1996, the Bank's loans-to-one borrower limit was
$17.5 million. FIRREA also limits nonresidential real property loans to 400% of
an institution's capital. Based on the present interpretation of the capital
definitions, American Federal's nonresidential real property loan portfolio at
December 31, 1996 was $320.3 million less than this limit. See Item 1. Business
- -- Supervision and Regulation -- Federal Savings Institution Regulation--Loans
to One Borrower.
Current regulations permit federal savings and loan associations to invest
up to 35% of assets in consumer loans. Secured or unsecured loans for
commercial, corporate, business, and agricultural purposes may be made in an
aggregate amount up to 10% of assets. However, some or all of these lending
authorities may be constrained by savings institution eligibility tests for
regulatory and income tax purposes.
The qualified thrift lender (QTL) test applicable to all savings
associations, as modified by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), requires that a savings institution's
qualified thrift investments equal or exceed 65% of the savings institution's
portfolio assets. See Item 1. Business -- Supervision and Regulation -- Federal
Savings Institutions--Qualified Thrift Lender Test for the discussion of
provisions of the QTL test. Under the current version of the QTL test, the
Bank's qualifying assets were 78.9% of portfolio assets at December 31, 1996.
The following table sets forth information, at the dates indicated,
concerning American Federal's loan portfolio by type.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
--------------------------------------------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Portfolio by type of loan or security:
Real estate mortgage loans:
Residential permanent $ 256,315 30.59% $ 267,679 33.24% $ 256,307 35.74%
Residential construction 11,720 1.40 15,963 1.98 25,036 3.49
Non-residential and multi-family permanent 131,151 15.65 134,909 16.75 131,419 18.32
Non-residential and multi-family construction 28,619 3.41 11,000 1.37 15,830 2.21
------- ------ --------- ----- ------ -----
Total real estate mortgage loans 427,805 51.05 429,551 53.34 428,592 59.76
-------- ----- --------- ----- ------- -----
Consumer loans:
Automobile 67,644 8.07 55,541 6.90 53,423 7.45
Home improvement 29,041 3.47 21,483 2.67 18,221 2.54
Residential loans (1) 169,659 20.25 142,129 17.65 114,172 15.92
Consumer finance 15,169 1.81 13,602 1.69 9,135 1.27
Credit line (2) 19,724 2.35 15,276 1.90 12,070 1.68
Credit card - - 34,824 4.32 3,071 .43
Unsecured 17,667 2.11 9,774 1.21 8,051 1.12
Other 20,035 2.39 24,028 2.98 18,571 2.59
-------- ------- ------- ------ ------- -----
Total consumer loans 338,939 40.45 316,657 39.32 236,714 33.00
------- ------ ------- ----- ------- -----
Commercial loans:
Commercial business 100,100 11.95 80,700 10.02 73,976 10.31
Direct financing leases receivable - - - - 8 .01
------------ ------- ------- ---- --------- -----
Total loans, net of unearned discounts 866,844 103.45 826,908 102.68 739,290 103.08
Less:
Undisbursed loans in process:
Residential 3,820 .45 4,745 .59 9,069 1.26
Nonresidential 14,459 1.72 6,564 .82 3,890 .55
Allowance for loan losses 10,710 1.28 10,234 1.27 9,099 1.27
-------- ------- ------- ------- -------- -------
Total loans, net $ 837,855 100.00% $805,365 100.00% $717,232 100.00%
======= ====== ======= ====== ======= ======
<CAPTION>
At December 31,
1993 1992
------------------------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Portfolio by type of loan or security:
Real estate mortgage loans:
Residential permanent $ 235,629 35.47% $ 256,044 37.66%
Residential construction 26,152 3.94 20,915 3.08
Non-residential and multi-family perma 130,061 19.58 133,738 19.67
Non-residential and multi-family const 13,888 2.09 9,352 1.37
-------- ------ -------- -----
Total real estate mortgage loans 405,730 61.08 420,049 61.78
------- ----- ------- ------
Consumer loans:
Automobile 56,814 8.55 64,438 9.48
Home improvement 16,811 2.53 16,800 2.47
Residential loans (1) 101,513 15.28 93,088 13.69
Consumer finance 7,026 1.06 4,862 71
Credit line (2) 10,165 1.53 9,419 1.38
Credit card 3,123 .47 - -
Unsecured 7,368 1.11 7,719 1.14
Other 16,578 2.50 15,213 2.24
---------- ----------- ------- -----
Total consumer loans 219,398 33.03 211,539 31.11
------- ----------- --------- -----
Commercial loans:
Commercial business 63,909 9.62 62,492 9.19
Direct financing leases receivable 870 .13 2,947 .43
-------- ------- ----- -----
Total commercial loans 64,779 9.75 65,439 9.62
------- ------ -------- ------
Total loans, net of unearned discounts 689,907 103.86 697,027 102.51
Less:
Undisbursed loans in process: 9,030 1.36 7,698 1.13
Residential 8,133 1.23 1,120 .16
Nonresidential 8,453 1.27 8,280 1.22
Allowance for loan losses ------ ------- -------- -------
$664,291 100.00% $679,929 100.00%
Total loans, net ======= ====== ======== ======
10
<PAGE>
</TABLE>
(1) Refers to loans secured by residential property, including home equity lines
of credit of $28.7 million, $25.6 million, $24.7 million, $24.3 million, and
$26.8 million at December 31, 1996, 1995, 1994, 1993 and 1992 respectively.
(2) Refers to lines of credit, principally unsecured.
<PAGE>
The following table sets forth information, at the dates indicated, concerning
American Federal's loan portfolio by collateral.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Portfolio by collateral:
Real estate mortgage loans:
Residential real estate:
1 to 4 family $268,035 31.99% $283,642 35.22% $281,343 39.23%
Multi-family 22,705 2.71 21,892 2.72 17,961 2.50
Non-residential real estate 137,065 16.35 124,017 15.40 129,288 18.03
------- ----- ------- ----- ------- -----
Total real estate mortgage loans 427,805 51.05 429,551 53.34 428,592 59.76
------- ----- ------- ----- ------- -----
Consumer loans:
Automobile 67,644 8.07 55,541 6.90 53,423 7.45
Real estate:
First mortgage 146,803 17.52 107,722 13.38 90,612 12.63
Second mortgage 50,980 6.08 45,419 5.64 41,175 5.74
Consumer finance 15,169 1.81 13,602 1.69 9,135 1.27
Unsecured 36,764 4.39 59,518 7.39 22,784 3.18
Other 21,579 2.58 34,855 4.32 19,585 2.73
-------- ----- ------- ------ ------- -----
Total consumer loans 338,939 40.45 316,657 39.32 236,714 33.00
------- ----- ------- ----- ------- -----
Commercial loans:
Commercial business:
Secured 96,178 11.48 76,862 9.54 69,767 9.73
Unsecured 3,922 .47 3,838 .48 4,209 .59
Direct financing leases receivable - - - - 8 -
-- ---- ------ ------ ------ ------ ---
Total commercial loans 100,100 11.95 80,700 10.02 73,984 10.32
------- ------- ------- ------ ------- ------
Total loans, net of discounts 866,844 103.45 826,908 102.68 739,290 103.08
------- ------ ------- ------ ------- ------
Less:
Undisbursed loans in process:
Residential 3,820 .45 4,745 .59 9,069 1.26
Non-residential 14,459 1.72 6,564 .82 3,890 .55
Allowance for loan losses 10,710 1.28 10,234 1.27 9,099 1.27
-------- ------- ------- ------ ------ -----
Total loans, net $837,855 100.00% $805,365 100.00% $717,232 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at December 31, 1996,
regarding the dollar amount of loans maturing in American Federal's portfolio
based on contractual terms to maturity.
<TABLE>
<CAPTION>
One Year Two Years Three Years Five Years Ten Years
Less Than Through Through Through Through Through Fifteen
One Year Two Years Three Years Five Years Ten Years Fifteen Years Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
mortgage (1) $ 14,153 $ 8,102 $ 7,877 $ 15,567 $ 43,202 $47,781 $119,633 $256,315
Construction (net of
undisbursed loans
in process) (2) 16,685 1,192 509 979 1,582 298 815 22,060
Commercial real estate
mortgage 43,456 21,876 12,865 29,724 20,867 1,468 895 131,151
Consumer and
Commercial 134,284 75,292 59,198 61,438 66,590 32,554 9,683 439,039
------- -------- ------ -------- ------- ------ -------- -----
Loans receivable (3) $208,578 $106,462 $80,449 $107,708 $132,241 $82,101 $131,026 $848,565
======= ======= ====== ======= ======= ====== ======= =======
</TABLE>
(1) The contractual loan repayment period on single-family residential real
estate loans originated by American Federal is generally 15 to 30 years.
The average life of a long-term loan is significantly less than its
maturity due to refinancing or prepayments.
(2) Includes construction loans in which the Bank has agreed to provide
permanent financing.
(3) Net of unearned discounts and loans in process.
<PAGE>
The following table sets forth the dollar amount of loans maturing after
December 31, 1997, which have fixed interest rates and those which have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
(Dollars in thousands)
Residential real estate mortgage (1) $ 51,324 $190,838 $242,162
Construction (net of undisbursed
loans in process) (2) 828 4,547 5,375
Commercial real estate mortgage (3) 21,577 66,118 87,695
Consumer and commercial business 248,451 56,304 304,755
------- ------- -------
Total (4) $322,180 $317,807 $639,987
======= ======= =======
(1) The average life of a long-term loan is significantly less than its stated
maturity due to refinancing or prepayments.
(2) Includes construction loans in which the Bank has agreed to provide
permanent financing.
(3) Fixed-rate loans generally reprice within five years or less.
(4) Net of unearned discounts and loans in process.
Loan approval procedures have been established for all loan categories
by American Federal's Board of Directors. Various levels of secured lending
authority up to $75,000 are granted to loan officers at the branch level
depending upon their experience. City executives may approve secured loans up to
$100,000, regional branch administrators up to $250,000, and heads of the
lending divisions up to $350,000. Lending authority for unsecured loans is
approximately 30% of the level granted for secured loans. Loans in excess of
$350,000 are reviewed by two lending division heads (up to a limit of $700,000)
and three lending division heads (up to a limit of $1.0 million). Those in
excess of $1 million are reviewed by a standing committee of lending division
heads and executive management. Those in excess of $2.5 million are reviewed by
an executive committee of the Board of Directors.
The Bank's Internal Audit and Credit Review Division, an independent
function within the Bank, is responsible for reviewing and reporting on loan
quality. The Internal Audit and Credit Review Division also prepares a monthly
report on loan payment delinquencies and reviews the adequacy of the Bank's
allowance for possible loan losses on a quarterly basis.
In addition to these responsibilities, the Internal Audit and Credit Review
Division determines the adequacy of internal controls and operational
procedures, ascertains compliance with laws, regulations and internal policies,
and reviews and assesses operational efficiency throughout the Bank.
RESIDENTIAL MORTGAGE LENDING
American Federal's residential mortgage loans, net of undisbursed loans in
process, totaled $264.2 million at December 31, 1996, representing 31.54% of
total loans. Residential mortgage loans are actively solicited from customers,
realtors, builders, developers, and attorneys. Mortgage loan specialists are
located in Easley, Greenville, and Spartanburg, South Carolina. A correspondent
network of mortgage brokers is also used to originate loans in favorable markets
in South Carolina. These loans are underwritten to the same standards as those
used by the Bank and are approved, prior to closing, by American Federal.
American Federal makes fixed-rate mortgage loans, both conventional and
government-guaranteed, as well as a wide range of adjustable-rate mortgages
(ARM). The interest rates on ARM loans currently available are subject to
adjustment at various intervals, ranging from one to seven years.
Virtually all loans in the ARM portfolio have interest rate caps applicable
to the adjustment period and to the life of the loan. Most of American Federal's
ARM loans are adjustable to a rate yielding a predetermined margin over the
weekly average yield of U.S. Treasury Securities adjusted to a constant maturity
of one, three, five, or seven years, a statistic published by the Board of
Governors of the Federal Reserve System.
13
<PAGE>
American Federal's borrower qualification procedures for residential loans
involve an analysis of the borrower's ability to repay the debt, the borrower's
credit history and income stability, and the estimated market value of the
property. In most cases, loan decisions are based upon nationally accepted
guidelines established by secondary market purchasers and private mortgage
insurance companies.
Special mortgage loan programs have been designed in conjunction with
the housing development departments of the cities of Greenville, Spartanburg,
Easley, and Greer, which target lower income neighborhoods or lower income
applicants and offer somewhat reduced interest rates. The Bank also participates
in state and federal programs to provide housing finance for single parents and
for rural areas. In 1992, American Federal introduced a Low Income Fixed Rate
Mortgage which eliminates application fees and closing costs charged by the
Bank, for families with 80% or less of the area's median income.
American Federal's mortgage lending policies generally limit the maximum
loan-to-value ratio on residential loans to 95% of the lesser of the appraised
value, as determined by an independent appraiser, or the purchase price. In
cases where the loan-to-value ratio exceeds 80%, the Bank generally requires the
borrower to purchase private mortgage insurance. The borrower is generally
required to obtain title insurance in favor of the Bank, to maintain adequate
hazard insurance, and to establish an escrow account for payment of real estate
taxes and insurance premiums.
Interim financing is available to bridge equity gaps between a customer's
purchase of a new residence and the sale of a current residence. Refinancing and
second mortgage loans are made available for qualified borrowers. The Bank also
offers financing for non-owner occupied one-to-four family dwellings and
approved condominium units.
Construction financing and financing to acquire residential building lots
for construction are available to individuals, qualified builders, and
developers. Construction loans net of loans in process attributable to
residential mortgage lending activities totaled $7.9 million at December 31,
1996. American Federal generally requires the prospective owner to hire a
general contractor and to submit detailed building plans and budgets. The
maximum loan-to-value ratio for such loans is 95%. Generally, the Bank advances
loan funds in three stages over a maximum period of nine months, subject to
satisfactory progress inspections. Upon completion of construction, the borrower
has the option to convert to permanent financing through either a fixed-rate or
an adjustable-rate mortgage loan.
The Bank's commitments to make conventional and Federal Housing Authority
(FHA) insured or Veterans Administration (VA) guaranteed mortgage loans on
existing residential dwellings are made for periods of up to 60 days from the
date of application. Such commitments are generally made at a rate of interest
based on the prevailing rates deliverable to the secondary market within 60
days. For further information concerning the Bank's loan commitments, see Note 3
of the "Notes to Consolidated Financial Statements" in the American Federal 1996
Annual Report incorporated herein by reference.
COMMERCIAL MORTGAGE LENDING
American Federal's commercial mortgage loan portfolio, net of undisbursed
loans in process, totaled $145.3 million at December 31, 1996, representing
17.34% of total loans. Excluding the $13.6 million loan secured by the building
that houses the Bank's headquarters, the largest single loan outstanding was
$7.3 million. The average loan balance was approximately $390,000 at December
31, 1996.
14
<PAGE>
Commercial mortgage loans are made for construction and permanent financing
of income-producing real estate. These loans are underwritten based on the
ability of the property to generate income at levels that provide a reasonable
certainty of repayment, the creditworthiness and relevant expertise of the
borrower, the Bank's prior experience with the borrower, the market need for the
proposed facility, the facility's alternative use, and, if applicable, the
tenant mix and lease provisions, as well as the appraised property value. The
Bank's primary lending area includes South Carolina and its adjoining states.
The portfolio is diversified, including shopping centers (with major anchor
tenants) (27.6%), office buildings (28.3%), apartment buildings (12.5%), nursing
care facilities (6.2%), and churches (5.4%). The majority of loans in the
portfolio at December 31, 1996, were one-, three-, or five-year adjustable-rate
loans.
Typically, the Bank also requires additional sources of debt repayment,
particularly during construction and lease-up periods. These frequently include
creditworthy guarantors, irrevocable letters of credit, additional collateral,
and borrower's equity. Permanent loans generally are required to attain net cash
flow levels that exceed the required debt service before the Bank will consider
releasing any of the additional collateral, guarantees, or letters of credit.
COMMERCIAL BUSINESS LENDING
American Federal's commercial business loans totaled $100.1 million at
December 31, 1996, representing 11.95% of total loans. The Commercial Lending
Division makes loans primarily to mid-sized corporate borrowers (annual sales of
$5 million to $100 million), small businesses (annual sales of $1 million to $5
million), and the professional community in the twelve-county market area. The
objective in pursuing these markets is to provide short-term, high-yielding, and
high-quality assets, to produce fee income, and to attract commercial deposits.
American Federal makes secured or unsecured commercial loans for
equipment acquisition, physical plant expansion, working capital, and other
business purposes. The Bank also participates in the Small Business
Administration program and special programs aimed at development or restoration
of commercial buildings.
Because commercial lending involves expertise different from that required
in traditional mortgage lending, American Federal employs experienced commercial
lenders who originate and service commercial loan products according to
standards and guidelines approved by the Board of Directors. Management believes
that commercial loans add diversity and rate sensitivity within its portfolio
and offer attractive yields, provided the loans are carefully underwritten and
monitored. The Bank plans to continue expanding its commercial loan portfolio,
within the regulatory limit of 20% of total assets, and with continued attention
to asset quality, interest rate sensitivity, and profitability.
Commercial business loans are generally made in amounts under $1.0 million,
and are based on the financial ability of the borrower to repay the obligation
and only secondarily on the appraised value of assets used as collateral.
Commercial business loans may be fixed-rate or variable-rate, with
maturities up to five years and amortization up to 20 years (for loans secured
by real estate.) The average loan balance outstanding as of December 31, 1996,
was approximately $86,000 and the largest loan or line of credit was $15.0
million. Approximately 80% of the portfolio is secured by real estate.
Responsibility for monitoring the performance of loans rests with the loan
officer. Reviews are also conducted by the Internal Audit and Credit Review
Division. Loan delinquencies are discussed by the
15
<PAGE>
lending management group quarterly and a weekly delinquency report is circulated
to the appropriate loan officers and to management. Formal reviews of all
commercial and commercial mortgage loans over predetermined dollar amounts and
of those previously identified as problems are conducted continuously. Each loan
is classified on a seven point scale according to the quality of the asset and
the risk to the Bank, and a schedule is established for the frequency of review.
Elements of the review include analysis of financial statements, management of
the borrower, economic factors, regulatory factors, loan documentation,
collateral liquidation values, guarantor/endorser strength, proper lending
authority process, and past credit experience. The results of these reviews are
reported to senior management.
CONSUMER LENDING
The Bank's net consumer loan portfolio totaled $338.9 million at December
31, 1996, representing 40.45% of total loans. Consumer lending has become an
increasingly important part of the Bank's business since 1982 when savings
institutions were authorized by statute to make secured and unsecured loans for
any personal or household purpose. These loans are attractive due to their
comparatively high yields, short maturities, and limited prepayments.
American Federal offers a broad range of consumer loan products, including
automobile and other titled vehicle loans, home improvement loans, first and
second mortgage loans, personal loans, loans secured by savings or other liquid
securities, credit cards, overdraft protection, and secured or unsecured lines
of credit. As of December 31, 1996, 58.35% of consumer loans, including lines of
credit, were secured by real estate.
Consumer loans are made directly by the Bank or indirectly through
designated automobile dealerships, using the Bank's underwriting standards. The
majority of the loans are made with terms of up to five years; first and second
mortgage loans range up to 20 years. Both fixed-rate and variable-rate loans are
available and are priced according to prevailing market rates for the term and
the type of collateral.
The "All-American Credit Line" offers overdraft protection and home equity
credit or unsecured credit, depending upon the request and qualification of the
borrower. The interest rate is tied to the New York Prime Rate as published in
The Wall Street Journal, with a range of prime plus 1/2% to a fixed rate of 18%.
(Variable-rate loans also have a ceiling of 18%.) American Federal was the first
institution in its market area to offer a three-tiered line of credit whereby
the interest rates charged vary with the level of approved credit. Monthly
payments are calculated as 5% of the outstanding balance with a minimum of $25
for credit lines under $2,500, and 2% of the outstanding balance with a minimum
of $75 for credit lines of $2,501 or more.
Home equity credit is generally secured by a second mortgage on the
customer's home and can be drawn upon by check or transfer to the customer's
checking account. The Bank will lend up to 85% of the appraised value of the
property less any other outstanding mortgage loan balance. The total of maximum
borrowings approved through all credit line products at December 31, 1996, was
$122.8 million. Secured and unsecured credit lines outstanding at that date were
$48.5 million, with 59.3% of the portfolio secured.
In 1995, the Bank increased its credit card portfolio to a total of $34.8
million as of December 31, 1995, through a marketing promotion in five
Southeastern states. In 1996, the Bank sold the portfolio. However, credit cards
are still available to the Bank's customers.
16
<PAGE>
Total automobile loans constituted 19.96% of the consumer loan portfolio as
of December 31, 1996, with $67.6 million outstanding. At December 31, 1996, the
Bank's percentage of indirect loans was approximately 12.8% of the consumer loan
portfolio, excluding consumer finance loans.
All consumer loan and credit line requests are evaluated to determine the
prospective borrower's ability and willingness to repay the obligation and
stability as a borrower. Ability to repay is determined by comparing an
applicant's monthly installment payments, including the proposed loan payment,
with gross monthly income. The resulting debt service to income ratio generally
must be below 40%. For applicants with significant assets or applicants with low
to moderate income, up to 45% may be accepted. The Bank offers a special
consumer mortgage loan program for low to moderate income borrowers which
features a lower interest rate.
Willingness to repay is determined by analyzing the applicant's credit
history for slow payments or undisclosed debts. An applicant's stability is
evaluated by reviewing information pertaining to a history of employment and
residence, and is considered to be an important factor for open-end or unsecured
credit. The availability of collateral is also a factor in appropriate
situations. American Federal's consumer lending portfolio, excluding consumer
finance loans, has experienced a low delinquency ratio. At December 31, 1996,
consumer loans greater than 30 days past due represented 3.13% of gross consumer
loans. To improve risk assessment and establish uniform guidelines for Fair
Lending, the Bank introduced credit scoring in 1995 for direct and indirect
loans.
The Bank operates Finance South, a finance company subsidiary, with 17
offices in the Upstate. Finance South originates short-term loans with an
average balance of $2,800 and an average estimated maturity of approximately one
year, to finance household appliances and furnishings. The loans may be direct
or indirect (arranged through the merchant). Second mortgage loans are also made
on a limited basis, with terms of 5 to 15 years.
At December 31, 1996, Finance South had outstanding 6,655 loans with a net
loans balance of $15.2 million. The average portfolio yield was 22.62%. Finance
South reported gross loans greater than 30 days past due of 3.38% at December
31, 1996, and chargeoffs of 3.41% of average gross loans for the year ended
December 31, 1996.
In the first quarter of 1997, the Bank entered into a definitive agreement
to sell substantially all of the assets of Finance South to Kentucky Finance
Co., Inc. The sale is subject to shareholder and regulatory approval and is
expected to be consummated in the second quarter of 1997.
LOAN ORIGINATIONS, SALES, AND PURCHASES
American Federal's objective in the management of its real estate loan
portfolio is to originate high quality loans while trying to maximize yields,
shorten the maturities, and increase the liquidity of these assets. The Bank has
sold fixed-rate loans in the secondary mortgage market either on a forward
commitment or immediate delivery basis to reduce the Bank's risk that interest
rates paid will escalate while holding long-term fixed-rate loans in the
portfolio, and to allow the Bank to continue to make loans during periods when
savings flows decline or funds are not otherwise available for lending.
Subject to market conditions, American Federal may sell loans, both to
private institutional purchasers and through secondary mortgage market programs
of government agencies such as FHLMC and FNMA. FHA and VA loans are sold on a
loan-by-loan basis to investors who service Government National Mortgage
Association (GNMA) securities. Future secondary market sales could be adversely
affected,
17
<PAGE>
among other ways, by increased competition from other lending sources, by
decreased future loan demand, and by high prevailing levels of interest rates,
which may not only reduce loan demand but also may reduce liquidity among many
traditional secondary market purchasers. During 1996, the Bank sold $13.4
million of its current production of long-term fixed-rate loans.
The Bank generally retains the servicing rights to loans sold, for which
it receives a fee of 25 to 50 basis points per annum of the unpaid balance of
each loan. As of December 31, 1996, the Bank was servicing loans for others
totaling approximately $168.2 million. Servicing income, included in
non-interest income, was $861,000 for the year ended 1996 and $901,000 for 1995.
18
<PAGE>
The following table sets forth the amounts of American Federal's loans
receivable and related activities for the periods indicated.
Years Ended December 31,
1996 1995 1994
(Dollars in thousands)
Loans receivable at beginning of year,
net of allowance $ 805,365 $ 717,232 $664,291
Loans originated:
Conventional real estate loans:
Construction 47,314 27,838 41,768
Loans on existing property 65,665 45,914 88,188
Loans refinanced 17,433 10,716 23,402
Consumer loans 178,124 171,298 115,173
Commercial loans 51,518 41,293 39,910
(Increase) decrease in undisbursed
loans in
process (6,970) 1,650 4,564
--------- -------- -----
367,024 298,709 313,005
-------- ------- -------
Loans purchased 13 12,178 11,819
Loans sold 32,950 184 26,721
Loans securitized 12,635 4,868 2,312
Principal repayments 274,502 214,130 239,458
Loan settlement by transfer to real estate
acquired in settlement of loans 1,032 528 1,548
Provision for possible loan losses 4,338 2,279 1,432
Other items, net (3,835) (765) (412)
-------- ------- ----
Loan receivable at end of year, net of
allowance $ 843,110 $ 805,365 $717,232
======= ======= =======
DELINQUENCIES
It is American Federal's policy to manage its loan portfolio so as to
recognize and respond to problem loans at an early stage in order to minimize
losses.
Nonreceipt of contractually due principal and interest payments on all
loans automatically triggers a written payment reminder or telephone contact.
All loans are classified as nonaccrual for purposes of income recognition at the
earlier of (a) the time the collection of the principal becomes uncertain; (b)
when business loans become 60 days past due; (c) when residential mortgage
loans, commercial real estate loans and consumer loans become 90 days past due;
or (d) when foreclosure action is commenced. A loan remains in nonaccrual status
until the factors which indicate doubtful collectibility no longer exist or
until the loan is determined to be partially or wholly uncollectible and is
charged off against the allowance for possible loan losses.
Asset repossession on secured consumer loans generally begins when the
account becomes 60 days delinquent. The loan is reduced to the net realizable
value of the collateral at the time of repossession, although recovery efforts
continue after chargeoff. Unsecured consumer loans are written off when they are
deemed uncollectible. Consumer finance loans typically have longer periods for
repossession and higher chargeoffs than consumer loans.
All property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold or
otherwise disposed of by the Bank.
The Lending Management Group, comprised of senior lending personnel, meets
periodically to discuss lending operations and other matters affecting the
lending activities of the Bank. In addition, the Loan Review Committee,
comprised of the President, the Chief Operating Officer and Chief Financial
Officer, and the Chief Legal Counsel, meets with the Lending Management Group
and performs a quarterly review of loan payment delinquency trends and
chargeoffs over $10,000, as well as all proposed workouts of problem loans over
$100,000 and selected loans below that amount. The Internal Audit and Credit
Review Division monitors compliance with overall lending policies and
guidelines,
19
<PAGE>
and conducts an internal loan review program to ensure that credit risk and
portfolio composition are kept within acceptable tolerances, consistent with the
overall goals of American Federal. Loan delinquencies and chargeoffs are
reported monthly to the Board of Directors.
The Bank classifies problem assets as substandard, doubtful, and loss.
Substandard assets have one or more well-defined weaknesses and are
characterized by the distinct possibility that the Bank 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 loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The Bank also
has a special mention category for assets which do not currently expose the Bank
to a sufficient degree of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close attention. If
an asset or portion thereof is classified loss, the Bank must either establish
specific allowances for loan losses in the amount of 100% of the portion of the
asset classified loss, or chargeoff such amount. In addition, if a loan meets
the definition of impairment as defined under Financial Accounting Standards
Board ("FASB"), Statement of Financial Accounting Standard (SFAS) No. 114, a
specific allowance is established to value the loan at its fair value.
NONPERFORMING ASSETS
The information contained under the section captioned Nonperforming Assets
in the American Federal 1996 Annual Report is incorporated by reference.
ALLOWANCE FOR LOSSES
The allowance for loan losses is available to absorb losses inherent in the
loan portfolio. The allowance is increased by provisions charged to operations
and decreased by chargeoffs, net of recoveries. Management evaluates the
adequacy of the allowance at least quarterly using the classification categories
discussed under Item 1. Business -- Delinquencies. In establishing the
appropriate classification for specific assets, management takes into account
the estimated value of underlying collateral, the borrower's ability to repay,
payment history, and current delinquency status, among other factors. The
remaining loan portfolio is evaluated for potential loss exposure by examining
the growth and composition of the portfolio, previous loss experience, current
delinquency levels, industry concentration, and general economic conditions. The
adequacy of the allowance is evaluated quarterly by the Credit Review Division,
as part of its internal review.
The allowance for losses on real estate held for development and sale is
evaluated quarterly through review of the fair market value of the real estate.
This value is ascertained by projecting future development and sales activity
based on historical performance, current economic and political conditions, and
probable changes in the future. If the fair market value is less than the book
value of the real estate, a valuation allowance is established or increased.
The allowance for losses on real estate acquired in settlement of loans is
evaluated quarterly. Additional allowances are established when the carrying
value exceeds fair market value less estimated selling costs.
The allowance for loan losses represents management's estimate of an amount
adequate to provide for losses inherent in the loan portfolio. However, there
are additional risks of future losses which cannot be quantified precisely or
attributed to particular loans or classes of loans. Because those risks
20
<PAGE>
include general economic trends as well as conditions affecting individual
borrowers, management's judgment of the allowance is necessarily approximate.
The allowance is also subject to regulatory examinations and determinations as
to adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peer
institutions identified by the regulatory agencies. The OTS last examined the
Bank as of March 31, 1996. No adjustments to the allowance for loan losses
resulted from this examination.
At December 31, 1996, the allowance for loan losses was $10.7 million or
1.26% of total loans outstanding, compared with $10.2 million or 1.25% at
year-end 1995. Management considers the allowance for loan losses to be adequate
based upon its current judgment, evaluation, and analysis of the loan portfolio.
However, no assurances can be given that the ongoing evaluations of the loan
portfolio in light of economic conditions and other factors then prevailing
would not require future additions to the allowance, thus adversely impacting
the results of the Bank's operations.
<PAGE>
Activity in the components of the allowance for loan losses is summarized in the
following table for the years ended December 31, 1996, 1995, 1994, 1993, and
1992.
<TABLE>
<CAPTION>
Non-
Residential Residential Consumer
Mortgage Mortgage Consumer Credit Finance Commercial Total
Loans Loans Loans Cards Loans Loans Allowance
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $ 806 2,569 2,827 - 89 1,754 8,045
Provision 355 - 2,524 - 110 462 3,451
Loans charged-off (487) (157) (2,328) - (37) (722) (3,731)
Loans recovered 8 - 336 - 1 170 515
------- ------ ----- --- -- ----- ----- -------
Balance at December 31, 1992 682 2,412 3,359 - 163 1,664 8,280
Provision - - 614 - 189 430 1,233
Loans charged-off (26) - (925) - (133) (548) (1,632)
Loans recovered - - 375 - 3 194 572
------ ------ ----- --- -- ----- ----- -------
Balance at December 31, 1993 656 2,412 3,423 - 222 1,740 8,453
Provision - - 1,004 - 260 168 1,432
Loans charged-off (45) (300) (633) - (209) (295) (1,482)
Loans recovered - - 364 - 7 325 696
------ ------ ----- --- -- ----- ----- -------
Balance at December 31, 1994 611 2,112 4,158 - 280 1,938 9,099
Provision 30 - 500 920 450 379 2,279
Loans charged-off (33) - (744) (305) (309) (230) (1,621)
Loans recovered - - 96 291 14 76 477
------ ------ ----- ------ ----- ----- -------
Balance at December 31, 1995 608 2,112 4,010 906 435 2,163 10,234
Provision 220 - 1,005 2,235 718 160 4,338
Loans charged-off (240) - (1,553) (1,990) (681) (203) (4,667)
Loans recovered 20 59 315 20 17 374 805
Reclassification - - 1,171 (1,171) - - -
------ ------ ----- ------ ----- ----- -----
Balance at December 31, 1996 $ 608 2,171 4,948 - 489 2,494 10,710
====== ====== ===== ====== ===== ===== ======
Allowance for loan losses as a
percentage of total loans by
category at December 31, 1996 .23% 1.46% 1.53% - % 3.22% 2.49% 1.26%
====== ====== ==== ======= ==== ==== =======
</TABLE>
INVESTMENT ACTIVITIES
A federally chartered savings bank has the authority, subject to certain
restrictions and limitations, to invest in federal funds, Euro deposits, FHLB
time deposits, repurchase agreements, commercial paper, certificates of deposit,
bankers' acceptances, U.S. Government and Agency obligations, collateralized
mortgage obligations, state and municipal bonds, and corporate bonds. At
December 31, 1996, such assets totaled $52.0 million, representing 3.9% of total
assets at that date. As with other financial institutions, American Federal's
investment portfolio is utilized for liquidity management, as collateral for
borrowed funds, and for asset diversification.
The Bank maintained liquid assets in excess of the amount required by
regulations during all periods reflected in the Consolidated Financial
Statements incorporated herein by reference. The required amount is 5% of the
average daily balances of deposits and short-term borrowings. Liquid assets
consist principally of cash, short-term interest-bearing deposits and
mortgage-backed securities with maturities of five years or less.
The Bank classifies investments and mortgage-backed securities as available
for sale at the purchase date. Investment securities and mortgage-backed
securities available for sale are recorded at market value. Although management
does not intend to sell such securities, if certain market conditions or
liquidity needs exist, the Bank may sell these securities prior to maturity.
Beginning January 1, 1994, investments available for sale are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity (net of income taxes). Gain or loss
on the sale of securities is based on the specific identification method.
22
<PAGE>
The Bank's investment policy is approved by the Board of Directors with
specific investment strategy formulated by the Investment Committee, composed of
the Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer, President of Finance South, Senior Vice President and Controller,
Treasurer, Senior Vice Presidents of Mortgage Lending, Commercial Lending,
Branch Administration, Research and Product Development, and Consumer Lending.
The Investment Committee approves all investment decisions before
implementation. All transactions are reported to the Investment Committee and to
the Board of Directors.
INSURANCE AND BROKERAGE ACTIVITIES
American Federal's non-interest income includes substantial commissions and
fees on a full range of insurance and investment products and investment
brokerage services. Two general types of insurance are offered: credit-related
and investment. Credit-related products currently available include credit life
and disability, mortgage life and disability, involuntary unemployment,
accidental death, term and title. The investment-related insurance products
include universal life and fixed-rate annuities. Through independent, licensed
brokerage service representatives, the Bank offers an even broader scope of
investments that includes mutual funds, tax-free investments, variable and
fixed-rate annuities, stocks, and bonds. During 1996, the Bank earned $1.7
million in commissions from insurance sales and $363,000 from brokerage
activities.
DEPOSITS
Deposits are the primary source of American Federal's funds for lending and
investment activities. In addition to deposits, funds are primarily derived from
principal repayments on loans and other investments, from the sale of loans and
investment securities, from other borrowings, and from increases in
stockholders' equity. Loan repayments are a relatively predictable source of
funds except during periods of significant interest rate declines, while deposit
flows tend to fluctuate with prevailing interest rates, money market conditions,
general economic conditions, and competition.
At December 31, 1996, deposits totaled $986.8 million, or 82.0% of total
liabilities. The majority of the Bank's depositors are residents of South
Carolina. American Federal has not solicited deposits outside South Carolina.
American Federal offers a wide variety of deposit accounts designed to
attract both short-term and long-term funds. These products include NOW
accounts, commercial checking accounts, money market accounts, regular savings
accounts, certificates of deposit, and retirement savings plans.
Some of the special deposit products offered by the Bank are: a free
checking account that reduces operating costs through a system of check
safekeeping; a VISA Check Card which provides access to checking funds at the
point of sale; a "Freedom Certificate" that allows customers to choose their own
maturity date anywhere from seven days to seven years, rather than at set
intervals; the "Catch-a-Rising-Rate" one-year CD that gives customers a one-time
option of switching to whatever new rate the Bank is paying for the remainder of
the term; the "Steady Saver CD", designed to encourage savings through
additional deposits and a higher rate for automatic monthly deposits; "Freedom
50 Checking" and "Super Checking", which provide a package of benefits and money
saving services; and the "Fair Deal Checking", a competitive business account
with charges based on account analysis.
At December 31, 1996, 22.9% of American Federal's deposits were in
checking accounts (i.e., NOW checking and commercial checking), which are
serviced not only by the Bank's 40 branch offices, but also by a 43 unit
proprietary ATM network and the multi-state HONOR ATM network. At December 31,
1996, 19.3% of American Federal's deposits were in savings accounts (i.e.,
regular
23
<PAGE>
passbook and money market accounts). Fixed-rate, fixed-term certificates
constituted the largest portion of deposits, aggregating 50.3% at December 31,
1996.
American Federal has aggressively marketed retirement account services to
individuals through the individual retirement account and to businesses through
Keogh, Corporate Plan, simplified employee pension accounts, and the new simple
IRA plans. Self-directed investment is also available for nontraditional
products such as mutual funds, stocks, and bonds through agreements with
brokerage service professionals. At December 31, 1996, American Federal was
custodian of $144.8 million in retirement deposit accounts, which was 14.67% of
total deposits at that date. Non-qualified tax deferred investments are also
promoted through the annuity programs.
American Federal manages deposit flows through weekly evaluation of the
internal cost of funds, general economic conditions, and market trends by the
Bank's Investment Committee. Liquidity funding for loans and investments is
examined daily by senior management and reviewed weekly by the investment
committee. Adjustments are made in savings rates for the various types of
accounts through assessment of the Bank's needs for funds and competitive
pricing.
24
<PAGE>
The following table sets forth information concerning American Federal's
time deposits and other interest-bearing deposits at December 31, 1996.
<TABLE>
<CAPTION>
Percentage
Minimum of Total
Category Interest Rate (1) Amount Balances (3) Deposits
- ------------------------------ -------------------- ------- ------------ ----------
<S> <C> <C> <C> <C>
NOW accounts 1.42% $250 $188,560 19.11%
Noninterest-bearing accounts - 250 37,087 3.76
Passbook accounts 2.47 100 84,987 8.61
Money market deposit accounts 2.81 2,500 85,719 8.69
Money market passbook accounts 2.47 200 19,459 1.97
Variable-rate certificates 4.92 25 74,685 7.57
Fixed-rate certificates (2):
Freedom certificates with
original maturity of
Less than 6 months 4.43 500 23,642 2.40
6 months to 1 year 4.95 500 126,553 12.82
1 year to 2 years 5.24 500 197,308 20.00
2 years to 3 years 5.45 500 29,645 3.00
3 years and over 5.64 500 91,734 9.30
Jumbo certificates 5.45 100,000 10,991 1.11
Penalty-free certificates 3.88 2,500 9,571 .97
Other certificates 5.37 100 6,839 .69
------- ------
Total $986,780 100.00%
======= ======
</TABLE>
(1) Represents the weighted average stated interest rate. Included in NOW
accounts are $28.3 million of Free Checking accounts which are
noninterest-bearing.
(2) Included in the amount of fixed-rate certificates is $60.7 million of
deposits of $100,000 or more.
(3) Dollars in thousands.
The following table sets forth American Federal's time deposits classified
by rates as of the date indicated.
At December 31,
Rate 1996 1995 1994
- -------------------- --------------------------------
(Dollars in thousands)
0% - 5.99% $510,622 $445,836 $432,142
6% - 7.99% 59,260 123,305 43,389
8% - 9.99% 1,086 6,310 8,585
------ ------ ------
Total $570,968 $575,451 $484,116
======= ======= =======
The following table sets forth the amount and maturities of time deposits at
December 31, 1996.
Amount Due In
Less Than 1-2 2-3 After
Rate One Year Years Years 3 Years Total
- ------------------- --------- ----- ----- ------- -----
(Dollars in thousands)
0% - 5.99% $413,340 $69,237 $12,263 $15,782 $510,622
6% - 7.99% 26,671 15,747 6,898 9,944 59,260
8% - 9.99% 602 200 284 - 1,086
------- ------- ------ ------ -------
Total $440,613 $85,184 $19,445 $25,726 $570,968
======= ====== ====== ====== =======
The following table sets forth the amounts and maturities of certificates of
deposits of $100,000 or more at December 31, 1996.
Maturity
(Dollars in thousands)
Less than 3 months $ 21,373
3 to 6 months 14,680
6 to 12 months 12,230
Over 12 months 12,438
------
<PAGE>
Total $ 60,721
=======
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by American Federal
between the dates indicated.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------------------------------------------------------------------------
Increase Increase Increase
Balance % (Decrease) Balance % (Decrease) Balance % (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
NOW checking accounts $ 188,560 19.11% $ 9,929 $178,631 18.27% $ 40,628 $138,003 16.52% $ 6,838
Noninterest-bearing
commercial accounts 37,087 3.76 2,025 35,062 3.59 6,330 28,732 3.44 5,960
Passbook accounts 84,987 8.61 4,258 80,729 8.25 16,997 63,732 7.63 6,436
Money market accounts 105,178 10.66 (2,330) 107,508 10.99 (13,089) 120,597 14.44 (1,030)
Variable-rate certificates 74,685 7.57 (30,273) 104,958 10.73 87,176 17,782 2.13 7,375
Freedom certificates 468,882 47.52 47,334 421,548 43.10 14,866 406,682 48.68 16,958
Jumbo certificates 10,991 1.11 (12,645) 23,636 2.42 (6,229) 29,865 3.57 2,599
Penalty-free certificates 9,571 .97 (4,071) 13,642 1.39 (6,645) 20,287 2.43 370
Other fixed-rate certificates 6,839 .69 (5,404) 12,243 1.26 2,559 9,684 1.16 (36,962)
--------- -------- -------- --------- -------- ---------------- ------- --------
$ 986,780 100.00% $ 8,823 $977,957 100.00% $142,593 $835,364 100.00% $ 8,544
======= ====== ======== ======= ====== ======= ======= ====== ========
</TABLE>
In the unlikely event of liquidation of the Bank, savings account holders
would receive payment of their savings account prior to any payment being made
to the holders of the Common Stock.
BORROWINGS
At December 31, 1996, borrowings totaled $197.3 million, or 16.40% of total
liabilities. A major source of such borrowings has been the FHLB of Atlanta,
which functions as a reserve bank providing credit for savings institutions
within its assigned region. As a member of the FHLB system, American Federal is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances secured by that stock and by other collateral pursuant to a blanket
security agreement which requires the Bank to maintain certain qualifying assets
such as U.S. Government securities and home mortgage loans not otherwise pledged
or encumbered. Qualifying mortgage loan assets which are eligible collateral
must have a book value of at least 160% of the borrowed amount, and agency
mortgage-backed securities 120% of the borrowed amount. A penalty is imposed on
all prepayments of fixed-rate advances.
Advances from the FHLB of Atlanta are made available through several
different credit programs. Each credit program has its own particular interest
rate and range of maturities. The FHLB of Atlanta establishes acceptable uses to
which the advances from each program may be applied, as well as limitations on
the size of advances. At December 31, 1996, American Federal had $87.0 million
in outstanding advances with a weighted average rate of 4.99%, representing
7.23% of total liabilities. The Bank's FHLB advances are payable on various
dates between 1997 and 2015 at rates ranging from 0.00% to 6.54%. See Note 9 of
the Notes to Consolidated Financial Statements incorporated herein by reference.
American Federal also borrows funds using reverse repurchase agreements and
dollar reverse repurchase agreements, where securities are sold with an
agreement to buy them back at a specified price at a later date, typically 90
days or less. These agreements to repurchase are deemed to be borrowings
collateralized by the securities sold (generally GNMA, FNMA, FHLMC, or U.S.
Government and agency issues). At December 31, 1996, $31.9 million in repurchase
agreements were outstanding with dealers and $27.9 million with customers. At
December 31, 1996, the Bank also had $50.5 million of other collateralized
borrowings. These borrowings were collateralized with mortgage-back securities,
and had maturities in 1997 and 1998. See Note 10 of the Notes to Consolidated
Financial Statements
26
<PAGE>
incorporated herein by reference for an analysis of these borrowings and a
description of the securities which collateralize such borrowings.
The following tables set forth certain information regarding American
Federal's short-term borrowings and average rates paid at the dates and for the
periods indicated.
At December 31,
1996 1995 1994
(Dollars in thousands)
Amount of Borrowings Outstanding:
Securities sold under agreements to repurchase $59,758 $ 84,483 $144,095
Other collateralized borrowings 50,500 50,500 -
Weighted Average Rate Paid On:
Securities sold under agreements to repurchase 5.05% 5.27% 5.23%
Other collateralized borrowings 5.72 5.72 -
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Average Short-Term Borrowings With Respect To:
Securities sold under agreements to repurchase $108,467 $120,727 $126,448
Other collateralized borrowings 50,500 8,568 -
Weighted Average Rate Paid On:
Securities sold under agreements to repurchase 5.17% 5.59% 4.09%
Other collateralized borrowings 5.72 5.78 -
</TABLE>
SUBSIDIARIES
American Federal is permitted to invest an amount equal to 2% of its assets
in its service corporations, with an additional investment of 1% of assets where
such investments serve primarily inner city and community development purposes.
At December 31, 1996, the Bank had a total net investment of $117,000 in its
service corporation composed primarily of short-term interest bearing deposits
and $15.2 million in its consumer finance company subsidiary.
Investments in other service related activities were insignificant.
American Federal has established various subsidiaries and divisions,
including its primary subsidiary, American Service Corporation of S.C. (ASC).
The Consolidated Financial Statements incorporated herein by reference include
the accounts of the Bank's wholly owned subsidiaries described below.
ASC, doing business as Piedmont Title Company, acts in an agency capacity
and processes title insurance policies for American Federal's residential and
commercial property loan originations as well
27
<PAGE>
as third party originators. ASC, doing business as American Properties, also
acts in an agency capacity and processes and sells real estate for American
Federal, ASC, and Finance South.
Finance South makes consumer loans averaging $2,800, with relatively short
maturities (average term, generally, of 12 months), to finance household
appliances and furnishings. Finance South also makes second mortgage loans, with
terms of 5 to 15 years, for the purpose of home improvement or bill
consolidation. See Item 1. Business -- Lending Activities -- Consumer Lending.
In the first quarter of 1997, the Bank entered into a definitive agreement
to sell substantially all of the assets of Finance South to Kentucky Finance
Co., Inc. The sale is subject to regulatory approval and is expected to be
consummated in the second quarter of 1997.
REAL ESTATE INVESTMENTS
American Federal has engaged in real estate development and management and
has invested in real estate joint ventures through ASC. Since 1984, American
Federal has not initiated any new real estate investment projects. At December
31, 1996, ASC's had no remaining net investment in real estate held for
development and sale, down from $29.5 million at the end of 1985. Elimination of
the real estate investment portfolio has been achieved through sales of assets
and establishment of allowances to offset declines in asset value. Pre-tax gains
from real estate held for development and sale totaled $313,000 for 1996.
Pre-tax losses from real estate held for development and sale totaled $367,000
and $1.1 million for the years ended December 31, 1995 and 1994, respectively.
28
<PAGE>
COMPETITION
In its market area, American Federal is subject to intense competition
from a number of local, regional, and superregional banking organizations, along
with other financial institutions and companies that offer financial services,
such as credit unions, retail credit companies, securities firms, insurance
companies, small loan companies, finance companies, mortgage companies, and
other financial service enterprises. Competition among financial institutions is
based upon interest rates offered on deposit accounts, interest rates charged on
loans and other credit and service charges, the quality of services rendered,
the convenience of banking facilities, and, in the case of loans to large
commercial borrowers, relative lending limits. Additional competition for
depositors' funds comes from issuers and suppliers of U.S. Government
securities, private debt obligations and other investment alternatives for
depositors. Many of the Bank's nonbank competitors are not subject to the same
extensive regulations that govern federally insured banks and thrifts. As a
result, such nonbank competitors may have certain advantages over the Bank in
providing certain services. In addition, many of the financial organizations in
competition with American Federal have much greater financial resources than the
Bank, and are able to offer similar services at more competitive costs with
greater leading capacities.
As of December 31, 1996, 35.4% of households in the
Greenville-Spartanburg-Anderson MSA was using one or more American Federal
services. The share of market is up from 32.9% of households at year-end 1995,
and 30.5% at year-end 1994. In competing with other financial service providers,
particular emphasis has been placed on the introduction of innovative products,
the application of improved technology, and the quality of service delivery.
EMPLOYEES
At December 31, 1996, American Federal, including its wholly-owned
subsidiaries, employed 658 full-time equivalent employees. American Federal
enjoys excellent employee relations. The Bank's employees are not represented by
any collective bargaining agreement.
FEDERAL AND STATE TAXATION
The following discussion of tax matters is intended only as a summary of
certain federal income tax matters and does not purport to be a comprehensive
description of the tax rules applicable to the Bank.
For federal income tax purposes, the Bank reports its income on a fiscal
year basis using the accrual method of accounting and is generally subject to
federal income taxation in the same manner as other corporations.
For tax years beginning before 1996, a thrift institution such as the Bank
which met certain definitional tests relating primarily to its assets and the
nature of its business was allowed to compute deductions for bad debts using a
reserve method of accounting. The Small Business Job Protection Act of 1996
repealed the reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. As a result, large thrift
institutions with more than $500 million in assets, such as the Bank, are no
longer able to deduct additions to a reserve for bad debts but are permitted to
deduct bad debts only as they occur.
In addition, a large thrift institution such as the Bank generally is
required to recapture (i.e., take into income) its post-1987 additions to its
bad debt reserve, that is, the amount by which its bad debt reserve exceeds the
balance of such reserve as of the end of its last taxable year ending before
1988. The excess
29
<PAGE>
reserves are recaptured into income over a period of six years, which may be
extended to seven or eight years if the thrift meets a residential loan
requirement. Although the Bank is required to recapture $4.0 million of
post-1987 additions to its bad debt reserve, the recapture will not
substantially impact earnings because the Bank has previously recorded deferred
tax liabilities for post-1987 additions to its bad debt reserve.
The balance of the Bank's pre-1988 bad debt reserves is subject to
recapture if the Bank ceases to qualify as a bank for federal income tax
purposes, or if the Bank makes certain distributions in excess of the Bank's
current and accumulated earnings and profits, distributions in redemption of
stock, or distributions in partial or complete liquidation. In the event of a
distribution considered to be made from pre-1988 reserves, the amount restored
to income would be the amount which, when reduced by the amount of tax on such
income, is equal to the amount of the distribution. The Bank does not intend to
make any distribution that would result in recapture of any portion of its
pre-1988 bad debt reserves.
31
<PAGE>
SUPERVISION AND REGULATION
GENERAL
The Bank is a federally-chartered savings bank subject to extensive
regulation, examination and supervision by the OTS, as its chartering agency and
by the Federal Deposit Insurance Corporation (FDIC), as the deposit insurer. The
Bank is also a member of the FHLB System and its deposit accounts are insured up
to the applicable limits by the FDIC under the Savings Association Insurance
Fund (SAIF) and, for certain deposits, the Bank Insurance Fund (BIF). 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 test the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. 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 regulation, whether by
the OTS, the FDIC or through changes in applicable federal laws could have a
material adverse impact on the Bank and its operations.
Set forth below are certain of the regulatory requirements applicable to the
Bank to the extent not discussed elsewhere herein.
OTS CAPITAL REQUIREMENTS
Under federal law and OTS regulations, savings associations are required to
comply with each of three separate capital adequacy standards: a "tangible
capital" requirement; a "leverage ratio;" and a "risk-based capital"
requirement. The OTS is authorized to establish individual capital requirements
for a savings association consistent with these capital standards. As described
more fully below under "Prompt Corrective Action," the OTS was required by the
Federal Deposit Insurance Improvement Act of 1991 (FDICIA) to promulgate
additional capital requirements that in certain respects have superseded the
capital requirements discussed immediately below.
TANGIBLE CAPITAL. The OTS capital regulations require tangible capital of at
least 1.5% of adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained earnings,
noncumulative perpetual preferred stock and related surplus. In addition, all
intangible assets, other than a limited amount of properly valued purchased
mortgage servicing rights (PMSRs), must be deducted from tangible capital.
LEVERAGE RATIO. The leverage ratio adopted by the OTS requires savings
associations to maintain core capital in an amount equal to at least 3.0% of
adjusted total assets. "Core capital" includes common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and any
related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, certain goodwill and certain mortgage servicing
rights less certain intangible assets, mortgage servicing rights and investments
in nonincludable subsidiaries. In general, intangible assets must be deducted in
computing core capital because they are excluded from assets under the OTS'
capital rules. There are exceptions to this rule of deduction, however. PMSRs,
originated mortgage servicing rights (OMSRs) and purchased credit card
relationships (PCCRs) may comprise in the aggregate up to 50% of an
association's core capital, with PCCRs not exceeding 25% of core capital,
provided that such rights must
32
<PAGE>
be valued at the lower of 90% of fair market value or 100% of the remaining
unamortized book value of the asset.
RISK-BASED CAPITAL. The risk-based capital standard for savings
institutions requires the maintenance of total capital (which is defined as core
capital and supplementary capital less certain holdings) to risk-weighted assets
of at least 8.0%. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. The components of core capital are
equivalent to those discussed earlier under the 3.0% leverage standard. The
components of supplementary capital currently include cumulative preferred
stock, long term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-adjusted assets. Overall, the
amount of supplemental capital counted toward total capital cannot exceed 100%
of core capital.
On August 31, 1995, the OTS issued an interim rule providing that the
amount of risk-based capital that may be required to be maintained by an
institution for recourse assets cannot be greater than the total of the recourse
liability. The interim rule provides that whenever the calculation of risk-based
assets (including assets sold with recourse) would result in a capital charge
greater than the institution's maximum recourse liability on the assets sold,
instead of including the assets sold in the institution's risk-weighted assets,
the institution may increase its risk-based capital by its maximum recourse
liability. In addition, qualified savings associations may include in their
risk-weighted assets, for the purpose of capital standards and other measures,
only the amount of retained recourse of small business obligation transfers
multiplied by the appropriate risk weight percentage. The interim rule sets
reserve requirements and aggregate limits for recourse held under the modified
treatment. Only well-capitalized institutions and adequately capitalized
institutions with OTS permission may use this reduced capital treatment.
On August 16, 1996, the federal banking agencies jointly proposed to
revise their respective risk-based capital rules relating to treatment of
certain collateralized transactions. These types of transactions generally
include claims held by banks (such as loans and repurchase agreements) that are
collateralized by cash or securities issued by the U.S. Treasury or U.S.
Government agencies. If adopted, the proposal would permit certain partially
collateralized claims to qualify for the 0% risk category. To qualify for the 0%
risk category, the portion of the claim that will be continuously collateralized
must be specified either in terms of dollar amount or percentage of the claim.
For off-balance sheet derivative contracts, the collateralized portion of the
transaction could be specified by dollar amount or percentage of the current or
potential future exposure.
FDICIA requires the OTS (and the other federal banking agencies) to
revise their risk-based capital standards, with appropriate transition rules, to
ensure that they take account of interest-rate risk, concentration of credit
risk, and the risks of non-traditional activities. In 1993, the OTS adopted a
final rule adding an interest rate risk (IRR) component that would be
incorporated into its risk-based capital rule. Under the final rule, which
became effective in 1994, only a savings association with "above normal"
interest rate risk exposure (i.e., where an institution's net portfolio value or
NPV would decline by more than 2% in the event of a hypothetical 200-basis point
move in interest rates) would be required to deduct an IRR component from its
capital. The NPV is defined as the net present value of expected cash inflows
and outflows from an institution's assets, liabilities, and off balance sheet
items. The IRR component deduction that such an institution would be required to
make from its capital would be equal to one half of its above normal interest
rate risk exposure (i.e., 50% of the amount by which the decline
32
<PAGE>
in its NPV exceeds a 2.0% decline). The deduction would become effective two
quarters after the date of the report on which the IRR component was based.
Savings associations with less than $300 million in assets and risk-based
capital ratios in excess of 12% are not subject to an IRR component deduction.
Effective September 1, 1995, the interest rate risk rule was amended to include,
in evaluating capital adequacy, an assessment of the exposure to declines in the
economic value of an association's capital due to changes in interest rates.
Based upon calculations performed by the OTS concerning the Bank, the
Bank's interest rate risk exposure has been determined to be not greater than
"normal" exposure as of December 31, 1996.
On June 26, 1996, the Office of the Comptroller of the Currency, the
Federal Reserve Board and the FDIC issued a joint agency policy statement that
provides the standards that the federal banking agencies will use to evaluate
the adequacy and effectiveness of an institution's interest rate risk
management. The joint policy addresses fundamental elements for sound interest
rate risk management, including appropriate board and senior management
oversight and the need for a comprehensive risk management process that
identifies, measures, monitors and controls risk. An institution with material
weaknesses in its risk management process or high levels of exposure relative to
its capital will be directed to take corrective action, including raising
additional capital, strengthening management expertise, improving management
information and measurement systems, reducing levels of exposure, or some
combinations of these actions, depending on the facts and circumstances of the
individual institutions.
The OTS issued a Thrift Bulletin in August 1995 that describes how and
under what circumstances an institution may (1) appeal its interest rate risk
component by requesting an adjustment to the interest rate risk component
generated by the OTS model or (2) seek approval to use its own internal interest
rate risk model to calculate the interest rate risk component. The Thrift
Bulletin provides that to be eligible to seek an adjustment to the interest rate
risk component, an institution must show that its interest rate risk component,
as calculated by the OTS, would cause the institution to move to a lower prompt
corrective action category and that the accuracy of the OTS' estimate of
interest rate risk exposure can be materially improved through the use of more
refined data or more appropriate assumptions tailored to the specific
institution. The Thrift Bulletin also outlines the circumstances under which
well capitalized institutions may request to use their own internal interest
rate risk model in place of the OTS model in calculating interest rate risk
capital requirements. The internal model must meet certain OTS standards,
including reasonable assumptions about future interest rates, prepayment rates
for assets and attrition rates for liabilities.
The FDICIA also required that the OTS (and other federal banking agencies)
revise the risk-based capital standards with appropriate transition rules to
take into account concentration of credit risks and risks of nontraditional
activities. Effective January 17, 1995, the OTS (along with the other federal
banking agencies) issued final regulations which explicitly identify
concentration of credit risk and other risks from nontraditional activities, as
well as an institution's ability to manage these risks, as important factors in
assessing an institution's overall capital adequacy. These final regulations do
not contain any specific mathematical formulas or capital requirements.
For purposes of determining all three capital components, federal law and
the OTS regulations require that investments in and extensions of credit to
certain non-includable subsidiaries be deducted from capital. However, under the
Housing and Community Development Act of 1992, the OTS, by order, may prescribe
a percentage of a thrift's investment in a non-includable subsidiary held as of
April 12, 1989 that may be included in a particular institution's capital, if it
determines that the use of such a percentage
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would not increase the risk to the institution's insurance fund, and would not
result in the institution being in an unsafe or unsound condition. The higher
percentage limit allowed by the OTS may not exceed: (i) 40%, from July 1, 1995
to June 30, 1996; and (ii) 0%, thereafter. Certain exemptions also generally
apply where the subsidiary: (i) is engaged in the activities solely as an agent
for its customers; (ii) is engaged solely in mortgage-banking activities; (iii)
(1) is an insured depository institution or a company the sole investment of
which is an insured depository institution and (2) was acquired by the
association prior to May 1989; or (iv) is a federal savings association that
existed as such on August 9, 1989, and was, or acquired its principal assets
from, an association that was chartered before October 15, 1982, as a state
savings or cooperative bank. See "Subsidiaries" for a discussion of the Bank's
non-qualifying subsidiary.
A comparison of the Bank's various regulatory capital requirements at
December 31, 1996 is included in Note 13 of Notes to Consolidated Financial
Statements, included in American Federal's 1996 Annual Report, which is
incorporated herein by reference.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the OTS and the other banking regulators are
required to establish five capital categories ("well-capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized") and to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, with respect to
institutions in the three undercapitalized categories, the severity of which
will depend upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the FDICIA requires the banking
regulator to appoint a receiver or conservator for an institution that is
critically undercapitalized. OTS and the other federal banking agencies have
specified by regulation the relevant capital level for each category.
Under the OTS final rule implementing the prompt corrective action
provisions, a savings institution that (i) has a total risk-based capital of
10.0% or greater, a Tier 1 (core) risk-based capital ratio of 6.0% or greater
and a leverage ratio of 5.0% or greater, and (ii) is not subject to any written
agreement, order, capital directive, or prompt corrective action directive
issued by the OTS, is deemed to be "well-capitalized." An institution with a
total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital
ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater is considered
to be "adequately capitalized." A savings institution that has a total
risk-based capital of less than 8.0% or a Tier 1 risk-based capital ratio of
less than 4.0% or a leverage ratio of less than 4.0% is considered to be
"undercapitalized." A savings institution that has total risk-based capital of
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible equity capital
to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets except
certain PMSRs and qualifying supervisory goodwill.
In the case of a bank or thrift that is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized, the institution
is required to submit an acceptable capital restoration plan to its appropriate
federal banking agency. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches, or engaging in any new line of business except in
accordance with an accepted capital restoration plan or with the approval of the
FDIC. In addition, the appropriate federal banking agency is given authority
with respect to any
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undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution if it determines "that those actions are necessary to carry out the
purpose" of FDICIA.
At December 31, 1996, the Bank met all of its capital requirements on a
fully phased-in basis and had the requisite capital levels to be deemed a "well
capitalized" institution under the OTS' prompt corrective action regulations.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank's deposit accounts are insured by the FDIC to a maximum of
$100,000 for each insured account through the SAIF and the BIF.
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The
risk-based system, which went into effect January 1, 1994, assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned.
Under the final risk-based assessment system there are nine assessment
risk classifications (I.E., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates for
members of both the BIF and the SAIF for the second half of 1995, as they had
been during 1996, ranged from 23 basis points (0.23% of deposits) for an
institution in the highest category (I.E., "well capitalized" and "healthy") to
31 basis points (0.31% of deposits) for an institution in the lowest category
(I.E., "undercapitalized" and "substantial supervisory concern"). These rates
were established for both funds to achieve a designated ratio of reserves to
insured deposits (I.E., 1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so that,
beginning in 1996, the deposit insurance premiums for 92% of all BIF members in
the highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the assessment rate range
of 23 to 31 basis points for SAIF members given the undercapitalized nature of
that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates
would have adverse consequences for SAIF-insured institutions, such as the Bank,
including reduced earnings and an impaired ability to raise funds in capital
markets and to attract deposits, in July 1995 the FDIC, the Treasury Department,
and the OTS released statements outlining a proposed plan to recapitalize the
SAIF, the principal feature of which was a special one-time assessment on
depository institutions holding SAIF-insured deposits, which was intended to
recapitalize the SAIF at a reserve ratio of 1.25%. This proposal contemplated
elimination of the disparity between the assessment rates on BIF and SAIF
deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act
of 1996 (the Funds Act) was enacted by Congress as part of omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC has implemented a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's SAIF-insured deposits
held as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Bank recorded a
charge against earnings for the special assessment in the quarter ended
September 30, 1996 in the amount of $5.6 million (pre-tax).
In addition, on December 24, 1996, in order to avoid collecting more
than needed to maintain the SAIF's capitalization rate at 1.25 percent of
aggregate insured deposits, the FDIC adopted in final a revision in the SAIF
assessment rate schedule which retroactively effected, as of December 11, 1996,
(i) a widening in the assessment rate spread among
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institutions in the different capital and risk assessment categories, (ii) an
overall reduction of the assessment rate range assessable on SAIF deposits of
from 0 to 27 basis points, and (iii) a special interim assessment rate range for
the last quarter of 1996 of from 18 to 27 basis points on institutions subject
to Financing Corporation (FICO) assessments in order to cover the interest due
for that period on outstanding FICO bonds. Effective January 1, 1997, FICO
assessments are imposed on both BIF- and SAIF-insured deposits in annual amounts
presently estimated at 1.29 basis points and 6.44 basis points, respectively.
The Bank anticipates that the net effect of the decrease in the premium
assessment rate on SAIF deposits will result in a reduction in its total deposit
insurance premium assessments for the years 1997 through 1999, assuming no
further changes in announced premium assessment rates.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS.
REGULATORY ASSESSMENTS
Savings institutions are required by OTS regulation to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, paid on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly thrift financial report. The Bank's total assessments for the calendar
year ended December 31, 1996 were $247,000.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of savings institutions are governed by
the Home Owners' Loan Act of 1933, as amended (HOLA) and, in certain respects,
the FDI Act. As a result of the FIRREA and FDICIA, the operations of savings
institutions, including the Bank, have been significantly impacted.
FIRREA was enacted for the purpose of resolving problem savings
institutions, establishing SAIF as a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings institutions and imposing bank-like
standards on savings institutions. FDICIA, among other things, requires that
federal banking regulators intervene promptly when a depository institution
experiences financial difficulties, mandates the establishment of a risk-based
deposit insurance assessment system and requires imposition of numerous
additional safety and soundness operational standards and restrictions. Both
FIRREA and FDICIA contain provisions affecting numerous aspects of the
operations and regulations of federally-insured savings associations and empower
the OTS and the FDIC, among other agencies, to promulgate regulations
implementing their provisions. The descriptions of statutory provisions and
regulations applicable to savings associations set forth in this document do not
purport to be complete descriptions of such statutes and regulations and their
effects on the Bank. Moreover, because some of the provisions of FDICIA are
still being implemented through the adoption of regulations by the various
federal banking agencies, the Bank cannot yet fully assess the impact of these
provision on its operations.
The federal banking statutes, as amended by FIRREA and the FDICIA, among
other things: (i) restrict the use of brokered deposits by savings institutions
that are not well capitalized; (ii) prohibit the acquisition of any corporate
debt security that is not rated in one of the four highest rating categories;
(iii) restrict the aggregate amount of loans secured by nonresidential real
estate property to 400% of capital; (iv) permit bank holding companies to
acquire savings institutions; and (v) require the federal banking agencies to
establish by regulation loan-to-value limitations on real estate lending.
Certain statutes are discussed in greater detail below.
LOANS TO ONE BORROWER. Under the HOLA, as amended by FIRREA, savings
institutions are generally subject to the national bank limits on loans to one
borrower. Generally, savings institutions may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of their
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unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if the portion of such loan in excess of 15%
of capital and surplus is secured by readily-marketable collateral, which is
defined to include actively-traded securities, but generally does not include
real estate.
Under currently applicable post-FIRREA regulations, as of December 31,
1996, the Bank could lend to a single borrower and its related entities on an
unsecured basis any amount up to $17.5 million based upon its unimpaired capital
and surplus on that date. American Federal believes it is currently in
compliance with all applicable loans-to-one-borrower requirements.
QUALIFIED THRIFT LENDER TEST. The HOLA requires savings institutions to
meet a QTL test. Under the QTL test, as modified by FDICIA, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangible assets, including goodwill, and (iii) the value of property used to
conduct business) in certain "qualified thrift investments" (such as home
mortgage loans and other residential real estate-related assets) on a monthly
average basis in 9 out of every 12 months.
A savings association that fails the QTL test and does not convert to a
bank charter generally will be prohibited from: (i) engaging in any new activity
not permissible for a national bank; (ii) paying dividends not permissible under
national bank regulations; (iii) obtaining advances from any FHLB; and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, beginning three years after
the association failed the QTL test, the association would be prohibited from
engaging in any activity not permissible for a national bank and would have to
repay any outstanding advances from an FHLB as promptly as possible. As of
December 31, 1996, the Bank's QTL percentage was 78.9%, which exceeded the
current QTL requirements.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger, and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution (Tier 1 Association) and has not been advised by the OTS that it is
in need of more than normal supervision, could, after prior notice but without
the approval of the OTS, make capital distributions during a calendar year equal
to the greater of (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year or (ii) 75% of its net income for the previous four
quarters. Any additional capital distributions would require prior regulatory
approval. An institution that meets its regulatory capital requirement, but not
its fully phased-in capital requirement before and after a proposed capital
distribution (Tier 2 Association) could, after prior notice but without the
approval of the OTS, make capital distributions of up to 75% of its net income
over the most recent four quarter period. In computing the institution's
permissible percentage of capital distributions, previous distributions made
during the previous four quarter period must be included. A savings institution
that does not meet its current regulatory capital requirement (Tier 3
Association) could not make any capital distributions without the prior written
approval of the OTS. Such institutions, however, may make capital distributions
consistent with approved capital plans. In the event a savings institution's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. Under the rule, the OTS could
prohibit a proposed capital distribution by an institution, which would
otherwise be
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permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, which took
effect in December 1992, the Bank would be prohibited from making any capital
distributions if, after the distribution the Bank would have (i) a total
risk-based capital ratio of less than 8.0%, (ii) a Tier 1 risk-based capital
ratio of less than 4.0%, or (iii) a leverage ratio of less than 4.0%
The Bank currently satisfies all of its capital requirements on a fully
phased-in basis and therefore is permitted to pay dividends in accordance with
the applicable capital distribution rules for Tier 1 Associations described
above.
LIQUIDITY. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government securities, state or federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0%, and is currently 5.0%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1.0%) of the total of its net
withdrawable deposit accounts and short-term borrowings payable. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
daily average liquidity of the Bank at December 31, 1996 was 8.21%, which
exceeded the then applicable 5.0% liquidity requirement. Its short-term
liquidity ratio at December 31, 1996 was 6.35%. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirement.
REAL ESTATE LENDING STANDARDS. As mandated by FDICIA, the OTS and the
other federal banking agencies have adopted uniform regulations, effective March
1993, prescribing standards for extensions of credit (i) secured by real estate
or (ii) made for the purpose of financing the construction of improvements on
real estate. The OTS regulation requires each savings association to establish
and maintain written internal real estate lending standards consistent with safe
and sound banking practices and appropriate to the size of the institution and
the nature and scope of its real estate lending activities. The policy must also
be consistent with accompanying OTS guidelines, which include loan-to-value
ratios for the following types of real estate loans: raw land (65%); land
development (75%); nonresidential construction (80%); improved property (85%);
and one- to four-family residential construction (85%). Owner-occupied one- to
four-family home mortgages and home equity loans do not have maximum
loan-to-value ratio limits, but those with a loan-to-value ratio at origination
of 90% or greater are expected to be backed by private mortgage insurance or
readily marketable collateral. Institutions are also permitted to make a limited
amount of loans that do not conform to the loan-to-value limitations so long as
such exceptions are appropriately reviewed and justified. The guidelines also
list a number of lending situations in which exceptions to the loan-to-value
standards are justified.
ACCOUNTING REGULATIONS AND POLICIES. In March 1995, the FASB issued
Statement No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to be Disposed of". The statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The statement was
effective for the Bank in 1996, and did not have a material impact on the Bank's
financial statements.
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In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights-an amendment of SFAS No.65". The statement requires that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those rights are acquired. The statement also
requires evaluation of capitalized mortgage servicing rights for impairment.
Currently, SFAS No. 65 recognizes only purchased mortgage servicing rights and
prohibits capitalization of servicing rights on loans sold that were acquired
through in-house originations. The statement was effective in 1996. The initial
impact of adopting the statement was not material.
In October 1995, the FASB issued SFAS No. 123 Accounting for Stock Based
Compensation." This statement was effective for financial statements issued for
1996. SFAS No. 123 provides guidance on the valuation of fixed and performance
stock compensation plans. The statement encourages, but does not require
entities to account for stock compensation awards based on the estimated fair
value of the award at the date of grant. The statement permits continuation of
current accounting practices which generally do not result in charges to expense
for stock options. However, footnote disclosure of the effects on the financial
statements as if the options had been expensed is required. The Bank has
continued its current accounting practice and has provided the required
disclosures. The statement had no impact on operating results.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". The statement
will become effective January 1, 1997. The statement uses a "financial
components" approach that focuses on control to determine the proper accounting
for financial asset transfers. Under that approach, after financial assets are
transferred, an entity would recognize on the balance sheet all assets it
controls and liabilities it has incurred. It would remove from the balance sheet
those assets it no longer controls and liabilities it has satisfied. The Bank
does not anticipate that adoption of this standard will have a material effect
on the Bank's financial statements in 1997.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125", an amendment to SFAS No. 125, which
is effective December 31, 1996. This statement delays the effective date of
certain provisions of SFAS No. 125 until after December 31, 1997. The amended
provisions include those related to the transfers of financial assets and
secured borrowings. The provisions in SFAS No. 125 related to servicing assets
and liabilities are not delayed by this amendment. The Bank does not anticipate
that adoption of this standard will have a material effect on the Bank's
financial statements.
COMMUNITY REINVESTMENT. Under the CRA, as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take that record into account
in its evaluation of certain applications by the institution. FIRREA amended the
CRA to require all institutions to make public disclosure of their CRA
performance using the ratings of "outstanding," "satisfactory," "needs to
improve," or "substantial noncompliance." The Bank received an
"outstanding"rating in its last CRA examination by the OTS dated July 24, 1995.
On May 4, 1995, the bank regulatory agencies, including the OTS,
adopted new uniform CRA regulations that provide guidance to financial
institutions on their CRA obligations and the methods by which those obligations
will be assessed and enforced. The regulations establish three tests applicable
to
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the Bank: (1) a lending test to evaluate direct lending in low-income areas
and indirect lending to groups that specialize in community lending; (ii) a
service test to evaluate its delivery of services to such areas; and (iii) an
investment test to evaluate its investment in programs beneficial to such areas.
The new CRA regulations became effective on July 1, 1995, but reporting
requirements were not effective until January 1, 1997. Evaluation under the
regulations is not mandatory until July 1, 1997. The Bank believes its current
operations and policies substantially comply with the regulations, and therefore
no material changes to operations or policies are expected.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement actions against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful actions likely to have an adverse effect on
an insured institution. Civil penalties cover a wider range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators are
provided with far greater flexibility to pursue enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to the capital requirements. Possible enforcement action ranges
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances.
SAFETY AND SOUNDNESS STANDARDS
The FDIA, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994(CDRI Act), requires the federal bank
regulatory agencies to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation and compensation, fees and
benefits, and such other operational and managerial standards as the agencies
deem appropriate. The federal bank regulatory agencies have adopted, effective
August 9, 1995, a set of guidelines prescribing safety and soundness standards
pursuant to FDICIA, as amended. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees, and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholders. The federal banking agencies determined that stock valuation
standards were not appropriate. The FDICIA, as amended by the CDRI Act, also
requires the federal banking agencies to establish standards relating to asset
quality and earnings. The federal banking agencies, including the OTS, issued
guidelines effective October 1, 1996 relating to asset quality and earnings.
Under the guidelines, a savings institution should maintain systems
(commensurate with its size and the nature and scope of its operations) to
identify problem assets and prevent deterioration in those assets, as well as to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the Bank's operations.
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In addition, the agencies adopted regulations that authorize, but do not
require, an agency to order an institution that has been given notice by an
agency that it is not satisfying any of such safety and soundness standards to
submit a compliance plan. If, after being so notified, an institution fails to
submit an acceptable compliance plan or fails in any material respect to
implement an accepted compliance plan, the agency must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
"prompt correction action" provisions of FDICIA. See --"Prompt Corrective
Action". If an institution fails to comply with such an order, the agency may
seek to enforce such order in judicial proceedings and to impose civil money
penalties.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. Each FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-Atlanta, is required to acquire
and hold shares of capital stock in FHLB-Atlanta in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB-Atlanta, whichever is greater. The Bank is in
compliance with this requirement, with an investment in FHLB-Atlanta stock at
December 31, 1996 of $8.3 million. FHLB advances must be secured by specific
types of collateral and may be obtained only for the purpose of providing funds
for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to members. Should dividends be reduced, or interest on further FHLB
advances increased, the Bank's net interest income might also be reduced.
Further, there can be no assurance that the impact of the FIRREA on the FHLBs
will not also cause a decrease in the value of the FHLB-Atlanta stock held by
the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board ("FRB") regulations require savings institutions
to maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The FRB regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for such accounts aggregating $52.0 million or less (subject to
adjustment by the FRB) the reserve requirement is 3.0%; for accounts greater
than $52.0 million, the reserve requirement is $1.6 million plus 10.0% (subject
to adjustment by the FRB between 8.0% and 14.0%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.0 million of
otherwise reservable balances (subject to adjustments by the FRB) are exempted
from the reserve requirements. The Bank is in compliance with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be cash, balances at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement may be to reduce the Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window," but FRB regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
EXECUTIVE OFFICERS
41
<PAGE>
The following lists the executive officers of the Bank, all positions held
by them in the Bank (including the period each such position has been held), a
brief account of their business experience during the past five years, and
certain other information including their ages.
WILLIAM L. ABERCROMBIE, JR. -- Chairman, Chief Executive Officer, and
President. He joined American Federal in 1973 and held management positions in
branch administration and loan administration until 1981. He established
Commercial Real Estate Lending at the Bank in 1983, and later served as Special
Assistant to the President for Lending Management and as Chief Operating
Officer. He became President and Chief Executive Officer in 1988, and was
elected Chairman in 1993. He serves on the Savings Association Insurance Fund
Advisory Committee to the FDIC, the State Board of Financial Institutions, and
is a past Chairman of the Community Financial Institutions of South Carolina. He
is 49.
MICHAEL A. TRIMBLE -- Chief Financial Officer, Chief Operating Officer, and
Director. He joined American Federal in 1984 as Chief Financial Officer. His
prior experience included six years in commercial banking and eight years in
public accounting with KPMG Peat Marwick LLP. He was named Chief Operating
Officer in January, 1990, retaining his position as Chief Financial Officer. He
is 55.
ROBERT A. LEA -- Senior Vice President and Controller. He joined American
Federal in 1989 as Assistant Controller and was previously affiliated with KPMG
Peat Marwick LLP as Tax Manager. He was named Controller in August, 1995. He is
35.
42
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1996, the net book value of the Bank's total investment in
premises and equipment was $17.6 million. See Note 7 of the Notes to
Consolidated Financial Statements incorporated herein by reference for
additional information. At December 31, 1996, the Bank owned 37 of its branch
office buildings (4 are constructed on leased land) and leased its main office.
<TABLE>
<CAPTION>
OFFICE YEAR SQUARE NET BOOK TOTAL OWN/
LOCATION OPENED FOOTAGE VALUE DEPOSITS LEASE TERMS OF THE LEASE
--------- ------- ------- ------ --------- ----- ------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
300 E. McBee Ave. 1984 164,716 $1,451 $ 97,641 Lease Original lease dated 11/30/84;
Greenville, S.C. Renewed: 7/01/95; Expires 6/30/00.
Five 5-year options.
The $1,273,000 is invested
in 6 acres of land adjoining
the main office.
105 E. Stone Avenue 1955 1,955 34 21,115 Own
Greenville, S.C.
201 S. Pleasantburg 1963 3,251 170 33,855 Own
Greenville, S.C.
55 Farrs Bridge Rd. 1967 2,895 147 50,579 Own
Greenville, S.C.
2111 Wade Hampton Blvd. 1972 2,279 119 35,536 Own
Greenville, S.C.
702 N. Main Street 1974 2,453 76 15,535 Lease Ground lease dated 10/10/72;
Greer, S.C. Terminates 12/31/98; Annual rent is
$8,640: Renewal: Three 5 year options
remain.
203 W. Butler Ave. 1988 3,500 555 35,048 Own
Mauldin, S.C.
5008 Old Spartanburg Rd. 1977 1,851 52 18,360 Lease Ground lease dated 4/12/76;
Eastgate Shopping Ctr. Terminates 5/31/06; Annual rent is
Taylors, S.C. $8,745; Renewal: Two 5-year
options remain.
2600 Old Anderson Rd. 1975 2,009 119 25,135 Lease Ground lease dated 8/15/77; renewed
Greenville, S.C. 8/31/94; Terminates 8/31/09; Annual
rent is $13,124; Renewal; One 10-year
option remains.
901 Haywood Rd. 198 12,124 192 14,341 Own
Greenville, S.C.
1715 Augusta Rd. 1981 2,103 397 15,876 Own Adjacent lot leased; Orig. lease dated
Greenville, S.C. 6/11/80; Terminates 7/31/00;
Annual rent is $5,100; Renewal:
Two 5-year options.
713 W. Wade Hampton Blvd. 1974 3,092 189 19,907 Own
Greer, S.C.
1610 Woodruff Rd. 1993 3,800 817 8,787 Own
Greenville, S.C.
453 E. Henry St. 1981 1,709 153 13,102 Own
Spartanburg, S.C.
24 S. Main St. 1958 8,162 278 54,155 Own
Inman, S.C.
43
<PAGE>
<CAPTION>
OFFICE YEAR SQUARE NET BOOK TOTAL OWN/
LOCATION OPENED FOOTAGE VALUE DEPOSITS LEASE TERMS OF THE LEASE
------------- -------- ------- --------- -------- ------ ------------------
301 E. Wood St. 1973 3,050 204 21,655 Own
Spartanburg, S.C.
7801 W. O. Ezell Blvd. 1975 2,020 270 19,878 Own
Spartanburg, S.C.
303 S. Alabama St. 1977 1,515 87 23,874 Own
Chesnee, S.C.
1704 E. Main St. 1983 2,303 284 10,695 Own
Spartanburg, S.C.
1504 W. Floyd Baker Blvd. 1993 3,800 850 17,064 Own
Gaffney, S.C.
314 E. Main St. 1974 9,610 231 18,116 Own
Union, S.C.
301 N. Broad St. 1978 4,349 155 15,727 Own
Clinton, S.C.
300 N. Main St. 1995 1,178 261 20,235 Own
Saluda, S.C.
129 N. Pine St. 1995 4,318 414 25,802 Own
Batesburg, S.C.
100 S. Main St. 1995 7,750 240 38,592 Own
Saluda, S.C.
301 N. Main St. 1995 1,485 0 0 Lease Acquired lease from Nations Bank. Lease
Saluda, S.C. Closed branch in 1996 (assets combined with above) dated 12/14/82; Amended 4/01/93;
Terminates 3/31/98;Renewal option:
Two 5-yr. options remain.
Annual rent $22,881.
102 E. Main St. 1995 2,562 345 18,108 Own
Ninety Six, S.C.
51 Town Center North 1995 1,482 49 5,157 Lease Acquired lease from Nations Bank. Lease
McCormick, S.C. dated 9/01/95; Terminates 9/01/97; Annual
rent $7,718; Renewal: Three 1-year
options remain.
201 Trade St. 1955 4,289 110 28,377 Own
Fountain Inn, S.C.
124 N. E. Main St. 1970 2,380 318 26,169 Own
Simpsonville, S.C.
201 E. First Ave. 1986 4,778 528 51,103 Own
Easley, S.C.
5 W. Main St. 1970 2,798 178 23,763 Own
Liberty, S.C.
5709 Calhoun Memorial Dr. 1971 2,772 211 21,678 Lease Ground lease dated 6/01/83;
Easley, S.C. Terminates 5/31/98; Annual rent
is $14,400; Renewal: One 5-year option.
1051 Tiger Blvd. 1975 3,340 192 14,509 Own
Clemson, S.C.
210 W. Cedar Rock St. 1976 2,718 159 27,317 Own
Pickens, S.C.
44
<PAGE>
<CAPTION>
OFFICE YEAR SQUARE NET BOOK TOTAL OWN/
44
<PAGE>
<CAPTION>
LOCATION OPENED FOOTAGE VALUE DEPOSITS LEASE TERMS OF THE LEASE
------------- -------- ------- --------- -------- ------ ------------------
1 North Hamilton Ave. 1993 3,800 750 28,672 Own
Williamston, S.C.
914 Anderson St. (Hwy. 86) 1983 2,074 155 25,783 Own
Piedmont, S.C.
Route 3, 81 Plaza1 979 2,084 202 20,611 Own
Powdersville, S.C.
1439 Sandifer Blvd. 1983 2,303 284 16,914 Own
Seneca, S.C.
1630 Reidville Rd. 1994 7,600 1,248 6,206 Own
Spartanburg, S.C.
6708 State Park Rd. 1994 2,474 25 2,323 Lease Lease dated 5/16/94;
Travelers Rest, S.C. Lease is managed by the month;
Annual rent $24,744.
SUPPORT FACILITIES
Williams, St. Bank's off-site 3,500 38 - Own
Williamston, S.C. storage facility
390 E. Henry St. Parking Lease Lease dated 11/2/95; Terminates 30
Spartanburg, S.C. days written notice;
Annual rent $420.
E. First Ave. Vacant property Own Purchased property for $34,000 in
Easley, S.C. March 1995 - for additional
parking.
Hwy 290 Vacant property Own Purchased property for $225,000 in
Duncan, S.C. March 1994 (2.0 acres) - future
branch site.
</TABLE>
44
<PAGE>
In addition to the 40 branch offices operated by the Bank, the Bank's
subsidiary, Finance South, leased all 17 consumer finance offices at December
31, 1996. The location and net book value for each office is listed below:
<TABLE>
<CAPTION>
OFFICE SQUARE NET BOOK OWN/
LOCATION FOOTAGE VALUE LEASE TERMS OF THE LEASE
(Dollars in thousands)
<S> <C> <C> <C> <C>
310-D East Main St. 1,200 -- Lease Lease dated 9/10/90; Renewed 8/18/94; Terminates 9/30/99;
Williamston, S.C. Annual rent $9,000; Renewal: Two 3-year options
621 Fairview Rd 1,200 -- Lease Lease dated 12/01/90; Renewed 9/11/95; Terminates 11/30/98;
Suite B-4 Annual rent $12,936; Renewal: None.
Simpsonville, S.C.
11109 Asheville Hwy., 1,200 -- Lease Lease dated 2/01/91; Renewed 4/01/95; Terminates 3/31/97;
Suite 5 Annual rent $2,550; Renewal: Three 2-year
Inman, SC options.
122 West Cherokee St., 2,000 -- Lease Lease dated 7/01/91; Renewed 7/01/94; Terminates 6/30/97;
Chesnee, SC Annual rent $3,990; Renewal: None
5155 Calhoun Memorial Hwy. 1,200 -- Lease Lease dated 3/01/95; Terminates 2/28/98;
Easley, S.C. Annual rent $11,932;
Renewal: Three year option.
1735 Reidville Rd. 1,600 -- Lease Lease dated 4/01/92; Renewal 5/01/94; Terminates 4/30/98;
Reidville Circle Center Suite 11 Annual rent $16,364; Renewal: Three 2-year options.
Spartanburg, SC
496-E S. Pleasantburg Dr. 1,125 -- Lease Lease dated 4/01/92; Renewed 4/01/95; Terminates 3/31/98;
Greenville, SC Annual rent $13,546; Renewal: None
3033-C Wade Hampton Blvd. 1,200 -- Lease Lease Dated 7/01/93; Terminates 6/30/99
Taylors, SC 29687 Annual Rent $12,900; Renewal: Three-year option.
15997 Wells Hwy. 952 -- Lease Renewed 3/01/94; Terminates 2/28/99;
Seneca, SC 29679 Annual Rent $11,625; Renewal: None.
630 Chesnee Hwy., Suite 4 1,200 -- Lease Lease Dated 9/15/92; Renewed 9/01/95;
Spartanburg, SC 29305 Terminated 8/31/98; Annual Rent $10,200;
Renewal: None.
1403 Hwy. 86, Piedmont Plaza 1,100 -- Lease Lease Dated 10/15/92; Renewed 10/15/93;
Piedmont, SC 29673 Terminates 10/14/97; Annual Rent $4,000;
Renewal: Two-year Option.
441 North Duncan By-Pass 1,600 -- Lease Lease Dated 1/09/93; Renewed 1/24/96;
West Town Plaza Unit #6 Terminates 2/7/97; Annual Rent $2,400;
Union, S.C. 29379 Renewal: Consecutive period containing 2
lease years, 4 months notice.
700 E. Main St. 1,400 -- Lease Lease dated 6/09/94; Terminates 5/31/99;
Duncan, SC 29334 Annual rent $10,800;
Renewal: Three-year option.
148 Walnut Lane 1,800 -- Lease Lease dated 7/01/93; Terminates 6/30/99;
Travelers Rest, SC Annual Rent $13,800; Renewal: None.
213 E. Main St. 800 -- Lease Lease dated 9/10/93; Renewal 8/01/95;
Pickens, SC 29671 Terminates 7/31/98; Annual Rent $7,800;
Renewal: Option to renew upon expiration.
1597 W. Floyd Baker Blvd. 1,200 -- Lease Lease dated 10/19/93; Terminates 10/31/98;
Gaffney, SC Annual Rent $12,000; Renewal: Three-year option.
1103 N. Main St., Suite C-2 1,200 -- Lease Lease dated 6/96; Terminates 11/30/99;
Fountain Inn, SC Annual Rent $12,600. One two-year option.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
46
<PAGE>
The Bank from time to time and currently is involved as plaintiff or
defendant in various legal actions incident to its business. Any adverse
decision is not believed to be material, either individually or collectively, to
the financial condition of the Bank.
In addition to actions in the normal course of business, on August 9,
1995, the Bank filed a claim against the United States in the Court of Federal
Claims. The complaint seeks compensation for exclusion of goodwill from the
calculation of the Bank's regulatory capital requirements as a result of
enactment of the FIRREA. The goodwill arose from acquisitions in 1982.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The market information contained in the section captioned Common Stock and
Dividend Information in the American Federal 1996 Annual Report is incorporated
herein by reference. The information contained under the section captioned
Ownership of Equity Securities in the Bank's 1997 Proxy Statement is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section captioned Selected Consolidated
Financial Data in the American Federal 1996 Annual Report is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in the section captioned Management's Discussion
and Analysis of Financial Condition and Results of Operations in the American
Federal 1996 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements contained in the American Federal
1996 Annual Report which are listed under Item 14 herein are incorporated herein
by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The registrant has not within the 24 months before the date of the most
recent consolidated financial statements changed its accountants and there have
been no disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned Proposal One --
Election of Directors in the Bank's 1997 Proxy Statement is incorporated herein
by reference.
The information contained under the section captioned Executive Officers in
Part I, Item 1 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned Executive
Compensation and Benefits and Information on Benefit Plans and Policies in the
1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
47
<PAGE>
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned Ownership of Equity Securities in the 1997 Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the sections captioned Ownership of Equity Securities and Proposal One --
Election of Directors in the 1997 Proxy Statement. Information contained in Item
12(a) above also is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference to
the sections captioned Proposal One -- Election of Directors and Ownership of
Equity Securities in the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Independent Auditor's Report*
2. Consolidated Financial Statements*
(a) Consolidated Balance Sheets
(b) Consolidated Statements of Operations
(c) Consolidated Statements of Cash Flows
(d) Consolidated Statements of Stockholders' Equity
(e) Notes to Consolidated Financial Statements
* Incorporated by reference included in American Federal 1996 Annual Report
attached as an Exhibit hereto. All schedules have been omitted as the
required information is either inapplicable or included in the Notes to
Consolidated Financial Statements.
3. The following exhibits are filed as part of this report in Item 14(C):
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
11.1 Statement relating to computation of earnings per share.
13.1 Annual Report
21.1 List of subsidiaries of the Registrant. (Incorporated herein by reference from
the Registrant's Form 10-K for the year ended December 31, 1991.)
28.1 Registrant's Proxy Statement for the Annual 1997 meeting.
</TABLE>
* Represents a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item 14(c)
of this report.
4. No reports on form 8-K have been filed during the last quarter of the
fiscal year covered by this report.
49
<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.
Date: March 28, 1997
AMERICAN FEDERAL BANK, FSB
BY:/s/ William L. Abercrombie, Jr.
William L. Abercrombie, Jr.
President, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
By: /s/ Michael A. Trimble Principal Financial Officer, Chief March 28, 1997
----------------------------------------- Operating Officer and Director
Michael A. Trimble
By: /s/ Robert A. Lea Principal Accounting Officer March 28, 1997
--------------------------------------------
Robert A. Lea
By: /s/ William L. Abercrombie, Jr. President, Chief Executive Officer and March 28, 1997
-------------------------------------- Chairman of the Board
William L. Abercrombie, Jr.
By: /s/ James P. Edwards Director March 28, 1997
------------------------------------------
James P. Edwards
B y: /s/ Blake P. Garrett, Jr. Director March 28, 1997
--------------------------------------------
Blake P. Garrett, Jr.
By: /s/ C. Dan Joyner Director March 28, 1997
--------------------------------------------
C. Dan Joyner
By: /s/ John A. McCarroll Director March 28, 1997
------------------------------------------
John A. McCarroll
By: /s Dr. David E. Shi Director March 28, 1997
---------------------------------------------
Dr. David E. Shi
By: /s/ Dr. B.J. Skelton Director March 28, 1997
---------------------------------------------
Dr. B.J. Skelton
</TABLE>
<PAGE>
Exhibit 11.1
EARNINGS PER SHARE CALCULATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
(Proceeds and number of shares in thousands)
PRIMARY EARNINGS PER SHARE: Proceeds Number of
shares
Weighted average number of shares of
common stock outstanding for the
period 10,967
Average options outstanding $4,982 477
4,982 11,444
----- ------
Assumed repurchase for treasury at
average market value (4,982) (270)
------ --------
$ - 11,174
======== =======
Net income $ 4,661
=======
Earnings per share $ .42
========
51
<PAGE>
Earnings per share calculation for the year ended December 31, 1996 (Proceeds
and number of shares in thousands)
Number of shares:
First quarter 11,448
Second quarter 11,396
Third quarter 11,133
Fourth quarter 11,174
Weighted average 11,287
Net income $14,492
Earnings per share $ 1.28
========
52
<PAGE>
Exhibit 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
As of or for the Years Ended December 31,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA:
Total interest income $103,992 $99,558 $86,369 $79,768 $87,206
Total interest expense 50,009 50,905 39,720 34,774 45,105
Net interest income 53,983 48,653 46,649 44,994 42,101
Provision for loan losses 4,338 2,279 1,432 1,233 3,451
Net interest income after provision for loan losses 49,645 46,374 45,217 43,761 38,650
Noninterest income 15,661 12,968 8,852 7,601 9,330
Noninterest expenses 43,014 34,600 31,466 31,002 29,433
Income before income taxes 22,292 24,742 22,603 20,360 18,547
Income taxes 7,800 6,502 7,072 7,907 7,046
Income before extraordinary item and cumulative effect of
changes in accounting principles 14,492 18,240 15,531 12,453 11,501
Extraordinary item -- (1,709) -- -- --
Cumulative effect of changes in accounting principles -- -- -- (35,178) --
Net income (loss) 14,492 16,531 15,531 (22,725) 11,501
<CAPTION>
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Earnings Per Share
Primary:
Income before extraordinary item and cumulative effect of
changes in accounting principles $1.28 $1.60 $1.37 $1.25 $1.87
Net income (loss) 1.28 1.45 1.37 (2.28) 1.87
Fully Diluted:
Income before extraordinary item and cumulative effect of
changes in accounting principles 1.28 1.60 1.37 1.19 1.48
Net income (loss) 1.28 1.45 1.37 (2.17) 1.48
Dividends per share .37 .28 .22 .10 --
Weighted average shares:
Primary 11,287 11,425 11,308 9,967 6,577
Fully diluted 11,316 11,438 11,308 10,485 8,324
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $1,318,400 $1,345,884 $1,254,418 $1,112,009 $1,039,518
Mortgage-backed securities 310,526 437,561 453,452 368,612 167,119
Loans receivable, net 837,855 805,365 717,232 664,291 679,929
Deposits 986,780 977,957 835,364 826,820 821,158
Federal Home Loan Bank advances 87,001 102,001 163,516 104,691 96,814
Other borrowed money 110,258 134,983 144,095 80,708 29,572
Stockholders' equity 115,592 109,792 93,358 81,735 76,065
<CAPTION>
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Performance ratios:
Return on average assets (1) 1.34% 1.28% 1.30% 1.22% 1.07%
Return on average stockholders' equity (1) 16.37 16.14 17.61 17.70 16.40
Net yield on average earning assets 4.22 3.98 4.12 4.71 4.38
Average interest-earning assets to average interest-bearing
liabilities 108.6 108.1 107.7 106.4 101.53
Efficiency ratio (1) 54.03 56.22 55.32 57.46 57.84
Asset quality ratios:
Net chargeoffs to average net loans .47 .15 .11 .16 .44
Nonperforming assets to total assets .48 .71 .50 .73 1.25
Allowance for loan losses to net loans 1.26 1.25 1.25 1.26 1.20
Allowance for loan losses to nonperforming loans 201.35 116.07 165.77 115.10 110.49
Regulatory capital ratios:
Tangible 8.08 7.42 7.57 7.35 3.41
Tier I leverage ratio 8.08 7.42 7.57 7.35 4.41
Tier I risk-based 13.26 13.10 13.97 12.92 7.16
Risk-based 14.51 14.35 15.21 14.17 8.41
<CAPTION>
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of banking offices 40 41 35 33 33
Number of deposit accounts 233,530 224,169 193,294 185,241 178,066
Number of loans 64,127 88,129 51,534 44,298 43,857
</TABLE>
(1) Computed based on income before cumulative effect of changes in accounting
principles for 1993 and excluding the $5.6 million ($3.6 million after tax)
effect of the special FDIC assessment in 1996.
6
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of American
Federal Bank, FSB and its subsidiaries. A more detailed discussion and analysis
is included in the American Federal Bank, FSB 1996 Annual Report on Form 10-K
filed with the Office of Thrift Supervision.
ASSET/LIABILITY MANAGEMENT AND CHANGES IN FINANCIAL CONDITION
The Bank's asset/liability management strategy continues to be one of
maximizing interest and fee income while maintaining asset quality and low
levels of risk to changes in interest rates. This strategy involves constant
monitoring of the economic factors influencing interest rates, investment and
borrowing opportunities, and asset quality. Adjustments to the Bank's holdings
are made as conditions change and opportunities arise. In 1996, the Bank's
strategy and market conditions combined to produce net interest income of $54.0
million, an increase of $5.3 million over 1995.
Total assets decreased $27.5 million to $1.32
billion at December 31, 1996. The Bank's assets
decreased as a result of sales of mortgage-backed
securities and credit cards. These sales took place (Graph Chart of Loans
late in 1996 in order to take an opportunity to and Mortgage-Backed
restructure total interest-earning assets towards Securities Goes Here)
higher quality, higher yielding investments, to
reduce the Bank's overall sensitivity to changes in
interest rates, and to protect the Bank from
possible future increases in nonperforming assets.
Total nonperforming assets were .48% of total (Graph Chart of Deposits
assets at December 31, 1996, down from .71% in Goes Here)
1995.
Total loans increased $32.5 million or 4.0% in
1996. The increase would have been over 8.7%
excluding the sale of the $33.0 million credit card
portfolio. The Bank experienced strong demand for
both consumer and commercial loans in 1996,
increasing those portfolios by $49.6 million and
$19.4 million, respectively. Mortgage loans
remained fairly level throughout 1996, due
primarily to sales of fixed rate originations in
the secondary market. Securities available for sale
decreased $97.1 million in 1996, primarily due to
the sale of $121.1 million of low-yielding
mortgage-backed securities.
Total liabilities decreased $33.3 million to
$1.20 billion at December 31, 1996, despite
increases in deposits of $8.8 million. Consumer and
commercial checking accounts increased $11.9
million or 5.6%. These accounts are a low-cost
source of funds for the Bank and serve to decrease
the Bank's sensitivity to changes in interest rates
since many of them are noninterest-bearing
accounts. These accounts have also been targeted
for growth by the Bank because of their strategic
significance as the primary banking relationship
through which customers select additional services.
Certificates of deposit have not been emphasized
due to their relative cost in comparison to
alternative sources of funds.
7
<PAGE>
<PAGE>
Other borrowings decreased $39.7 million in 1996
(Graph Chart of Interest as proceeds from sales of assets were used to repay
Rate Sensitivity short-term borrowings. As a result, the Bank
Goes Here) lowered its overall borrowing costs for the year
ended December 31, 1996 to 4.24% from 4.51% in
1995. In addition, the Bank's interest sensitivity
as measured by the excess of liabilities over
assets repricing within one year improved for the
second consecutive year to 2.83% at December 31,
1996 compared to 4.97% at December 31, 1995, and
8.39% in 1994.
INTEREST SENSITIVITY ANALYSIS
The following table illustrates the repricing
analysis of the Bank's interest-earnings assets and
interest-bearing liabilities as of December 31,
1996. For purposes of the table, repricing
characteristics of loans include estimated annual
prepayment rates. The Bank's balances in NOW and commercial deposits have
historically shown low sensitivity to movements in interest rates. NOW accounts
are grouped in deposits maturing or repricing after five years, while the
commercial deposits are shown as net noninterest sensitive assets.
<TABLE>
<CAPTION>
GREATER AFTER 3
THAN AFTER 1 YEARS NET
6 MONTHS YEAR BUT BUT NONINTEREST
6 MONTHS THROUGH WITHIN WITHIN AFTER SENSITIVE
OR LESS 1 YEAR 3 YEARS 5 YEARS 5 YEARS ASSETS
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate sensitivity gap $(77,099) $ 39,748 $125,022 $124,633 $(112,129) $ 100,175
Cumulative sensitivity gap (77,099) (37,351) 87,671 212,304 100,175 --
Percent of gap to total assets:
Period (5.85)% 3.01% 9.48% 9.45% (8.50)% 7.60%
Cumulative (5.85) (2.83) 6.65 16.10 7.60 --
</TABLE>
Over the past six years, the Bank's one-year interest sensitivity gap has
decreased from 11.8% as of December 31, 1990 to its current level of 2.83%. The
improvement is primarily the result of changes in the asset mix toward assets
with shorter repricing terms, a movement towards noninterest sensitive
liabilities and liabilities with longer repricing terms, and increased capital.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. American Federal earned $14.5 million in 1996, compared to $16.5
million in 1995. Excluding the special FDIC assessment for recapitalization of
the Savings Association Insurance Fund, the Bank earned $18.1 million, an
increase of $1.6 million or 9.5% over 1995. Net interest income increased $5.3
million and noninterest income increased $2.7 million. The provision for loan
losses increased $2.1 million and noninterest expenses were $2.9 million higher,
excluding the $5.6 million SAIF special assessment. Income taxes were $1.3
million higher due to a one-time adjustment of estimated tax in 1995, offset by
lower pre-tax income in 1996.
NET INTEREST INCOME. Net interest income was $54.0 million in 1996, an
increase of $5.3 million compared to 1995. The impact of changes in the mix of
interest-earning assets and interest-bearing liabilities and overall slightly
lower interest rates caused the interest rate spread and net yield on earning
assets to improve 24 basis points each. The net yield on earning assets improved
to 4.22% for the year from 3.98% in 1995.
INTEREST INCOME. Total interest income for the year ended December 31, 1996
was $104.0 million, an increase of $4.4 million or 4.4% over 1995. This increase
was the effect of a $58.8 million increase in average interest-earning assets to
$1.28 billion. The yield on interest-earning assets decreased slightly, by 3
basis points, due to a lower interest rate environment in 1996, offset by a
shift in total earning assets towards higher yielding loans and away from
securities. Average balances on consumer loans increased $55.2 million, and
average
8
<PAGE>
<PAGE>
commercial loans increased $11.7 million. Average balances of mortgage-backed
securities and residential loans decreased $16.6 million and $13.0 million,
respectively. The mortgage-backed securities portfolio decreased due to the sale
early in the fourth quarter of $121.1 million of securities, and due to
repayments throughout the year. Average balances of investment securities
increased $20.9 million over 1995. These securities decreased 16 basis points in
yield, consistent with the overall lower interest rates in the market.
NET INTEREST INCOME
<TABLE>
<CAPTION>
AT
DECEMBER 31, YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1996 1995 1994
<CAPTION>
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage-backed securities 6.26% $ 412,574 $ 25,937 6.29% $ 429,159 $ 28,322 6.60% $ 430,034 $ 26,249
Loans:
Residential mortgage 8.01 270,939 21,571 7.96 283,973 22,264 7.84 279,089 21,754
Commercial mortgage 8.57 136,413 11,864 8.70 136,356 12,219 8.95 112,136 9,275
Consumer 10.12 333,557 34,350 10.30 278,384 28,651 10.29 223,707 22,292
Commercial business 8.86 87,121 7,699 8.84 75,467 6,924 9.17 69,497 5,916
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.05 828,030 75,484 9.12 774,180 70,058 9.05 684,429 59,237
Other interest and
dividends 5.93 39,639 2,571 6.49 18,111 1,178 6.50 16,667 883
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-earning assets 8.14% $1,280,243 $103,992 8.12% $1,221,450 $ 99,558 8.15% $1,131,130 $ 86,369
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Deposits 3.87% $ 942,766 $ 37,328 3.96% $ 876,971 $ 35,501 4.05% $ 808,035 $ 27,220
Borrowings 5.31 235,812 12,681 5.38 252,704 15,404 6.10 242,672 12,500
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing liabilities 4.11% $1,178,578 $ 50,009 4.24% $1,129,675 $ 50,905 4.51% $1,050,707 $ 39,720
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Excess (deficit) of
interest-earning assets over
interest-bearing liabilities $ 101,665 $ 91,775 $ 80,423
Net interest income $ 53,983 $ 48,653 $ 46,649
Interest rate spread 4.03% 3.88% 3.64%
Net yield on earning assets 4.22% 3.98%
<CAPTION>
<S> <C>
YIELD/
RATE
<S> <C>
Interest-earning assets:
Mortgage-backed securities 6.10%
Loans:
Residential mortgage 7.79
Commercial mortgage 8.27
Consumer 9,96
Commercial business 8.51
<S> <C>
8.65
Other interest and
dividends 5.30
<S> <C>
Total interest-earning assets 7.64%
<S> <C>
Interest-bearing liabilities:
Deposits 3.36%
Borrowings 5.15
<S> <C>
Total interest-bearing liabilities 3.78%
<S> <C>
Excess (deficit) of
interest-earning assets over
interest-bearing liabilities
Net interest income
Interest rate spread 3.86%
Net yield on earning assets 4.12%
</TABLE>
INTEREST EXPENSE. For the year ended December 31, 1996, interest expense was
$50.0 million, a decrease of $896,000 or 1.8% compared with 1995. Total interest
expense decreased due to changes in the composition of total interest-bearing
liabilities and decreases in rates on other borrowings. Average balances in
total deposits increased $65.8 million, partially
due to branch purchases in the second and third (Graph Chart of Loan
quarters of 1995 which were included for a full 12 Loss Allowance and
months in the 1996 average balances. However, part Nonperforming Loans
of the increase relates to a continued emphasis on Goes Here)
growth of transaction accounts. Average balances in
transaction accounts increased $34.2 million in
1996 compared to 1995. Due to the relatively low
average rates paid on these deposits, borrowing
costs on deposits decreased 9 basis points in 1996.
In addition, in late 1995, the Bank secured $50.5
million of borrowings at an average rate of 5.80%.
These borrowings, combined with the prepayment in
1995 of a 9.90%, $25.0 million FHLB advance,
decreased the Bank's other borrowing cost by 72
basis points during 1996.
PROVISION FOR LOAN LOSSES. The provision for
loan losses was $4.3 million in 1996 compared to $2.3 million in 1995. The
increase was due primarily to growth in the loan portfolio and losses in the
credit card portfolio, which was sold in the fourth quarter of 1996. Net
chargeoffs for the credit card portfolio in 1995 were $267,000 as opposed to
$2.0 million in 1996 prior to the sale. Total net
9
<PAGE>
<PAGE>
chargeoffs for 1996 were $3.9 million compared to $1.1 million for 1995. At
December 31, 1996, the allowance for loan losses was 1.26% of total net loans.
(For additional discussion see "Nonperforming Assets.")
NONINTEREST INCOME. Noninterest income increased 20.8% to $15.7 million in
1996. Excluding gains and losses on sales of assets, noninterest income
increased 23.3%. The increases were primarily due to increases in service fees
on deposits, loan fee income, and insurance commissions. Service fees on
deposits, loan fees, and insurance commissions increased 25.2%, 12.1%, and
23.2%, respectively, in 1996. Growth in deposit fees was generated as the number
of consumer checking accounts increased from 111,000 in 1995 to 119,000 in 1996.
Part of the increase in deposit account fee income is also due to 1995 branch
purchases. These branches were included in the Bank's deposit base for a full
year for the first time in 1996. In addition to new accounts, more customers are
utilizing the Bank's ATM and Visa Check Card services.
The gain on the sale of loans of $2.9 million in 1996 resulted from the sale
of the credit card portfolio in the fourth quarter. The $2.7 million loss on
sale of securities arose from the sale of $121.1 million of low yielding
mortgage-backed securities, also in the fourth quarter.
NONINTEREST EXPENSE. Noninterest expense increased $8.4 million in 1996
compared to 1995. Of that increase, $5.6 million was due to the special FDIC
assessment in the third quarter for the Bank's share of the recapitalization of
the SAIF. The remainder of the increase is attributable to compensation and
fringe benefits and net occupancy expenses. Both of these expenses were impacted
by a full year of expenses for branches acquired during 1995 and by investments
in branch automation technology, also in 1995. Compensation and fringe benefits
increased 9.8% and occupancy expenses increased 9.7% over 1995 levels.
INCOME TAXES. Income taxes for 1996 were $7.8 million, a 20.0% increase over
1995. The increase was due to a lower than usual expense in 1995 from a one-time
decrease in the Bank's estimated tax liability, offset by lower pre-tax income
in 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL. American Federal earned $16.5 million in 1995, compared to $15.5
million in 1994. Net interest income increased $2.0 million and noninterest
income increased $4.4 million, while the provision for loan losses increased
$847,000 as a result of loan growth. Noninterest expenses were $3.4 million
higher in 1995. During the year, the Bank incurred extraordinary charges of $1.7
million, net of tax, by prepaying $35.5 million of FHLB advances. Income taxes
were reduced in 1995 due to a $1.5 million one-time adjustment of estimated tax
liability.
NET INTEREST INCOME. Net interest income is the largest component and most
significant determinant of net income for American Federal. A relatively small
percentage change in net interest income may cause a significant fluctuation in
net income. Net interest income for 1995 was $48.7 million, an increase of $2.0
million compared to 1994.
Average interest-earning assets increased $90.3 million to $1.2 billion,
while interest-bearing liabilities increased $79.0 million to $1.1 billion. The
impact of higher interest rates during early 1995 resulted in the yield on
interest-earning assets increasing 51 basis points to 8.15% and the cost of
interest-bearing liabilities increasing 73 basis points to 4.51%.
While the interest rate spread decreased 22 basis points to 3.64%, the net
yield on earning assets only decreased 14 basis points to 3.98%. The net yield
on earning assets decreased 8 basis points less because of an improved ratio of
interest-earning assets to interest-bearing liabilities. For the year ended
December 31, 1995, the ratio was 108.1% compared with 107.7% for 1994. This
resulted primarily from retention of earnings.
INTEREST INCOME. Total interest income for 1995 was $99.6 million, an
increase of $13.2 million or 15.3% over 1994. This increase was the combined
effect of a $90.3 million increase in interest-earning assets and a 51 basis
point increase in yield.
Average balances on consumer, commercial mortgage, and commercial business
loans increased $54.7 million, $24.2 million and $6.5 million, respectively. The
growth in consumer loans resulted from a
10
<PAGE>
<PAGE>
combination of growth in branch production, a successful credit card
solicitation, and the purchase of loans in connection with branch acquisitions.
The Bank's consumer finance subsidiary also experienced growth of $5.4 million
or 47.0% over year end 1994.
The yield on average interest earning assets in 1995 was 8.15% compared with
7.64% in 1994. Loan yield increased 40 basis points to 9.05%, and the yield on
mortgage-backed securities increased 50 basis points to 6.60%.
INTEREST EXPENSE. For the year ended December 31, 1995, interest expense was
$50.9 million, an increase of $11.2 million or 28.2% compared with 1994. Total
interest expense increased due to a combination of increased interest rates
during late 1994 and early 1995, and increased balances. Rate increases
accounted for 68% of the increase, while increased balances accounted for the
remainder.
Overall, the average cost of interest-bearing liabilities increased 73 basis
points to 4.51%. Average deposit costs increased 69 basis points to 4.05%, while
borrowing costs increased 95 basis points to 6.10%. During much of 1995, the
short-term nature of borrowings increased total borrowing costs. However, as a
result of branch purchases, the Bank was able, in the third quarter, to prepay a
9.90% FHLB advance maturing in 1998. A second advance was prepaid in the fourth
quarter. These transactions resulted in a total of $1.7 million of prepayment
charges, net of income taxes, but will allow the Bank to reduce future borrowing
costs.
For 1995, average interest-bearing liabilities were $1.1 billion, an increase
of $79.0 million or 7.5% compared to 1994. Average interest-bearing deposits
were $877.0 million, an increase of $68.9 million or 8.53%, while FHLB advances
and other borrowings increased $10.0 million or 4.1%.
PROVISION FOR LOAN LOSSES. For 1995, the provision for loan losses was $2.3
million, an increase of 59.1%. Net chargeoffs were $1.1 million in 1995 and
$786,000 in 1994. The allowance for loan losses was 1.25% of total net loans as
of December 31, 1995 and 1994. (For additional discussion see "Nonperforming
Assets.")
NONINTEREST INCOME. Noninterest income increased $4.1 million or 46.5% in
1995 compared to 1994. Excluding the impact of a $1.2 million write-down of real
estate in 1994, noninterest income increased $2.8 million or 27.0% in 1995. This
includes increases in loan fees and late charges of $329,000, increases in
service fees on deposits of $1.9 million, and decreases in other income of
$259,000.
The increase in service fees on deposits resulted primarily from an 18.5%
growth in the number of checking accounts and the successful introduction of a
debit card service in mid 1994. Loan fees increased because of lower
amortization of excess servicing costs which resulted from lower principal
payments of loans serviced for others in 1995. As of December 31, 1995,
approximately 45,000 or 40% of NOW account customers had debit cards. The
decrease in other income partially resulted from a gain on the sale of fixed
assets in 1994 which was not repeated in 1995.
NONINTEREST EXPENSES. Noninterest expenses increased $3.1 million or 10.0% in
1995 compared to 1994. In general, the increased expenses were the result of the
purchase of six additional locations and the credit card solicitation during the
year.
Compensation and fringe benefits increased 8.8% or $1.5 million. Base
compensation increased $1.2 million or 8.7% while fringe benefits increased
$290,000 or 9.5%. Again, the higher base compensation resulted primarily from
new employees in six locations acquired in 1995.
The remaining noninterest expenses increased $1.6 million or 11.2%. The
increase resulted in $656,000 of credit card solicitation costs and $312,000 of
intangible amortization related to the branch acquisitions.
The Bank also implemented a new $1.8 million delivery system in all branch
locations designed to increase accuracy and speed and improve customer service.
The new system is operated using personal computers on local area networks which
communicate with the main frame computer system via modem. The system allows
account information to be updated more quickly, and allows front-line personnel
the flexibility required to process multiple customer transactions more
smoothly. Long term, the Bank expects to realize a significant increase in the
speed of processing transactions as a result of the implementation of this
system, and customers will be able to conduct multiple transaction visits more
quickly.
11
<PAGE>
<PAGE>
INCOME TAXES. Income taxes for 1995 were $6.5 million compared to $7.1
million in 1994. The reduced tax resulted from a lower effective tax rate
partially offset by higher pre-tax earnings. The lower tax rate resulted from a
one-time decrease in an estimated tax liability.
NONPERFORMING ASSETS
All loans are classified as nonaccrual for
purposes of income recognition at the earlier of
(a) the time the collection of the principal
(Graph Chart of becomes uncertain; (b) when business loans and
Nonperforming Assets commercial real estate loans become 60 days past
Goes Here) due; (c) when residential mortgage loans and
consumer loans become 90 days past due; or (d) when
foreclosure action is commenced. A loan remains in
nonaccrual status until the factors which indicate
doubtful collectibility no longer exist, or until
the loan is determined to be uncollectible and is
charged off against the allowance for loan losses.
American Federal's nonperforming assets as of
December 31, 1996, 1995, and 1994 are shown in the
following table:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans on nonaccrual (1):
Mortgage $1,880 $4,034 $ 912
Commercial 1,271 2,452 2,739
Consumer 1,330 1,416 428
Total nonaccrual loans 4,481 7,902 4,079
Other nonperforming loans (2) 838 915 1,410
Total of nonperforming loans 5,319 8,817 5,489
Other nonperforming assets (3) 1,051 731 777
Total nonperforming assets $6,370 $9,548 $6,266
Percentage of total assets .48% .71% .50%
Percentage of nonperforming loans and other nonperforming assets to total loans and
other nonperforming assets .75% 1.17% .86%
</TABLE>
(1) If the above nonaccrual loans had been current in accordance with their
original terms and had been outstanding throughout the period or since
origination, for the years ended December 31, 1996, 1995 and 1994, the Bank
would have recorded approximately $565,000, $540,000, and $400,000 in
interest income on such loans, respectively. Included in the consolidated
statements of operations for each of the years ended December 31, 1996, 1995
and 1994 was approximately $282,000, $270,000 and $200,000, respectively, of
interest income which has been recognized on loans which were in nonaccrual
status at the end of the respective periods.
(2) Includes current loans accruing at below market rates of interest.
(3) Consisting primarily of real estate acquired in settlement of loans of
$954,000, $677,000 and $695,000 at December 31, 1996, 1995 and 1994,
respectively.
Total nonperforming assets decreased $3.2 million or 33.3% during 1996. At
December 31, 1996, nonperforming loans were $5.3 million or .63% of total
loans and other nonperforming assets. Under Statement of Financial Accounting
Standards (SFAS) No. 114, the recorded investment in impaired loans was
12
<PAGE>
<PAGE>
$4.3 million at December 31, 1996 and $5.2 million at December 31, 1995. Of
the loans considered to be impaired, $366,000 were included in nonaccruing
loans and $838,000 were included in other nonperforming loans above. The
remainder was not considered nonperforming.
At December 31, 1996, the allowance for loan losses was $10.7 million or
1.26% of loans outstanding, compared to $10.2 million or 1.25% at year-end
1995. Management considers the allowance for loan losses to be adequate based
upon its current evaluation and analysis of the loan portfolio. Adjustments
to the allowance may be necessary if economic conditions differ significantly
from the assumptions used in making the evaluations.
Real estate acquired in settlement of loans was $954,000 at December 31,
1996. These assets are carried at the lower of cost or fair value less the
estimated cost to sell.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are principal repayments on
mortgage-backed securities and loans, growth in savings deposits, borrowings,
FHLB advances, and earnings and other additions to stockholders' equity. The
Bank also had sufficient collateral at December 31, 1996 to support
approximately $157.8 million in additional FHLB advances and short-term
borrowings.
Liquid assets were approximately $111.4 million at December 31, 1996. The
Bank's liquidity exceeded all regulatory requirements during the year.
At December 31, 1996, commitments to
originate mortgage loans totaled $14.2 million.
In addition, outstanding unused consumer equity (Graph Chart of
lines of credit to customers totaled $74.3 Capital Ratios
million. The Bank was committed to $27.7 million Goes Here)
of commercial loans and lines of credit at
December 31, 1996. The Bank expects to fund
these commitments with cash provided from normal
operations. The Bank had no outstanding
commitments to sell loans at December 31, 1996.
At December 31, 1996, $156.7 million or 79.4%
of the FHLB advances and other borrowings had
maturities of less than one year, while 77.2% of
the $571.0 million of certificates of deposit
were scheduled to mature within one year.
Historically, a substantial portion of these
certificates renew.
At December 31, 1996, stockholders' equity
was $115.6 million or 8.8% of total assets. During 1996, the Bank continued
its plan to repurchase outstanding warrants for common stock. The repurchase
of 540,000 warrants was completed during the year, leaving no warrants
outstanding.
ACCOUNTING AND REPORTING CHANGES
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The
statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The statement was effective for the Bank
for the year ended December 31, 1996, and did not have a material impact on
the Bank's financial statements.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights an amendment of SFAS No. 65". The statement requires that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those rights are acquired. The statement
also requires evaluation of capitalized mortgage servicing rights for
impairment. Currently, SFAS No. 65 recognizes only
13
<PAGE>
<PAGE>
purchased mortgage servicing rights and prohibits capitalization of servicing
rights on loans sold that were acquired through in-house originations. The
statement was effective for the Bank January 1, 1996. The initial impact of
adopting the statement was not material.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation." This statement was effective for 1996. SFAS No. 123 provides
guidance on the valuation of fixed and performance stock compensation plans.
The statement encourages, but does not require entities to account for stock
compensation awards based on the estimated fair value of the award at the
date of grant. The statement permits continuation of current accounting
practices which generally do not result in charges to expense for stock
options. However, footnote disclosure of the effects on the financial
statements as if the options had been expensed is required. The Bank
continued its previous accounting practice. Therefore, the statement had no
impact on operating results.
In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". The
statement will become effective January 1, 1997. The statement uses a
"financial components" approach that focuses on control to determine the
proper accounting for financial asset transfers. Under that approach, after
financial assets are transferred, an entity would recognize on the balance
sheet all assets it controls and liabilities it has incurred. It would remove
from the balance sheet those assets it no longer controls and liabilities it
has satisfied. The Bank does not anticipate that adoption of this standard
will have a material effect on the Bank's financial statements in 1997.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125", an amendment to SFAS No. 125,
which is effective December 31, 1996. This statement delays the effective
date of certain provisions of SFAS No. 125 until after December 31, 1997. The
amended provisions include those related to the transfers of financial assets
and secured borrowings. The provisions in SFAS No. 125 related to servicing
assets and liabilities are not delayed by this amendment. The Bank does not
anticipate that adoption of this standard will have a material effect on the
Bank's financial statements.
OTHER MATTERS
On February 18, 1997, the Bank announced that a definitive agreement had
been reached with CCB Financial Corporation (CCB), headquartered in Durham,
North Carolina. The terms of the agreement call for CCB to issue .445 shares
of common stock for each share of the Bank at the closing date. This
transaction, which is structured as a tax-free pooling of interests, is
valued at $325.1 million based on the exchange ratio and the five day average
closing price of CCB through Friday, February 14, 1997 of $64.85.
This transaction is subject to regulatory authority and shareholder
approval. The merger is expected to be completed by the third quarter of
1997.
In 1995 the Bank filed a claim against the United States in the Court of
Federal Claims. The complaint seeks compensation for goodwill taken by the
government as a result of enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989. The goodwill arose from acquisitions in
1982. It is difficult for the Bank's management to assess the outcome of this
litigation at this time.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, substantially all of 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 does the effect of inflation.
14
<PAGE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS December 31,
<S> <C> <C>
American Federal Bank, FSB and Subsidiaries 1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 38,115 49,757
Short-term interest-bearing deposits 51,979 3,285
Securities available for sale (amortized cost of $338,987 at December 31, 1996 and $436,963 at
December 31, 1995) 342,341 439,485
Loans receivable, net:
Held for sale -- 1,273
Held for investment (net of allowance of $10,710 at December 31, 1996 and $10,234 at
December 31, 1995) 837,855 804,092
837,855 805,365
Real estate 954 728
Accrued interest receivable 8,669 7,985
Federal Home Loan Bank stock, at cost 8,290 8,290
Premises and equipment, net 17,555 17,716
Other assets 12,642 13,273
$1,318,400 1,345,884
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 986,780 977,957
Federal Home Loan Bank advances 87,001 102,001
Other borrowed money 110,258 134,983
Drafts outstanding 10,231 9,557
Other liabilities 8,538 11,594
1,202,808 1,236,092
Stockholders' equity:
Serial preferred stock, no par value; Authorized 10,000,000 shares; none outstanding at
December 31, 1996 and 1995 -- --
Common stock, $1.00 par value; Authorized 50,000,000 shares; issued and outstanding 10,975,535
at December 31, 1996 and 10,903,385 at December 31, 1995 10,976 10,903
Additional paid-in-capital 53,811 54,529
Unrealized gain on securities available for sale, net of income taxes 2,048 1,541
Retained income, restricted 48,757 42,819
115,592 109,792
$1,318,400 1,345,884
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31,
<S> <C> <C> <C>
American Federal Bank, FSB and Subsidiaries 1996 1995 1994
<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 75,484 70,058 59,237
Mortgage-backed securities 25,937 28,322 26,249
Other interest and dividends 2,571 1,178 883
103,992 99,558 86,369
INTEREST EXPENSE:
Deposits 37,328 35,501 27,220
Borrowings:
Short-term borrowed funds 10,149 12,141 7,996
Long-term borrowed funds 2,532 3,263 4,504
50,009 50,905 39,720
Net interest income 53,983 48,653 46,649
Provision for loan losses 4,338 2,279 1,432
Net interest income after provision for loan losses 49,645 46,374 45,217
NONINTEREST INCOME:
Service fees on deposits 10,697 8,545 6,653
Loan fees and late charges 1,837 1,638 1,309
Insurance commissions 1,707 1,386 1,290
Other 1,084 858 1,117
Net gain (loss) on sale of:
Loans receivable 2,917 56 (156)
Securities (2,667) 162 --
Real estate 86 323 (1,361)
15,661 12,968 8,852
NONINTEREST EXPENSES:
Compensation and fringe benefits 20,058 18,269 16,784
Net occupancy 7,400 6,747 6,616
Advertising 1,236 1,205 1,149
Federal insurance premiums 7,647 1,970 1,897
Other 6,673 6,409 5,020
43,014 34,600 31,466
Income before income taxes 22,292 24,742 22,603
Income taxes 7,800 6,502 7,072
Net income before extraordinary item 14,492 18,240 15,531
Extraordinary item -- loss on extinguishment of debt, net of income taxes -- (1,709) --
Net income (loss) $ 14,492 16,531 15,531
EARNINGS (LOSS) PER SHARE:
Primary and fully diluted:
Before extraordinary item $ 1.28 1.60 1.37
Extraordinary item -- (.15) --
$ 1.28 1.45 1.37
Dividends per share $ .37 .28 .22
WEIGHTED AVERAGE SHARES:
Primary 11,287 11,425 11,308
Fully diluted 11,316 11,438 11,308
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
American Federal Bank, FSB and Subsidiaries
<S> <C> <C> <C> <C> <C>
Additional Retained Total
Common Paid-in Income, Stockholders'
Stock Capital Restricted Other Equity
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $10,829 54,262 16,644 -- 81,735
Exercise of stock options 22 84 -- -- 106
Unrealized loss on securities, net of income taxes -- -- -- (1,630) (1,630)
Cash dividends declared on common stock -- -- (2,384) -- (2,384)
Net income -- -- 15,531 -- 15,531
Balance at December 31, 1994 10,851 54,346 29,791 (1,630) 93,358
Exercise of stock options 52 313 -- -- 365
Repurchase of common stock warrants -- (130) (460) -- (590)
Unrealized gain on securities, net of income taxes -- -- -- 3,171 3,171
Cash dividends declared on common stock -- -- (3,043) -- (3,043)
Net income -- -- 16,531 -- 16,531
Balance at December 31, 1995 10,903 54,529 42,819 1,541 109,792
Exercise of stock options 73 454 -- -- 527
Repurchase of common stock warrants -- (1,172) (4,509) -- (5,681)
Unrealized gain on securities, net of income taxes -- -- -- 507 507
Cash dividends declared on common stock -- -- (4,045) -- (4,045)
Net income -- -- 14,492 -- 14,492
Balance at December 31, 1996 $10,976 53,811 48,757 2,048 115,592
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,
American Federal Bank, FSB and Subsidiaries 1996 1995 1994
<S> <C> <C> <C>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,492 16,531 15,531
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for losses on loans and real estate 4,468 2,279 2,639
Depreciation and amortization of leasehold improvements 1,504 1,227 1,211
Increase in deferred income taxes 495 2,758 1,057
Amortization of intangibles 653 388 --
Stock dividends on FHLB stock -- -- (103)
Loss on extinguishment of debt, net -- 1,709 --
(Gain) Loss on sales of assets (336) (155) 185
Accretion of discount on loans acquired (279) (270) (393)
Other amortization and accretion 2,393 2,923 4,618
Net change in loans held for resale 1,286 (1,217) 9,088
Other items, net (4,571) (3,989) 1,065
Net cash provided by operating activities 20,105 22,184 34,898
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Purchases (122,339) (63,421) (73,121)
Sales 129,346 37,593 --
Calls, maturities, and prepayments 94,618 49,833 82,504
Purchases of securities held for investment -- -- (98,298)
Increase in loans receivable, net (44,670) (95,304) (67,890)
Real estate sales, net 762 2,167 1,575
Increases in premises and equipment, net (1,343) (4,211) (3,155)
Net cash provided (used) by investing activities 56,374 (73,343) (158,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand accounts 13,880 11,227 18,204
Increase (decrease) in certificate accounts (5,057) 21,084 (9,660)
Purchase of deposits -- 101,210 --
Proceeds from long-term FHLB advances -- 285 6,525
Repayments of long-term FHLB advances (10,000) (60,500) (14,000)
Increase (decrease) in short-term FHLB advances (5,000) (1,300) 66,300
Increase (decrease) in short-term other borrowed money (24,725) (59,612) 63,387
Proceeds from long-term other borrowed money -- 50,500 --
Increase in drafts outstanding 674 1,668 1,153
Dividend payments on common stock (4,045) (3,043) (2,384)
Proceeds from exercise of stock options 527 365 106
Repurchase of common stock warrants (5,681) (590) --
Net cash provided (used) by financing activities (39,427) 61,294 129,631
Net increase in cash and cash equivalents 37,052 10,135 6,144
Cash and cash equivalents at beginning of period 53,042 42,907 36,763
Cash and cash equivalents at end of period $ 90,094 53,042 42,907
SUPPLEMENTAL INFORMATION:
Interest paid $ 49,788 50,515 39,706
Income taxes paid 7,775 3,890 7,802
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS:
Securitization of loans receivable into mortgage-backed securities 9,997 4,868 2,312
Transfer from loans receivable to real estate acquired in settlement of loans 1,032 528 1,548
Unrealized gain (loss) on securities 832 5,190 (2,629)
Transfer of mortgage-backed securities to available for sale -- 332,396 --
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting and
reporting policies which American Federal Bank, FSB and Subsidiaries (the
"Bank") follow in preparing and presenting their consolidated financial
statements.
A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Bank and its wholly-owned subsidiaries, American Service
Corporation of S.C. (ASC) and Finance South, Inc. The principal business
activities of the subsidiaries are real estate sales, mortgage loan
originations and consumer finance. In consolidation all significant
intercompany items and transactions have been eliminated.
B) CASH AND CASH EQUIVALENTS
For purposes of consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks, short-term interest-bearing
balances in other banks, federal funds sold and securities purchased
under resale agreements. Both cash and cash equivalents have original
maturities of three months or less, and accordingly, the carrying amount
of such instruments is deemed to be a reasonable estimate of fair value.
C) SECURITIES
The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
115 effective January 1, 1994, and classified all securities as held to
maturity or available for sale. The effect of the adoption of SFAS No.
115 was a decrease in stockholders equity $1.6 million, net of tax. The
Bank does not have any trading securities. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values -- other than those accounted for under
the equity method or as investments in consolidated subsidiaries -- and
all investments in debt securities. Under SFAS No. 115, investments are
classified into three categories as follows: (1) Investments Held to
Maturity -- debt securities that the Bank has the positive intent and
ability to hold to maturity, which are reported at amortized cost; (2)
Trading Securities -- debt and equity securities, that are bought and
held principally for the purpose of selling them in the near term, which
are reported at fair value, with unrealized gains and losses included in
earnings; and (3) Investments Available for Sale -- debt and equity
securities which may be sold under certain conditions, which are reported
at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity (net of tax
effects).
In November 1995, the FASB issued a guide to implementation of SFAS No.
115 on accounting for certain investments in debt and equity securities
which allowed for the one-time transfer of certain investments classified
as held to maturity to available for sale. The Bank transferred $332.4
million of mortgage-backed securities to available for sale as of
December 31, 1995.
The fair value of securities is based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Sales are
accounted for on a trade date basis.
The Bank maintained liquid assets in excess of the amount required by
regulations during all periods included in these consolidated financial
statements. The required amount is 5% of the average daily balances of
deposits and short-term borrowings. Liquid assets consist principally of
cash, short-term interest-bearing deposits and investment securities and
mortgage-backed securities with remaining maturities of less than five
years.
D) LOANS
GENERAL. Loans held for investment are recorded at cost. Mortgage loans
consist of conventional 1-4 family residential loans, construction loans,
and interim and permanent financing of non-residential loans that are
secured by real estate.
19
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commercial loans are made primarily on the strength of the borrower's
general credit standing, the ability to generate repayment from income
sources and the collateral securing such loans. Consumer loans generally
consist of home equity loans, second mortgage loans, automobile, and
other personal loans.
In many lending transactions, collateral is taken to provide an
additional measure of security. Generally, the cash flow or earning power
of the borrower represents the primary source of repayment and collateral
liquidation a secondary source of repayment. The Bank determines the need
for collateral on a case-by-case or product-by-product basis. Factors
considered include the current and prospective creditworthiness of the
customer, terms of the instrument and economic conditions.
Mortgage loans held for sale are valued at the aggregate lower of cost or
market as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis.
IMPAIRMENT. On January 1, 1995, the Bank adopted the provisions of SFAS
No. 114 "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
requires creditors to evaluate loans for impairment and value those loans
for which it is probable that the creditor will be unable to collect all
amounts due according to the terms of the loan agreement at the present
value of expected cash flows, market price of the loan, if available, or
value of the underlying collateral. Expected cash flows are required to
be discounted at the loan's effective interest rate. SFAS No. 118 amends
SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan, and requires disclosure of income
recognition methods used.
INTEREST INCOME. Interest on loans is accrued monthly based on the
principal amount outstanding. The Bank places commercial and mortgage
loans on nonaccrual status when they become greater than sixty and ninety
days delinquent, respectively. Consumer loans are placed on nonaccrual
status when they become ninety days delinquent. When interest is received
it is recognized as a principal reduction or interest income based upon
management's determination of the loan's ultimate collectibility.
The Bank provides an allowance for possible uncollectible accrued
interest on loans which are ninety days delinquent for all interest
accrued prior to the loan being placed on nonaccrual status. This
allowance is included as a reduction of accrued interest receivable.
FEES AND DISCOUNTS. The net of loan origination fees received and direct
costs incurred in the origination of loans is deferred and amortized to
interest income over the contractual life of the loans adjusted for
actual principal prepayments using a method approximating the interest
method.
Discounts on loans acquired through merger are amortized over the
weighted average remaining contractual life of the loans adjusted for
actual principal prepayments, using a method approximating the interest
method.
SALES. The Bank sells and retains servicing on certain whole and
participating interests in real estate loans when the loans do not meet
the Bank's portfolio criteria. The Bank does not recognize gains or
losses on loan sales if the loans sold have the same approximate average
interest rate, adjusted for normal servicing costs, as the contractual
yield to the purchaser. However, gains or losses are recognized if at the
time of sale the average interest rate on the loans sold, adjusted for
normal servicing costs, differs from the agreed yield to the purchaser.
Gains or losses on such loan sales are determined based on the present
value of the difference between estimated future receipts and expected
normal servicing costs incurred by the Bank.
In 1996, the Bank adopted SFAS No. 122, "Accounting for Mortgage
Servicing rights". This statement requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans
for others, however those rights are acquired. A mortgage banking
operation that acquires mortgage servicing rights through either a
purchase or origination of mortgage loans and sells or securitizes those
loans with servicing rights retained, should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans
(without the servicing rights) based on their relative fair values if it
is practicable to estimate those fair values.
20
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 122 also requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair
value of those rights. A mortgage banking enterprise should stratify its
mortgage servicing rights that are capitalized after the adoption of SFAS
No. 122 based on one or more of the predominant risk characteristics of
the underlying loans. Any impairment is recognized through a valuation
allowance for each impaired stratum.
E) ALLOWANCE FOR LOAN LOSSES
The Bank provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the related allowance and all recoveries
are credited to the allowance. Additions to the allowance for possible
loan losses are provided by charges to operations based on various
factors which, in management's judgment, deserve current recognition in
estimating possible losses. Such factors considered by management include
the market value of the underlying collateral, stated guarantees by the
borrower if applicable, the borrowers' ability to repay from other
economic resources, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to outstanding loans, loss
experience, delinquency trends and economic conditions.
Beginning in 1995, the Bank adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan." Under the new standard, the allowance for
credit losses related to loans that are identified for impairment
evaluation in accordance with SFAS No. 114 is based on discounted cash
flows using the loan's initial effective interest rate, market price of
the loan, or the fair value of the collateral for collateral dependent
loans. Prior to 1995, the allowance for credit losses related to these
loans was based on undiscounted cash flows or the fair value of the
collateral for collateral dependent loans. This evaluation is inherently
subjective as it requires material estimates including the amounts and
timing of future cash flows expected to be received on impaired loans
that may be susceptible to significant change. The adoption of the
standard required no increases to the allowance for loan losses and had
no impact on net income for 1995 or 1996.
While management uses the best information available to make evaluations,
future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluations. Allowances for loan losses are subject to periodic review by
various regulatory authorities and may be adjusted based upon information
that is available to them at the time of their examination.
F) REAL ESTATE
Real estate represents real estate acquired through foreclosure and is
initially recorded at the lower of cost (principal balance of the former
mortgage loan less any specific valuation allowances) or estimated fair
value less costs to sell. Subsequent improvements are capitalized. Costs
of holding real estate, such as property taxes, insurance, maintenance
and interest expense, less related revenues during the holding period,
are expensed as period costs. Market values of real estate acquired in
settlement of loans are reviewed regularly and allowances for possible
losses are established when the carrying values of real estate acquired
in settlement of loans exceeds fair values less estimated costs to sell.
G) PREMISES AND EQUIPMENT
Premises and equipment are presented at cost, net of accumulated
depreciation and amortization. Depreciation and amortization of premises
and equipment are provided principally on a straight-line basis over the
estimated useful lives of the related assets. Estimated lives are
twenty-five to forty years for buildings and improvements and generally
three to ten years for furniture, fixtures and equipment.
The cost of maintenance and repairs is charged to expense as incurred and
improvements and other expenditures which materially increase property
lives are capitalized. The costs and accumulated depreciation applicable
to premises and equipment retired or otherwise disposed of are eliminated
from the related accounts and any resulting gains or losses are credited
or charged to income.
21
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H) INTANGIBLE ASSETS
The excess of cost over net assets and identifiable intangible assets of
acquired branches, including deposit base intangibles, is amortized over
the estimated periods benefited. At December 31, 1996, other assets
included intangibles totaling $8.0 million which are primarily related to
1995 acquisitions. Included in noninterest expenses in 1996 and 1995 was
$653,000 and $388,000, respectively, of amortization of these
intangibles. There was no intangible amortization in 1994.
I) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of securities under agreements to repurchase.
Fixed-coupon reverse repurchase agreements are treated as financings,
with the obligation to repurchase securities sold being reflected as a
liability and the securities underlying the agreements remaining as an
asset. During each period presented, the securities were delivered by
appropriate entry by the Bank's safekeeping agent to the counterpart's
accounts. The dealers may have sold, loaned or otherwise disposed of such
securities to other parties in the normal course of their operations, and
have agreed to resell to the Bank substantially identical securities at
the maturities of the agreements.
J) INCOME TAXES
The Bank accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes." Under SFAS No. 109 deferred tax expense or
benefit is recognized for the net change during the year in the deferred
tax liability or asset. That amount together with income taxes currently
payable is the total amount of income tax expense or benefit for the
year. Deferred taxes are provided for differences in financial reporting
bases for assets and liabilities as compared with their tax bases.
Basically, a current tax liability or asset is established for taxes
presently payable or refundable and a deferred tax liability or asset is
established for future tax items. A valuation allowance, if applicable,
is established for deferred tax assets that may not be realized.
K) PENSION COSTS
The Bank determines periodic pension cost which includes the cost of
benefits earned during the current period and an interest cost on the
projected benefit obligation, reduced by the earnings on assets held by
the retirement plan and amortization of the plan's excess funding over 15
years beginning January 1, 1987. The projected unit credit method is used
for the actuarial determination of pension expense.
L) STOCK BASED COMPENSATION
In 1996, the Bank adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation". The statement permits the Bank
to continue accounting for stock based compensation as set forth in APB
Opinion 25, "Accounting for Stock Issued to Employees", provided the Bank
discloses the proforma effect on net income and earnings per share of
adopting the full provisions of SFAS No. 123. Accordingly, the Bank
continues to account for stock based compensation under APB Opinion 25
and has provided the required proforma disclosures.
M) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosure in the financial statements regarding the fair value
of on and off-balance sheet financial instruments for which it is
practicable to do so. Fair values are based on quoted market prices where
available, and on estimates of present value or other valuation
techniques. These estimates are made at a specific point in time and are
subjective in nature involving uncertainties and significant judgement.
In addition, SFAS No. 107 excludes all non-financial instruments and
22
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
certain financial instruments from its disclosure requirements.
Accordingly, the aggregate fair values presented do not represent the
underlying fair value of the Bank.
Fair values for consolidated financial statement reporting purposes are
estimated for loans with similar financial characteristics. These loans
are segregated by type of loan, considering credit risk, interest rate
and prepayment characteristics. Each loan category is further segmented
into fixed and adjustable rate categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through estimated maturity dates. Expected cash flows are
discounted using the Bank's current rates that reflect the credit and
interest rate risks inherent in each category of loans. A prepayment
assumption is used as an estimate of the portion of loans that will be
repaid to their scheduled maturity.
N) USE OF ESTIMATES
Management of the Bank has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
the contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
O) OTHER
Certain amounts, previously reported, have been reclassified to state all
periods on a comparable basis which had no effect on stockholders' equity
or net income as previously reported.
(2) SECURITIES AVAILABLE FOR SALE
Securities available for sale are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Mortgage-backed securities
Adjustable-rate $ 155,020 2,239 (40) 157,219
5 and 7 year balloons 19,013 113 -- 19,126
15 and 30 year 133,652 1,241 (712) 134,181
Securities and obligations of U.S. government agencies and
corporations 31,302 513 -- 31,815
$ 338,987 4,106 (752) 342,341
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Adjustable-rate $ 129,551 1,396 (445) 130,502
5 and 7 year balloons 143,320 211 (686) 142,845
15 and 30 year 162,190 2,583 (559) 164,214
Securities and obligations of U.S. government agencies and
corporations 1,902 22 -- 1,924
$ 436,963 4,212 (1,690) 439,485
</TABLE>
Included above at December 31, 1996 and 1995, are $20.1 million and $29.7
million, respectively, of securities which qualify as a liquidity item
under the Office of Thrift Supervision ("OTS") liquidity requirements.
Certain of
23
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Bank's securities are pledged as collateral for advances and other
borrowed money as set forth in notes 9 and 10.
At December 31, 1996, included in the mortgage-backed securities were net
unamortized premiums of $4.8 million compared to $7.3 million at December
31, 1995. The Bank amortized $3.7 million, $1.9 million and $3.8 million
of net premiums for the years ended December 31, 1996, 1995 and 1994,
respectively.
In 1996, the Bank sold $129.3 million of mortgage-backed securities at a
loss of $2.7 million. In 1995 the Bank sold securities of $37.6 million
at a gain of $162,000. In 1994, the Bank recorded no gains or losses on
sales of securities.
The amortized cost and estimated market values of available for sale
securities held as of December 31, 1996, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities
due to borrowers' rights to prepay or call obligations prior to maturity
with or without penalty.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 2,553 2,586
Due after one year through five years 17,592 17,757
Due after five years through ten years 25,458 25,533
Due after ten years 293,384 296,465
$ 338,987 342,341
</TABLE>
24
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LOANS RECEIVABLE, NET
Classification of loans receivable, net is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
Conventional loans:
Residential (1-4 family units) $233,382 241,394
Non-residential and multi-family 133,975 134,909
Construction loans 40,339 26,963
Whole loans and participations purchased 21,716 27,907
429,412 431,173
Other loans:
Consumer loans 294,130 244,490
Equity lines of credit 48,457 40,827
Credit cards receivable -- 34,824
Commercial loans 100,100 80,700
442,687 400,841
Less:
Unearned discounts:
Consumer loans 3,648 3,484
Loans acquired through mergers 705 999
Loans purchased or originated 902 623
Allowance for loan losses 10,710 10,234
Undisbursed loans in process 18,279 11,309
34,244 26,649
$837,855 805,365
</TABLE>
The following is a reconciliation of the allowance for loan losses on
loans receivable, net:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance $10,234 9,099 8,453
Provision 4,338 2,279 1,432
Loans written-off (4,667) (1,621) (1,482)
Recoveries 805 477 696
Ending balance $10,710 10,234 9,099
</TABLE>
At December 31, 1996, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $4.3 million (of which
$366,000 were on a nonaccrual basis). Included in this amount is $720,000
of impaired loans for which the related allowance for credit losses is
$108,000 and $3.5 million of loans which, as a result of previous
write-downs, do not have an allowance for credit losses. Included in
loans for which there are no related allowances is one loan with a
recorded investment of $3.4 million. This loan, while impaired due to the
uncertainty of contractual cash flows, has been recorded at a discount
and written down to the level of cash flows which can be reasonably
expected to be realized by the Bank. The average recorded investment in
impaired loans during the year ended December 31, 1996 was approximately
$5.4 million. For the year ended December 31, 1996, the Bank recognized
interest income on those impaired loans of $320,000, using the cash basis
method of income recognition. At December 31, 1995, the recorded
investment in loans that are
25
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
considered to be impaired under SFAS No. 114 was $5.2 million (of which
$1.7 million were on a nonaccrual basis). Included in this amount is $1.6
million of impaired loans for which the related allowance for credit
losses is $125,000 and $3.6 million of loans which, as a result of
previous write-downs, do not have an allowance for credit losses.
Included in loans for which there are no related allowance is one loan
with a recorded investment of $3.5 million. This loan, while impaired due
to the uncertainty of contractual cash flows, has been recorded at a
discount and written down to the level of cash flows which can be
reasonably expected to be realized by the Bank. The average recorded
investment in impaired loans during the year ended December 31, 1995 was
approximately $5.3 million. For the year ended December 31, 1995, the
Bank recognized interest income on those impaired loans of $360,000,
using the cash basis method of income recognition.
Loans on nonaccrual totaled $4.5 million and $7.9 million at December 31,
1996 and 1995, respectively. Foregone interest income for the years ended
December 31, 1996, 1995, and 1994 on nonaccruing loans was approximately
$282,000, $270,000 and $200,000, respectively.
The Bank had outstanding commitments to originate mortgage loans at
December 31, 1996 as follows (in thousands):
<TABLE>
<S> <C>
Fixed rate residential, from 6.88% to 9.63% $ 978
Adjustable rate residential from 6.75% to 8.25% 1,400
Nonresidential, from 7.88% to 9.00% 11,790
$14,168
</TABLE>
Unused consumer equity lines of credit of $74.3 million and $59.0 million
were outstanding at December 31, 1996 and 1995, respectively. The Bank
was committed to $27.7 of commercial loans and lines of credit at
December 31, 1996. The Bank had no commitments to sell mortgage loans at
December 31, 1996.
The Bank services real estate loans for others which are not included in
the accompanying consolidated financial statements. The total amount of
loans serviced for others was approximately $168.2 million, $183.1
million and $207.5 million at December 31, 1996, 1995 and 1994,
respectively.
At December 31, 1996 and 1995, the majority of the loan portfolio was
secured by collateral located in the State of South Carolina and there
were no significant concentrations of loans in any type of industry, type
of property or to one borrower.
Certain of the Bank's first mortgage loans were pledged as collateral for
advances from the FHLB, as set forth in note 9.
(4) REAL ESTATE
The following is a reconcilation of the allowance for losses on real
estate acquired in settlement of loans:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance $147 147 106
Provision 130 -- 60
Losses incurred (96) -- (19 )
Ending balance $181 147 147
</TABLE>
26
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Loans receivable $5,163 5,030
Mortgage-backed securities 2,744 2,767
Other securities 762 188
$8,669 7,985
</TABLE>
(6) INVESTMENTS REQUIRED BY LAW
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
amounts were deemed to be a reasonable estimate of fair value.
(7) PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Land $ 5,490 5,596
Office buildings and improvements 10,806 10,417
Furniture, fixtures and equipment 22,167 21,244
38,463 37,257
Less accumulated depreciation (20,908) (19,541)
$ 17,555 17,716
</TABLE>
The following is a schedule by year of future minimum rental payments (in
thousands) at December 31,
1996 required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year:
<TABLE>
<S> <C>
1997 $1,741
1998 1,663
1999 1,566
2000 775
2001 22
Thereafter 139
<CAPTION>
<S> <C>
$5,906
<CAPTION>
</TABLE>
Rental expense under operating leases, included in net occupancy expense,
amounted to approximately
$1.8 million for the year ended December 31, 1996, and $1.9 million for
1995 and 1994.
27
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) DEPOSITS
A summary of deposit accounts by type and weighted average rate follows:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C> <C> <C>
1996 1995
<CAPTION>
BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand accounts:
Passbook $ 84,987 2.47% $ 80,728 2.47%
NOW 188,560 1.18 178,631 1.48
Money market 105,178 2.72 107,508 2.60
Commercial 37,087 -- 35,065 --
415,812 1.73 401,932 1.85
Certificate accounts:
Fixed rate 496,281 5.19 471,067 5.49
Variable rate 74,687 4.92 104,958 5.59
570,968 5.16 576,025 5.50
$986,780 3.71% $977,957 4.00%
</TABLE>
Included in the above deposits are Jumbo certificate accounts totaling
$44.2 million at December 31, 1996 and $52.0 million at December 31,
1995.
Certificate accounts by maturity consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
0 months to 6 months $317,374 323,774
6 months to 12 months 123,240 139,510
12 months to 24 months 85,184 54,613
24 months to 36 months 19,445 28,719
Over 36 months 25,725 29,409
$570,968 576,025
</TABLE>
Interest expense by type of deposit is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Transaction accounts $ 1,973 1,952 1,805
Money market accounts 2,860 2,999 3,200
Passbook savings accounts 2,097 1,908 1,534
Certificate accounts 30,398 28,642 20,681
$37,328 35,501 27,220
</TABLE>
28
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized by year of maturity and weighted average
interest rate in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C> <C> <C>
1996 1995
<CAPTION>
BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996 $ -- --% $ 90,000 5.71%
1997 86,400 5.01 11,400 5.82
2007-2015 601 3.21 601 3.21
$87,001 4.99% $102,001 5.71%
</TABLE>
At December 31, 1996 and 1995, the Bank has pledged its investment in
stock of the FHLB and first mortgage loans and mortgage-backed securities
with unpaid principal balances of approximately $123.5 million and $151.8
million, respectively, to collateralize FHLB advances.
In 1995, the Bank prepaid an advance of $25.0 million at 9.9% due in
1998, and a $10.5 million 8.3% advance due in 1996. As a result, the Bank
recorded prepayment penalties totaling $1.7 million, net of income taxes,
as an extraordinary item in the accompanying financial statements for
1995.
(10) OTHER BORROWED MONEY
Other borrowed money includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Repurchase agreements with brokers $ 31,851 66,050
Repurchase agreements with customers 27,907 18,433
Other collateralized borrowings 50,500 50,500
$110,258 134,983
</TABLE>
The repurchase agreements with brokers mature in 1997. The other
collateralized borrowings mature as follows: $10.5 million in 1997, and
$40.0 million in 1998. These repurchase agreements and borrowings were
collateralized by securities with aggregate market values of $80.4
million and amortized cost of $79.4 million and market value of $117.7
million and amortized cost of $117.9 million at December 31, 1996 and
1995, respectively.
Customer repurchase agreements are payable upon demand. The customer
repurchase agreements had weighted average interest rates of 4.67%, 5.07%
and 5.01% at December 31, 1996, 1995 and 1994, respectively. They were
collateralized by securities with a market value of $34.6 million and
amortized cost of $34.3 million at December 31, 1996 and a market value
of $20.2 million and an amortized cost of $19.8 million at December 31,
1995.
29
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the average amounts of securities sold
under repurchase agreements and the maximum amounts outstanding at any
month-end for the years ended December 31:
<TABLE>
<CAPTION>
MAXIMUM AT AVERAGE
MONTH-END OUTSTANDING
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995 1994
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements:
Brokers $124,284 132,439 149,054 $ 83,826 106,041 115,158
Customers 27,907 19,770 12,399 24,641 14,686 11,290
$152,191 152,209 161,453 $108,467 120,727 126,448
</TABLE>
(11) INCOME TAXES
Income tax expense for the years ended December 31, attributable to
operations consist of the following:
[CAPTION]
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $6,179 2,670 4,848
State 1,138 1,074 1,167
Deferred 483 2,758 1,057
$7,800 6,502 7,072
</TABLE>
Income taxes were reduced in 1995 due to a $1.5 million adjustment of
estimated tax liability.
Income taxes attributable to operations differ for the years ended
December 31, from the amount computed by applying the statutory Federal
income tax rate of 35% to income before income taxes, as follows:
[CAPTION]
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at Federal rate $7,802 8,659 7,911
Increase (decrease) resulting from:
State income taxes, net of federal benefit 782 835 845
Adjustment of prior years' estimated tax liabilities -- (1,500) --
Decrease in valuation allowance for deferred tax assets (600) (1,000) (850)
Other, net (184) (492) (834)
$7,800 6,502 7,072
</TABLE>
30
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for the
years ended December 31, are presented below:
[CAPTION]
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
State net operating loss carryforwards $ 721 799
Book loan loss deduction in excess of tax 2,797 2,234
Premise and equipment, due to differences in depreciation 832 962
Other 799 1,364
Total deferred tax assets 5,149 5,359
Less valuation allowance 559 1,159
4,590 4,200
Deferred tax liabilities:
Difference in carrying basis of FHLB stock due to stock dividends
not recognized for tax purposes 1,254 1,254
Unrealized gain on securities 1,304 981
Basis differences in real estate 48 118
Other 896 919
Total deferred liabilities 3,502 3,272
Net deferred tax asset $1,088 928
</TABLE>
The net deferred tax assets are included in other assets in the Bank's
Consolidated Balance Sheets. A valuation allowance has been established
to reduce the deferred tax asset to the level at which it is "more likely
than not" that the tax benefits will be realized. The change in the
valuation allowance is due to utilization of temporary differences in the
current tax calculation. Realization of tax benefits of deductible
temporary differences and operating loss or credit carryforwards depends
on having sufficient taxable income of an appropriate character within
the carryback and carryforward periods.
A portion of the change in the net deferred tax asset relates to
unrealized gains and losses on securities available for sale. The related
current period tax benefit of $323,000 has been recorded directly to
stockholders' equity. The balance of the change in the net deferred tax
asset results from current period deferred tax of $483,000.
As a result of recent tax legislation, the Bank will be required to
recapture tax bad debt reserves in excess of pre-1988 base year amounts
of approximately $4.0 million over an eight year period, and to change
its overall tax method of accounting for bad debts to the specific
chargeoff method. The Bank does not expect the recapture to adversely
impact earnings due to deferred tax liabilities previously included in
the Bank's consolidated financial statements.
31
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EMPLOYEE BENEFITS
QUALIFIED PENSION PLAN
The Bank has a noncontributory defined benefit plan covering
substantially all full-time salaried employees. An employee's benefits
are based on years of service and compensation during the last five years
of employment. The Bank's funding policy is to contribute annually the
maximum amount that can be deducted for Federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service performed to date, but also for benefits expected to be earned in
the future. Pension expense amounted to $565,000, $577,000, and $454,000
for the years ended December 31, 1996, 1995, and 1994, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the Bank's consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
1996 1995
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefit obligation $ 6,112 5,004
Nonvested benefit obligation 197 195
$ 6,309 5,199
Projected benefit obligation for service rendered to date $ 8,751 7,275
Plan assets at fair market value 7,558 5,898
Plan assets less than projected benefit obligation (1,193) (1,377)
Unrecognized net loss from past experience different from that assumed and effects of changes in
assumptions 920 407
Prior service costs previously incurred not yet expensed 371 411
Unrecognized net transition asset at January 1, 1987 being recognized over 15 years 27 32
Accrued pension cost $ 125 (527)
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost benefits earned $ 480 396 345
Interest on projected benefit obligation 585 488 439
Return on plan assets (546) (377) (374)
Net amortization of transition asset and prior service costs 46 70 44
Net pension cost $ 565 577 454
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% for the three
years ended December 31, 1996. The expected long-term rate of return on
assets was 9.0% for 1996 and 7.5% for 1995 and 1994. The rate of increase
in future compensation levels was 4.75% in 1996 and 5.0% in 1995 and
1994.
401(K) PLAN
The Bank has a defined contribution employee benefit plan covering
full-time salaried employees, whereby employees can invest up to 15% of
their earnings. In 1996 and 1995, the Bank's contribution equaled 100% of
the employee's contributions for the first 3% of gross pay and 50% on the
next 2% of gross pay. In 1994 the
32
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bank made matching contributions equal to 25% of the employee's
contributions for the first 1% of gross pay and 50% of the employee's
contribution between 1% and 2% of gross pay.
The Bank's expense was $461,000, $424,000, and $133,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. All contributions
are made at the end of the year.
STOCK OPTION PLAN
At December 31, 1996, the Bank has two stock-based compensation plans
(employees and directors), which are described below. The Bank applies
APB Opinion No. 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Bank's two
stock-based compensation plans been determined consistent with FASB
Statement No. 123, the Bank's net income and earnings per share would
have been reduced to the pro forma amounts indicated below
(in thousands except per share data):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net income As reported $14,492 $16,531
Pro forma 14,078 16,375
Primary earnings per share As reported $ 1.28 $ 1.45
Pro forma 1.25 1.43
Fully diluted earnings per share As reported $ 1.28 $ 1.45
Pro forma 1.24 1.43
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996, and 1995,
respectively: dividend yield of 2.1%, expected volatility of 24.5% and
26%, risk-free interest rates of 6.25% and 6.10%, and expected lives of 5
years.
The Bank has two fixed option plans. Under the 1989 American Federal
Bank, FSB Stock Option and Incentive Plan, ("the Plan") the Bank may
grant options to its employees for up to 700,000 shares of common stock.
Options expire 10 years from the date of grant, and are immediately
exercisable. Options for 71,950 shares remain available for grant under
the Plan at December 31, 1996.
Under the 1995 Directors Performance Plan ("the Directors' Plan"), for
years in which the Bank achieves certain performance goals, each director
who served as a director as of December 31 of the preceding year will be
granted an option to purchase 1,500 shares of stock at the fair market
value on the date of grant. Options expire 10 years from the date of
grant, and are exercisable at any time after six months and one day
following the date of grant and prior to expiration. The maximum number
of shares of American Federal stock for which options may be granted
under the Directors Plan is 45,000. Options for 15,000 shares remain
available for grant under the Directors' Plan.
A summary of the status of the Bank's two fixed option plans as of
December 31, 1996, 1995, and 1994 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
SHARES1996 PRICE SHARES1995 PRICE SHARES1994 PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 454,250 $ 8.92 462,500 $ 8.24 430,250 $ 7.61
Options granted 95,000 15.34 43,750 13.88 55,200 11.70
Options exercised (72,150) 7.29 (51,900) 5.20 (22,550) 4.75
Options forfeited (300) 10.54 (100) 9.44 (400) 9.44
Options outstanding, end of year 476,800 $10.45 454,250 $ 8.92 462,500 $ 8.24
</TABLE>
The weighted average grant date fair value of options granted during the
year was $15.34 for the year ended December 31, 1996, and $13.89 for the
year ended December 31, 1995.
33
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock options outstanding and exercisable as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF WEIGHTED AVERAGE REMAINING
EXERCISE PRICES SHARES EXERCISE PRICE CONTRACTUAL LIFE
<S> <C> <C> <C>
$2.31 to 5.00 73,800 $ 4.94 2.11 years
6.88 to 9.44 222,950 9.38 6.31
10.50 to 11.88 48,650 11.69 7.71
13.75 to 13.88 37,000 13.83 8.36
14.50 to 15.50 94,400 15.32 9.22
$2.31 to 15.50 476,800 10.45 6.54
</TABLE>
(13) CAPITAL
The Bank's actual capital and ratios, those required by the Bank's
primary regulator, the Office of Thrift Supervision (OTS), as well as
those required in order to be considered well capitalized according to
the Prompt Corrective Action Provisions are presented in the following
table. As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I core ("leverage") ratios as set forth in the table. There are no
conditions or events since that notification that management believes
have changed the institution's category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Tangible capital
(to Total Assets) $105,704 8.08% $19,619 1.50 % $ -- -- %
Core capital
(to Total Assets) 105,704 8.08 39,237 3.00 65,369 5.00
Tier I Capital
(to Risk-based Assets) 115,678 13.26 -- -- 47,831 6.00
Risk-based Capital
(to Risk-based Assets) 115,678 14.51 63,775 8.00 79,719 10.00
As of December 31, 1995:
Tangible capital
(to Total Assets) $ 99,074 7.42% $20,028 1.50 % $ -- -- %
Core capital
(to Total Assets) 99,074 7.42 40,056 3.00 66,760 5.00
Tier I Capital
(to Risk-based Assets) 108,528 13.10 -- -- 45,366 6.00
Risk-based Capital
(to Risk-based Assets) 108,528 14.35 60,489 8.00 75,611 10.00
</TABLE>
(14) EARNINGS PER SHARE
Primary earnings per share for 1996, 1995, and 1994 were computed by
dividing net income, before and after the impact of the extraordinary
item, if applicable, by the number of common stock equivalents. Common
stock equivalents were determined by adjusting the weighted average
number of shares outstanding for the period by the number of common stock
options and warrants outstanding. However, during 1996 and 1995, the Bank
repurchased all of the 600,000 outstanding warrants to purchase the
Bank's common stock. No warrants remained outstanding during the 4th
quarter of 1996, and did not affect earnings per share calculations for
that quarter.
The fully diluted earnings per share for 1996, 1995, and 1994 were
computed in a similar manner as primary earnings per share.
34
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of operations by quarter:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
<CAPTION>
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE
DATA)
<S> <C> <C> <C> <C>
1996
Interest income $25,663 26,025 26,842 25,462
Interest expense 12,717 12,571 12,937 11,784
Net interest income 12,946 13,454 13,905 13,678
Provision for loan losses 722 1,124 1,596 896
Noninterest income 3,425 3,738 4,322 4,176
Noninterest expenses 8,949 9,165 15,107 9,793
Income before income taxes 6,700 6,903 1,524 7,165
Income taxes 2,345 2,416 535 2,504
Net income $ 4,355 4,487 989 4,661
Earnings per share:
Primary and fully diluted $ .38 .39 .09 .42
Weighted average shares:
Primary 11,448 11,396 11,133 11,174
Fully diluted 11,448 11,424 11,151 11,180
1995
Interest income $ 24,044 24,874 25,211 25,429
Interest expense 12,141 12,775 13,212 12,777
Net interest income 11,903 12,099 11,999 12,652
Provision for loan losses 348 872 277 782
Noninterest income 2,922 3,516 3,169 3,705
Noninterest expenses 8,445 8,524 9,027 8,948
Income before income taxes 6,032 6,219 5,864 6,627
Income taxes 2,052 2,115 80 2,255
Net income before extraordinary item 3,980 4,104 5,784 4,372
Extraordinary item -- -- (1,653) (56)
Net income $ 3,980 4,104 4,131 4,316
Earnings per share:
Primary and fully diluted:
Before extraordinary item $ .35 .36 .50 .38
Extraordinary item -- -- (.14) --
$ .35 .36 .36 .38
Weighted average shares:
Primary and Fully diluted 11,359 11,435 11,481 11,449
</TABLE>
35
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) CARRYING AMOUNTS AND
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of
December 31, are summarized below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 90,094 90,094 53,042 53,042
Securities available for sale 342,341 342,341 439,485 439,485
Loans receivable, net 837,855 852,333 805,365 820,059
Federal Home Loan Stock 8,290 8,290 8,290 8,290
Other financial assets 8,669 8,669 7,985 7,985
FINANCIAL LIABILITIES
Deposits:
Demand accounts $415,812 415,812 401,932 401,932
Certificate accounts 570,968 572,680 576,025 576,970
Advances from Federal Home Loan Bank 87,001 86,852 102,001 101,856
Other borrowed money 110,258 110,258 134,983 134,983
Drafts outstanding 10,231 10,231 9,557 9,557
</TABLE>
The Bank had, at December 31, 1996 and 1995, $116.2 million and $166.1
million, respectively, of off-balance sheet financial commitments. These
commitments are to originate loans and unused consumer lines of credit
and credit card lines. Since these obligations are based on current
market rates, if funded, the original principal is considered to be a
reasonable estimate of fair market value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Bank's financial instruments fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayment trends, 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 any of these assumptions used in calculating fair
value would also significantly affect the estimates. Further, the fair
value estimates were calculated as of December 31, 1996 and 1995.
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, the Bank has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise value, loan servicing
portfolio, deferred tax liabilities, and premises and equipment. In
addition, the 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 these estimates.
36
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) AFFILIATION WITH CCB FINANCIAL CORPORATION
On February 18, 1997, the Bank announced that a definitive agreement had
been reached with CCB Financial Corporation (CCB), headquartered in
Durham, North Carolina. The terms of the agreement call for CCB to issue
.445 shares of common stock for each share of the Bank at the closing
date. This transaction, which is structured as a tax-free pooling of
interests, is valued at $325.1 million based on the exchange ratio and
the five day average closing price of CCB through Friday, February 14,
1997 of $64.85.
This transaction is subject to due diligence and to regulatory authority
and shareholder approval. The merger is expected to be completed by the
third quarter of 1997.
37
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
American Federal Bank, FSB
We have audited the consolidated balance sheets of American Federal Bank, FSB
and subsidiaries (the "Bank") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Bank at December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
January 17, 1997
MANAGEMENT'S REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS
Management is responsible for the content of the consolidated financial
statements and for the information contained in other sections of this annual
report. Such information is believed to be consistent with the content of the
consolidated financial statements. Management believes that the consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles appropriate in the circumstances to reflect, in all
material respects, the substance of events and transactions that should be
included. In some instances, the consolidated financial statements reflect
management's judgments and estimates as to the effects of events and
transactions that are accounted for or disclosed.
The Audit Committee of the Board of Directors of American Federal Bank, FSB,
composed solely of outside directors, meets periodically with the Bank's
management, internal auditors and independent certified public accountants, KPMG
Peat Marwick LLP, to review matters relating to the quality of financial
reporting, internal accounting control, and the nature, extent and result of the
audit efforts. The independent accountants and the internal auditors have full
and free access to the Audit Committee and meet with the committee, both with
and without management present, to discuss all appropriate matters.
<TABLE>
<S> <C> <C>
/s/ Roy Abercrombie /s/ Mike Trimble /s/ Robert Lea
WILLIAM L. ABERCROMBIE, JR. MICHAEL A. TRIMBLE ROBERT A. LEA
President and Chief Operating Officer and Senior Vice President
Chief Executive Officer Chief Financial Officer and Controller
</TABLE>
38
<PAGE>
<PAGE>
Exhibit 28.1
March 14, 1997
TO THE SHAREHOLDERS OF
AMERICAN FEDERAL BANK, FSB:
You are cordially invited to attend the 1997 Annual Meeting of
Shareholders of American Federal Bank, FSB, which will be held at the Bank's
home office, located at 300 East McBee Avenue, in Greenville, South Carolina
29601, on April 23, 1997, at 4:00 p.m., local time.
At the 1997 Annual Meeting, you will be asked to consider and vote upon
(i) a proposal to elect two directors to serve until the 2000 Annual Meeting of
Shareholders, (ii) a proposal to ratify the appointment of KPMG Peat Marwick LLP
as the independent accountants for American Federal for the fiscal year ending
December 31, 1997, and (iii) such other business as may come properly before the
1997 Annual Meeting or any adjournment thereof.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE, AND
RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE, EVEN IF YOU CURRENTLY PLAN
TO ATTEND THE 1997 ANNUAL MEETING. Your vote is important, regardless of the
number of shares you own. This will not prevent you from voting in person but
will assure that your vote is counted if you are unable to attend the meeting.
As you may know, on February 18, 1997, the Bank announced that it had
entered into a definitive merger agreement with CCB Financial Corporation
("CCB"), pursuant to which the Bank would be acquired by CCB and the outstanding
shares of the common stock of the Bank would be converted into shares of the
common stock of CCB. We will not consider a proposal to approve the proposed
merger with CCB at the 1997 Annual Meeting, as you will receive at a later date
a proxy statement setting forth a detailed description of the proposed merger
with CCB and the reasons of the Board of Directors of the Bank for approving
such merger with CCB. We currently anticipate that a special meeting of
shareholders of the Bank will be held in late Spring or early Summer to consider
and vote upon a proposal to merge the Bank with CCB.
If you have any questions about the enclosed Proxy Statement or the 1996
Annual Report, please let us hear from you.
Sincerely,
William L. Abercrombie, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE>
AMERICAN FEDERAL BANK, FSB
300 EAST MCBEE AVENUE
GREENVILLE, SOUTH CAROLINA 29601
864-255-7000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 23, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders of
American Federal Bank, FSB ("American Federal") will be held at the home office
of American Federal, located at 300 East McBee Avenue, Greenville, South
Carolina 29601, on April 23, 1997, at 4:00 p.m., local time (the "1997 Annual
Meeting"), for the following purposes:
1. ELECT DIRECTORS. To consider and vote upon a proposal to elect two
directors to serve until the 2000 Annual Meeting of Shareholders and until their
successors are duly elected and qualified;
2. RATIFY APPOINTMENT OF ACCOUNTANTS. To consider and vote upon a
proposal to ratify the appointment of KPMG Peat Marwick LLP as independent
accountants for American Federal for the fiscal year ending December 31, 1997;
and
3. OTHER BUSINESS. To transact such other business as may properly come
before the 1997 Annual Meeting or any adjournment thereof.
Only shareholders of record at the close of business on February 24,
1997, are entitled to receive notice of and to vote at the 1997 Annual Meeting
or any adjournment thereof. All shareholders, whether or not they expect to
attend the 1997 Annual Meeting in person, are requested to complete, date, sign,
and return the enclosed form of proxy in the accompanying envelope. The proxy
may be revoked by the person who executed it by filing with the Secretary of
American Federal an instrument of revocation or a duly executed proxy bearing a
later date, or by voting in person at the 1997 Annual Meeting.
By Order of the Board of Directors
Deborah A. Brady
Secretary
March 14, 1997
PLEASE COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY TO
AMERICAN FEDERAL IN THE ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
1997 ANNUAL MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN
PERSON IF YOU WISH, EVEN IF YOU PREVIOUSLY HAVE RETURNED YOUR PROXY.
<PAGE>
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS OF
AMERICAN FEDERAL BANK, FSB
TO BE HELD ON APRIL 23, 1997
INTRODUCTION
GENERAL
This Proxy Statement is being furnished to the shareholders of American
Federal Bank, FSB, a federally chartered stock savings bank ("American
Federal"), in connection with the solicitation of proxies by the Board of
Directors of American Federal from holders of the outstanding shares of the
$1.00 par value common stock of American Federal ("American Federal Common
Stock"), for use at the Annual Meeting of Shareholders of American Federal to be
held on April 23, 1997, or any adjournment thereof (the "1997 Annual Meeting").
The 1997 Annual Meeting is being held to consider and vote upon (i) a proposal
to elect two directors to serve until the 2000 Annual Meeting of Shareholders
and until their successors are duly elected and qualified, (ii) a proposal to
ratify the appointment of KPMG Peat Marwick LLP as independent accountants for
American Federal for the fiscal year ending December 31, 1997, and (iii) such
other business as may properly come before the 1997 Annual Meeting or any
adjournment thereof. The Board of Directors of American Federal knows of no
business that will be presented for consideration at the 1997 Annual Meeting
other than the matters described in this Proxy Statement.
The principal executive offices of American Federal are located at 300
East McBee Avenue, Greenville, South Carolina 29601. The telephone number of
American Federal at such offices is (864) 255-7000.
This Proxy Statement is dated March 14, 1997, and is first being mailed
to the shareholders of American Federal on or about March 17, 1997.
RECORD DATE, SOLICITATION, AND REVOCABILITY OF PROXIES
The Board of Directors of American Federal has fixed the close of
business on February 24, 1997, as the record date for the determination of the
American Federal shareholders entitled to receive notice of and to vote at the
1997 Annual Meeting. Accordingly, only holders of record of shares of American
Federal Common Stock at the close of business on such date will be entitled to
vote at the 1997 Annual Meeting. At the close of business on such date, there
were 11,005,385 shares of American Federal Common Stock issued and outstanding
and held by 2,751 shareholders of record. For information with respect to
shareholders who own more than 5% of the outstanding American Federal Common
Stock, see "Ownership of Equity Securities." Subject to the right of
shareholders to cumulate their votes in the election of directors, holders of
American Federal Common Stock are entitled to one vote on each matter considered
and voted upon at the 1997 Annual Meeting for each share of American Federal
Common Stock held of record at the close of business on February 24, 1997.
Shares of American Federal Common Stock represented by a properly executed
proxy, if such proxy is received in time and not revoked, will be voted at the
1997 Annual Meeting in accordance with the instructions indicated in such proxy.
In determining whether a quorum exists at the 1997 Annual Meeting for
purposes of all matters to be voted on, all votes "for" or "against," as well as
all abstentions (including those to withhold authority to vote in certain
cases), with respect to the proposal receiving the most such votes will be
counted. The vote required to elect directors, and to ratify the appointment of
KPMG Peat Marwick LLP as independent accountants for American Federal for the
fiscal year ending December 31, 1997, is a majority of the shares of American
Federal Common Stock represented and entitled to vote at the 1997 Annual Meeting
at which a quorum is present. With respect to proposals for
<PAGE>
which brokers are automatically authorized to vote, abstentions and
broker non-votes will be counted as part of the base number of votes to be used
in determining if the proposal has received the requisite number of base votes
for approval. Thus, abstentions and broker non-votes will have the same effect
as a vote "against" such a proposal. With respect to proposals for which brokers
must be authorized to vote, broker non-votes will not be counted as part of the
requisite number of base votes for approval, and only abstentions will have the
same effect as a vote against such proposal.
A shareholder who has given a proxy may revoke it at any time prior to
its exercise at the 1997 Annual Meeting by either (i) giving written notice of
revocation to the Secretary of American Federal, (ii) properly submitting to
American Federal a duly executed proxy bearing a later date, or (iii) voting in
person at the 1997 Annual Meeting. All written notices of revocation or other
communications with respect to revocation of proxies should be addressed as
follows: American Federal Bank, FSB, P.O. Box 1268, Greenville, South Carolina
29602, Attention: Deborah A. Brady, Secretary.
The 1996 Annual Report to Shareholders, including consolidated
financial statements for the fiscal year ended December 31, 1996, either has
been mailed to shareholders previously or accompanies this Proxy Statement.
PROPOSAL ONE
ELECTION OF DIRECTORS
GENERAL
The 1997 Annual Meeting is being held to elect two directors of
American Federal to serve three-year terms of office. The Board of Directors of
American Federal is divided into three classes, with the terms of office of each
class ending in successive years. The terms of the directors in Class II expire
at the 1997 Annual Meeting. The directors in Class I and Class III will continue
in office following the 1997 Annual Meeting. Currently, there are three
directors in Class I, two directors in Class II, and three directors in Class
III. The shareholders are being asked to vote on the election of two directors
in Class II, to serve three-year terms expiring at the 2000 Annual Meeting of
Shareholders .
With respect to the election of directors, Section 12 of American
Federal's Bylaws (made effective by expiration of Section 8 of American
Federal's Charter in January 1994) grants to each shareholder entitled to vote
at the 1997 Annual Meeting the right to cumulate such holder's votes in the
election of the two nominees. This means that every shareholder entitled to vote
in the election of directors has a right to vote that number of shares owned by
such holder for each nominee for director, or to cumulate such holder's votes by
giving to one candidate the number of votes represented by the number of
nominees to be elected multiplied by the number of shares of American Federal
Common Stock held by such shareholder. In the event that a shareholder desires
to cumulate such holder's votes, such shareholder must so indicate as
appropriate on the proxy validly executed and returned by such shareholder.
All shares represented by valid proxies received pursuant to this
solicitation, and not revoked before they are exercised, will be voted in the
manner specified therein. In the event that any nominee is unable to serve
(which is not anticipated), the persons designated as proxies will cast votes
for the remaining nominee and for such other persons as they may select.
The affirmative vote of the holders of a majority of the shares of
American Federal Common Stock represented and entitled to vote at the 1997
Annual Meeting at which a quorum is present is required for the election of the
directors listed below.
THE NOMINEES HAVE BEEN RECOMMENDED TO THE AMERICAN FEDERAL BOARD OF
DIRECTORS BY THE NOMINATING COMMITTEE THEREOF. THE BOARD OF DIRECTORS
2
<PAGE>
UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF THE TWO NOMINEES LISTED
BELOW TO SERVE AS DIRECTORS.
The following table sets forth the name of each nominee or director
continuing in office of American Federal; a description of such director's
positions and offices with American Federal (other than as a director), if any;
a brief description of such director's principal occupation and business
experience during at least the last five years; directorships presently held by
such director in companies other than American Federal with registered
securities; and certain other information including such director's age and the
number of shares of American Federal Common Stock beneficially owned by such
director on December 31, 1996. For information concerning membership on
committees of the Board of Directors, see "Proposal One--Election of
Directors--Information About the Board of Directors and Its Committees."
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
AMERICAN FEDERAL
NAME AND YEAR COMMON STOCK
FIRST ELECTED A DIRECTOR BACKGROUND INFORMATION BENEFICIALLY OWNED (1)
NOMINEES FOR DIRECTOR
CLASS II
TERM EXPIRING ANNUAL MEETING 2000
<S> <C>
William L. Abercrombie, Jr. Mr. Abercrombie has been President and Chief Executive
1988 Officer of American Federal since 1988 and
Chairman of the Board of American Federal since
1993. He joined American Federal in 1973 and held
management positions in branch administration and
loan administration until 1981. Mr. Abercrombie
established Commercial Real Estate Lending at the
Bank in 1983 and later served as special assistant
to the President for Lending Management and as
Chief Operating Officer, prior to assuming his
position. He is 49. 148,439 (2)
3
<PAGE>
NUMBER OF SHARES OF
AMERICAN FEDERAL
NAME AND YEAR COMMON STOCK
FIRST ELECTED A DIRECTOR BACKGROUND INFORMATION BENEFICIALLY OWNED (1)
Blake P. Garrett, Jr. Mr. Garrett has been a partner in Garrett & Garrett 91,000 (3)
1982 Construction, a commercial real estate developer,
and related partnerships since 1966. Mr. Garrett
also serves as director for Real Estate Fund
Investment Trust. He is 56.
</TABLE>
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE
CLASS I
FOR TERM EXPIRING ANNUAL MEETING 1999
<TABLE>
<S> <C> <C>
David E. Shi, Ph.D. Dr. Shi joined Furman University as Vice President for 10,967 (4)
1994 Academic Affairs in 1993 and became President in
June 1994. He previously was a professor of
history with Davidson College, beginning 1976. He
was appointed to the Board of American Federal in
1994. Dr. Shi is 45.
B.J. Skelton, Ph.D. Dr. Skelton is a retired educator. He previously was 10,500 (4)
1982 Athletic Director at the University of
Texas-Arlington and Vice Provost and Dean of
Admissions and Registrations and Professor of
Horticulture at Clemson University. Dr. Skelton
served on the Board of Directors of Home Savings
and Loan Association, Easley, South Carolina, for
six years prior to its merger with American
Federal in 1982. He also owns and operates a real
estate business in Upstate South Carolina. He is
62.
Michael A. Trimble Mr. Trimble has been Chief Operating Officer of
1989 American Federal since 1990 and Chief Financial
Officer since 1984. He was previously affiliated
with KPMG Peat Marwick LLP for eight years and a
Virginia bank holding company for six years. He is
54. 106,039 (5)
4
<PAGE>
NUMBER OF SHARES OF
AMERICAN FEDERAL
NAME AND YEAR COMMON STOCK
FIRST ELECTED A DIRECTOR BACKGROUND INFORMATION BENEFICIALLY OWNED (1)
</TABLE>
<PAGE>
CLASS III
TERM EXPIRING ANNUAL MEETING 1998
<TABLE>
<S> <C> <C>
James P. Edwards Mr. Edwards is retired from Edwards & Hedrick, CPAs, 16,589 (6)
1982 P.A. He served as President and Managing Officer
of such firm since 1961. He is 70.
C. Dan Joyner Mr. Joyner has been President of C. Dan Joyner 36,769 (7)
1972 Enterprises and Chairman of the Board of C. Dan Joyner
Insurance, Inc. for 31 years. He has been Regional
President for Upstate South Carolina of the
Prudential/C. Dan Joyner, a real estate brokerage firm,
since 1985. He is 59.
Mr. McCarroll has been Executive Director and 6,842(8)
John A. McCarroll Chief Executive Officer for the Phillis Wheatley
1991 Association, Greenville, South Carolina, since
1970. He also served on American Federal's central
region advisory board during 1990. He is 57.
</TABLE>
(1) Each nominee and director continuing in office beneficially owns
less than I% of American Federal Common Stock outstanding, except for
William L. Abercrombie, Jr., who beneficially owns 1.4% of American
Federal Common Stock outstanding. Information relating to beneficial
ownership of American Federal Common Stock by directors is based upon
information furnished by each person using "beneficial ownership"
concepts set forth in rules of the Securities and Exchange Commission
under Section 13 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), which rules have been adopted by the Office of
Thrift Supervision (the "OTS"). Under such rules, a person is deemed to
be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the
power to dispose or to direct the disposition of such security. The
person also is deemed to be a beneficial owner of any security of which
that person has a right to acquire beneficial ownership within 60 days.
Under such rules, more than one person may be deemed to be a beneficial
owner of the same securities, and a person may be deemed to be a
beneficial owner of securities as to which he or she may disclaim any
beneficial interest. Except as indicated in other notes to this table
describing special relationships with other persons and specifying
shared voting or investment power, directors possess sole voting and
investment power with respect to all shares of American Federal Common
Stock set forth opposite their respective names. The beneficial
ownership of American Federal Common Stock set forth in this column
reflects 186,800 shares of American Federal Common Stock that may be
deemed to be beneficially owned by the directors who have been granted
options to purchase additional shares of American Federal Common Stock
that are exercisable within 60 days of December 31, 1996. Such figures
also include an aggregate of 34,280 shares allocated to the accounts of
directors who are executive officers pursuant to American Federal's
401(k) retirement savings plan (the "401(k) Plan"). For
5
<PAGE>
information with respect to stock options granted to certain executive
officers and the other compensation plans, see "Proposal One --
Election of Directors - Executive Compensation and Benefits," " --
Information on Benefit Plans and Policies," " -- Director
Compensation," and " -- Report of the Compensation and Benefits
Committee."
(2) Includes 86,700 shares that may be acquired by exercise of options;
14,543 shares held by American Federal's 401(k) plans; 19,036 shares
owned by Mr. Abercrombie's wife, Mary Carol Abercrombie; 1,238 shares
owned as custodian for Mr. Abercrombie's son, William Travis
Abercrombie; 1,069 shares owned by William Travis Abercrombie; and 2,307
shares owned as custodian for Mr. Abercrombie's daughter, Kristi Cooke
Abercrombie.
(3) Includes 6,500 shares that may be acquired by exercise of options;
13,000 shares owned as custodian for Mr. Garrett's son, Blake P. Garrett
III; 13,000 shares owned as custodian for Mr. Garrett's daughter,
Jennifer M. Garrett; 11,000 shares owned as custodian for Mr. Garrett's
daughter, Amanda E. Garrett; 9,000 shares owned as custodian for Mr.
Garrett's daughter, Laura R. Garrett; 4,000 shares owned by Mr.
Garrett's son, Blake P. Garrett III, as custodian for Mr. Garrett's
grandson, Oakley M. Garrett; 1,000 shares owned by Mr. Garrett's son,
Blake P. Garrett III, as custodian for Mr. Garrett's grandson, Wade H.
Garrett; and 2,500 shares owned by Garrett Wenck and Garrett, Inc.
(4) Includes 6,500 shares that may be acquired by exercise of options.
(5) Includes 56,900 shares that may be acquired by exercise of options;
19,737 shares held by American Federal's 401(k) plans; 1,597 shares
owned by Mr. Trimble's wife, Loretta Trimble; and 1,000 shares owned as
custodian for Mr. Trimble's son, Paul Trimble.
(6) Includes 6,500 shares that may be acquired by exercise of options
and 4,089 shares held in trust for Mr. Edwards' account in American
Federal's Deferred Compensation Plan for directors.
(7) Includes 6,500 shares that may be acquired by exercise of options;
11,519 shares held in trust for Mr. Joyner's account in American
Federal's Deferred Compensation Plan for directors and 2,571 shares
owned by Mr. Joyner's wife, Katherine Joyner.
(8) Includes 5,200 shares that may be acquired by exercise of options.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors of American Federal held 12 meetings during
1996. All of the directors attended at least 75% of the aggregate total number
of meetings of the Board of Directors and the committees of the Board on which
they served. During 1996, Edmund L. Potter attained the age of 72 and in
accordance with the By-laws of American Federal, Mr. Potter became a director
emeritus on January 1, 1997.
American Federal's Board of Directors presently has three standing
committees the Executive, Audit, and Compensation and Benefits Committees.
Information regarding the functions of those committees, their membership, and
the number of meetings held during 1996 follows.
The Executive Committee meets on call by management and is empowered to
act for the Board of Directors between regular board meetings. The Executive
Committee met 19 times during 1996. Its members were Messrs.
Garrett (Chairman), Joyner, Potter, Drs. Shi and Skelton.
The Audit Committee annually recommends to the Board of Directors the
firm to be engaged as independent accountants for American Federal for the next
year, reviews the plan for the audit engagement, results of internal auditing,
and reports of regulatory authorities; generally reviews financial reporting
procedures; and periodically reports to the Board. During 1996 the Audit
Committee held four
6
<PAGE>
meetings. The members of the Audit Committee were Messrs. Potter(Chairman),
Edwards, Garrett, McCarroll and Dr. Shi.
The Compensation and Benefits Committee meets on call by management to
review personnel policies and salary and benefit programs of all employees.
During 1996 the Compensation and Benefits Committee held five meetings. The
members of the Compensation and Benefits Committee were Messrs. Joyner
(Chairman), Edwards, McCarroll and Dr. Skelton.
The Nominating Committee, which is comprised of all the members of the
Board of Directors, recommends nominees for election as directors. The
Nominating Committee must deliver written nominations to the Secretary at least
20 days prior to the date of the annual meeting of shareholders. No nominations
for directors except those made by the Nominating Committee may be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of American Federal at least five days prior to
the date of the annual meeting. If the Nominating Committee fails or refuses to
act at least 20 days prior to the annual meeting, nominations for directors may
be made at the annual meeting by any shareholder entitled to vote. During 1996
the Board of Directors held one meeting in its capacity as the Nominating
Committee.
MANAGEMENT STOCK OWNERSHIP
As of December 31, 1996, based on available information, all directors
and executive officers of American Federal as a group (10 persons) beneficially
owned approximately 478,326 shares of American Federal Common Stock, which
constituted 4% of the shares outstanding at that date. The foregoing figure
includes, in some instances, shares in which members of a director's or
officer's immediate family have a beneficial interest by reason of shared voting
or investment power and as to which the director or officer may disclaim
beneficial ownership. See "Proposal One--Election of Directors--General." The
amount includes 192,050 shares of American Federal Common Stock subject to
options that are exercisable within 60 days of December 31, 1996.
7
<PAGE>
EXECUTIVE COMPENSATION AND BENEFITS
The following Summary Compensation Table sets forth certain
information concerning compensation to all executive officers of American
Federal whose total annual salary and bonus for 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Other
Annual Restricted Securities
Name and Principal Compen- Stock Underlying LTIP Payouts
Position Year Salary Bonuses sation Awards Options/SARs
($) ($) ($) ($) (#)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William L. Abercrombie, Jr 1996 262,167 92,605 -- -- 1,500/0 -- 46,411 1
Chairman of the Board, 1995 245,333 84,686 -- -- 1,500/0 -- 39,463
President, and Chief 1994 225,067 31,170 -- -- 8,700/ -- 21,733
Executive Officer
Michael A. Trimble 1996 173,500 44,849 -- -- 1,500/0 -- 24,839 2
Chief Operating Officer 1995 165,000 43,450 -- -- 1,500/0 -- 13,217
Chief Financial Officer 1994 154,869 20,420 -- -- 3,900/0 -- 5,968
Harry G. McDonnold 1996 102,633 16,248 -- -- 1,000/0 -- 5,738 3
EVP, Retail Banking & 1995 96,700 1,817 -- -- 1,500/ -- 3,510
Operations 1994 93,333 1,170 -- -- 1,000/0 -- 3,240
William V. Minton 1996 102,875 15,955 -- -- 1,500/0 -- 6,418 4
SVP, Coordinator of 1995 92,333 2,398 -- -- 1,200/0 -- 6,060
Consumer Lending & 1994 88,333 1,170 -- -- 1,000/0 -- 6,012
Chairman, Finance South
Robert L. Simonet 1996 82,536 12,738 -- -- 1,500/0 -- 30,306 5
SVP, Branch 1995 79,368 2,229 -- -- 1,200/0 -- 22,891
Administration 1994 76,500 -- -- -- 1,000/0 -- 26,004
</TABLE>
(1) Includes $3,875 rnting payment by American Federal of the
annual premium on a whole life insurance policy for Mr. Abercrombie;
$6,000 contributed by American Federal for Mr. Abercrombie pursuant
to American Federal's 401(k) Plan; and $36,536 accrued in connection
with American Federal's Supplemental Employee Retirement Plan
("SERP").
(2) Includes $6,000 contributed by American Federal for Mr. Trimble
pursuant to American Federal's 401 (k) Plan; and $18,839 accrued in
connection with American Federal's SERP.
(3) Includes $4,838 contributed by American Federal for Mr. McDonnold
pursuant to American Federal's 401(k) Plan; and a $900 car allowance.
(4) Includes $4,878 contributed by American Federal for Mr. Minton
pursuant to American Federal's 401(k) Plan; $40 in insurance
commisions and a $1,500 car allowance.
(5) Includes $4,974 contributed by American Federal for Mr. Simonet
pursuant to American Federal's 401(k) Plan; and $25,332 in insurance
commissions.
8
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides details regarding stock options granted in
1996 to the individuals named in the Summary Compensation Table. In addition, in
accordance with OTS rules, there are shown the hypothetical gains or "option
spreads" that would exist for the respective options. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10% from the
date the options were granted over the full option term.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value at
Assumed Annual Rates of
Number of Percent of Stock Price Appreciation For
Securities Total Option Term (1)
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
<S> <C> <C> <C> <C> <C> <C>
William L. 1,500/0 1.9% $15.50 04-24-06 $37,872 $60,305
Abercrombie Jr.
Michael A. 1,500/0 1.9% $15.50 04-24-06 $37,872 $60,305
Trimble
Harry G. 1,000/0 1.3% $15.31 03-21-06 $24,938 $39,710
McDonnold
William V. 1,500/0 1.9% $15.31 03-21-06 $37,408 $59,565
Minton
Robert L. 1,500/0 1.9% $15.31 03-21-06 $37,408 $59,565
Simonet
</TABLE>
(1) These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises are dependent on the
future performance of American Federal Common Stock and overall market
conditions. There can be no assurance that the amounts reflected in
this table will be achieved.
9
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR VALUES
The following table shows stock option exercises by the individuals
named in the Summary Compensation Table. In addition, this table includes the
number of shares covered by both exercisable and non-exercisable options as of
December 31, 1996. Also reported are the values for "in-the-money" options,
which represent the positive spread between the exercise price of any such
existing options and the year-end price of American Federal Common Stock.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Shares Year End (#) Year End ($)
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
William L. 6,700 $70,350 86,700/0 $892,400/0
Abercrombie, Jr.
Michael A. 6,000 $57,750 56,900/0 $556,300/0
Trimble
Harry G. 1,200 $15,825 16,900/0 $166,207/0
McDonnold
William V. 9,700 $64,181 -- --
Minton
Robert L. 2,500 $32,188 7,200/0 $ 51,756/0
Simonet
</TABLE>
INFORMATION ON BENEFIT PLANS AND POLICIES
EMPLOYMENT AGREEMENTS. On January 1, 1989, American Federal entered
into employment agreements with William L. Abercrombie, Jr., President and Chief
Executive Officer, and Michael A. Trimble, Chief Operating Officer, of American
Federal (collectively hereinafter referred to as the "Employment Agreements").
The Employment Agreements originally provided for annual base salaries for
Messrs. Abercrombie and Trimble, respectively, subject to annual adjustment by
the Board of Directors. Each Employment Agreement provided for an initial term
of three years but also provided that on January 1 of 1990 and of each
succeeding year, the Employment Agreement automatically would be extended for an
additional year absent prior written notice to the contrary. The Employment
Agreements also provided for severance payments in the event employment was
terminated following a "change of control," as defined therein.
American Federal entered into Amended and Restated Employment
Agreements, made effective as of September 1, 1993 and amended and restated as
of April 1, 1996, with Messrs. Abercrombie and Trimble (hereinafter referred to,
as reviewed by the Board of Directors annually, as the "Amended and Restated
Employment Agreements"), providing for the employment of such individuals as
Chairman of the Board, President, and Chief Executive Officer and Chief
Operating Officer and Chief Financial Officer, respectively, for a period, in
each case, of 36 calendar months which can be extended by the Board of Directors
for a period of up to 12 additional months based on an annual review of the
performance of each such officer by the Board of Directors. The Amended and
Restated Employment Agreements currently provide for annual base salaries of
$265,000 and $175,000 for Messrs. Abercrombie and Trimble, respectively, subject
to annual adjustment by the Board of Directors, together with such bonuses as
the Board of Directors, in its discretion and upon an evaluation of performance,
may determine. The Amended and Restated Employment Agreements generally provide
for the
10
<PAGE>
participation by such individuals in all benefit plans provided, now or
in the future, by American Federal, including all benefits for which "senior
management," as defined in the Amended and Restated Employment Agreements, is
eligible. In addition, such agreements provide for benefits payable upon the
disability or death of Messrs. Abercrombie and Trimble.
The Amended and Restated Employment Agreements also provide for
severance payments, subject to certain limitations set forth therein and in the
regulations of the OTS, in the event employment is terminated, whether without a
"change of control," as defined in the Amended and Restated Employment
Agreements, or after a change of control, so long as such termination is not (i)
for "cause," as defined in the Amended and Restated Employment Agreements, (ii)
pursuant to retirement at or after age 65, (iii) pursuant to a voluntary, early
retirement prior to age 65, (iv) due to disability, or (v) due to death (any
such event of termination hereinafter referred to as a "Termination").
In the event of a Termination of employment without a change of
control, each of Messrs. Abercrombie and Trimble would be entitled to receive,
commencing on the last day of the month during which such Termination occurred
and ending on the date on which his Amended and Restated Employment Agreement
would have expired but for such event, (i) monthly payments in an amount equal
to the highest monthly salary paid to such officer at any time under his Amended
and Restated Employment Agreement, (ii) annual bonus payments in an amount equal
to the highest bonus payment such officer previously received from American
Federal, and (iii) benefits generally equal to those such officer would have
received had he remained in the employment of American Federal during the
remaining term of the Amended and Restated Employment Agreement. Upon the
occurrence of a Termination after a change of control, each of Messrs.
Abercrombie and Trimble would be provided severance payments and acceleration of
retirement eligibility. In addition, each such officer would continue, for a
period of 36 months following the Termination, to accrue service credits for
vesting for pension and all other employee benefit plan purposes, as if he
continued to be employed by American Federal during such period, and would
continue to be covered under, or would be provided benefits comparable to those
he received under, all employee benefit plans of American Federal. In the case
of Termination after a change in control, the total value of these payments and
benefits cannot exceed the product of (i) 2.99 and (ii) such officer's "base
amount," as defined in Section 28OG(b) of the Internal Revenue Code of 1986, as
amended (the "Code"). The contracts also call for a two year non-compete in the
event of Termination.
In addition, American Federal entered into an Amended and Restated
Agreement and Contract of Employment, as of January 1, 1995 and effective August
1, 1996, with each of Harry G. McDonnold and William V. Minton, providing for
employment of such individuals as Executive Vice President of Operations, and
Senior Vice President, Coordinator of Consumer Lending, respectively, for a
period, in each case, of one year, which can be extended each year by the Board
of Directors for a period of not less than one year. Such employment agreements
currently provide for annual base salaries of $104,600 and $106,000 for Messrs.
McDonnold and Minton, respectively. Each of such employment agreements provide
for a severance benefit to be paid to each executive officer upon a termination
not for cause, including a termination resulting from a change of control. Such
severance benefit consists of the payment to the executive of salary and
benefits at his then current level for a period of one year from the date that
the termination becomes effective.
American Federal also entered into an Amended and Restated Severance
Protection Agreement, effective as of August 18, 1994, and amended restated as
of August 17, 1995 and August 1, 1996, with Robert L. Simonet, which provides
for a severance payment to Mr. Simonet in the event a change of control of
American Federal (as defined in such agreement) and Mr. Simonet's employment is
terminated after such change of control in an amount equal to 12 months' salary
at a rate equivalent to the base salary paid to Mr. Simonet the last full month
prior to the change of control.
PENSION PLAN. American Federal maintains a noncontributory defined
benefit pension plan (the "Pension Plan") covering all full-time, salaried
employees who have attained age 21 and have completed at least one year of
service and one thousand hours of service during such year. Benefits under the
Pension Plan are determined primarily by final average compensation and years of
service. The
11
<PAGE>
following table sets forth the estimated annual benefits payable
upon retirement to persons in the specified compensation and years-of-service
classifications.
PENSION PLAN TABLE
Years of Service
REMUNERATION 15 20 25 30 35
- ------------ -- -- -- -- --
$ 125,000 $ 25,643 $34,191 $ 42,739 $ 51,287 $59,835
150,000 31,268 41,691 52,114 62,536 72,959
175,000* 31,268 41,691 52,114 62,536 72,959
200,000 31,268 41,691 52,114 62,536 72,959
225,000 31,268 41,691 52,114 62,536 72,959
250,000 31,268 41,691 52,114 62,536 72,959
300,000 31,268 41,691 52,114 62,536 72,959
* Values remain constant after $150,000 compensation maximum is met.
Credited years of service through 1996 and includable remuneration for
1996 under the Pension Plan for the individuals named in the Summary
Compensation Table were as follows: William L. Abercrombie, Jr., 23 years and
$150,000, Michael A. Trimble, 13 years and $150,000, Harry G. McDonnold 22 years
and $124,006, William V. Minton 13 years and $125,011 and Robert L. Simonet 14
years and $127,412. The estimated annual benefits reflected in the preceding
table have been computed in straight-life annuity amounts and are not subject to
any deduction for Social Security or other offset amounts.
The Revenue Reconciliation Act of 1993 reduced the amount of an
employee's compensation that may be taken into account for qualified retirement
plan purposes. For plan years beginning in 1994, a qualified retirement plan can
only take into account $150,000 of compensation. As a direct result of this
legislation, on December 19, 1994, a SERP was established for William L.
Abercrombie, Jr. and Michael A. Trimble pursuant to which American Federal will
provide additional retirement benefits equal to those benefits to which Mr.
Abercrombie and Mr. Trimble would have been entitled absent such limitation. The
value of the supplemental retirement benefits accrued during 1996 under the SERP
was $36,536 for Mr. Abercrombie and $18,839 for Mr.
Trimble.
DIRECTOR COMPENSATION
GENERAL. Each director, other than directors who are also executive
officers or employees, currently is paid a fee of $1,375 per Board meeting for
his services as a director, conditioned upon attendance at ten of the twelve
monthly meetings, together with an annual retainer fee of $5,000. Each member of
a committee, other than directors who are also executive officers or employees,
is paid an additional fee of $300 for each committee meeting attended. Directors
who are also executive officers or employees receive no Board member or
committee fees.
DEFERRED COMPENSATION PLAN. American Federal maintains a plan pursuant
to which individual directors may, at their election, defer the payment of
directors' fees until they attain the age of 72 or more. Under this plan,
American Federal establishes an interest-bearing liability account for each
participant from which deferred fees and interest earned thereon are to be paid
in five equal annual installments upon death, disability, or resignation from
the Board of Directors. In the event that a participant ceases to serve as a
director prior to attaining the age of 72 for reasons other than death or
12
<PAGE>
disability, American Federal may, in its discretion, pay the amount in such
participant's account in five equal annual installments or withhold payment
until age 72, death, or disability, whichever comes first.
1988 STOCK OPTION AND INCENTIVE PLAN. At the Special Meeting of
Shareholders of American Federal held on March 11, 1993, the shareholders
approved an amendment to American Federal's 1988 Stock Option and Incentive Plan
(the "Stock Option Plan") that provided for grants of nonincentive stock options
to directors who are not employees of American Federal. Pursuant to the terms of
that amendment, each nonemployee director who was a member of American Federal's
Board on April 18, 1993, was granted options to purchase 3,500 shares of
American Federal Common Stock, and each person becoming a director after April
18, 1993 and is not an employee of American Federal also has been, or will be,
granted options to purchase 3,500 shares of American Federal Common Stock.
1995 DIRECTORS PERFORMANCE PLAN. At the 1995 Annual Meeting, the
shareholders approved the 1995 Directors Performance Plan (the "Performance
Plan"). Beginning with the adjournment of that meeting and at the adjournment of
the annual meeting for each of the succeeding years during the term of the
Performance Plan in which (i) the return on average assets and (ii) the return
on average equity of American Federal for the fiscal year preceding the annual
meeting as reported by American Federal in its earnings release for such prior
fiscal year are 1.1% and 15%, or greater, respectively, each director of
American Federal who was also serving in such capacity as of December 31 of the
preceding year will be granted an option to purchase 1,500 shares of American
Federal Common Stock, subject to adjustment as provided for in the Performance
Plan and provided that no director may receive grants of options for more than
4,500 shares of American Federal Common Stock under the Performance Plan.
Because American Federal reported for the 1995 fiscal year a return on average
assets and a return on average equity of 1.28% and 16.14%, respectively, at the
adjournment of the 1996 Annual Meeting, each director was granted an option to
purchase 1,500 shares of American Federal Common Stock. In addition, American
Federal reported for the 1996 fiscal year a return on average assets and a
return on average equity, excluding the special assessment to the Savings
Association Insurance Fund, of 1.34% and 16.37%, respectively, and at the
adjournment of the 1997 Annual Meeting, each director will be granted an option
to purchase 1,500 shares of American Federal Common Stock.
The report of the Compensation and Benefits Committee of the Board of
Directors is set forth below.
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE
During 1996, the Compensation and Benefits Committee of the Board of
Directors of American Federal was composed entirely of four independent,
non-employee directors who are not, and have never been, officers or employees
of American Federal. The Board of Directors designates the members and Chairman
of such Committee. None of the non-employee directors have relationships with
American Federal that would call into question their independence as committee
members.
COMPENSATION POLICY. The policies that govern the Committee's executive
compensation decisions are designed to align changes in total compensation with
changes in the value created for American Federal shareholders. The Committee
believes that compensation of executive officers and others should be directly
linked to American Federal's operating performance and that achievement of
performance objectives over time is the primary determinant of share price. The
underlying objectives of the Committee's compensation strategy are to establish
incentives for certain executives and others to achieve and maintain the optimum
short-term and long-term operating performance for American Federal, to link
executive and shareholder interests through equity based plans, and to provide a
compensation package that recognizes individual contributions as well as overall
business results.
In January, 1996, the Board approved a new Profit Sharing Plan for all
employees which replaced the previous Corporate Incentive Program. Establishing
the Profit Sharing Plan was determined to be an effective way to reward
employees for outstanding performance, based not only on how well American
Federal performed in 1996 but also on how well each employee performed his or
her job.
13
<PAGE>
SALARIES. The Compensation and Benefits Committee reviews operating
results for the fiscal year and unusual accomplishments during the year and also
considers economic conditions and other external events that affect the
operations of American Federal. Based on this examination, salaries are set for
the coming year within the salary structure of American Federal. In 1996, the
total salary budget provided for a 4% increase over the prior year, based on
local competition.
The base salary of senior officers is initially determined by
evaluating the responsibilities of the position against the competitive market
place. The salary structure for executive officers is included in the general
salary structure for American Federal. Salary ranges for executive officers are
determined with reference to a third-party survey of comparable regional
financial institutions with similar asset size. Salary ranges for other
employees are determined with reference to surveys of salaries at local
financial institutions.
DEDUCTION LIMIT. At this time, because of its compensation levels,
American Federal does not appear to be at risk of losing deductions under
Section 162(m) of the Code, which generally establishes, with certain
exceptions, a $1 million deduction limit on executive compensation for all
publicly held companies. As a result, American Federal has not established a
formal policy regarding such limit, but will evaluate the necessity for
developing such a policy in the future.
STOCK OPTIONS. Executive officers and other persons designated by the
Compensation and Benefits Committee also are eligible to participate in American
Federal's Stock Option Plan. Executive officers who are directors of American
Federal also are eligible to receive options under the Performance Plan. The
stock option plans are intended to assist American Federal in securing and
retaining such employees by allowing them to participate in the ownership and
growth of American Federal through the granting of stock options and SARs. The
granting of options and SARs gives such employees an additional inducement to
work for American Federal's success.
SUMMARY OF CEO COMPENSATION. The Compensation and Benefits Committee
reviews and evaluates the performance of the Chief Executive Officer and submits
adjustments for approval by the whole committee and for approval by the full
Board of Directors. In determining the compensation paid to the CEO for 1996,
the Compensation and Benefits Committee appraised the overall business strategy
and management initiatives to maximize returns to shareholders. In addition,
utilizing published surveys, databases, and proxy data, including, for example,
public information compiled from SNL Executive Compensation Review 1996 for
Thrift Institutions (the "survey data"), the Committee surveyed the total
compensation of chief executive officers of comparable-sized financial
institutions located in comparable markets from across the nation, as well as of
locally-based banks and thrifts. While there is likely to be a substantial
overlap between the financial institutions included in the survey data and the
banks and thrifts represented in the Nasdaq Bank Index line on the shareholder
return performance graph, below, the groups are not exactly the same. The
Compensation and Benefits Committee believes that the most direct competitors
for executive talent are not necessarily the same as the companies that would be
included in the published industry index established for comparing shareholder
returns.
Analysis of the survey data showed that Mr. Abercrombie's compensation,
after correction upwards in 1994, was at the median of the comparative groups.
Based upon American Federal's excellent performance in 1996 and the results of
the peer group analysis, the Committee established Mr. Abercrombie's 1996 salary
at $262,167, and approved total bonuses to him of $92,605, which maintained his
total compensation at the median of the comparative groups. Bonuses are not
guaranteed, but when given, are based on American Federal's performance and
stock appreciation. All bonuses are recommended by the Compensation and Benefits
Committee and approved by the Board.
Compensation and Benefits Committee
C. Dan Joyner (Chairman)
B.J. Skelton
James P. Edwards
14
<PAGE>
John A. McCarroll
15
<PAGE>
PERFORMANCE GRAPH
The following graph compares the monthly cumulative, total return on
American Federal Common Stock from December 31, 1991, to December 31, 1996, with
that of the Nasdaq Composite, an average of all over-the-counter stocks, and the
Nasdaq Bank Index, an average of all bank and thrift institutions whose stock is
traded on the Nasdaq Stock Market. Cumulative, total return represents the
change in stock price and the amount of dividends received over the indicated
period, assuming the reinvestment of dividends. The data was provided by an
independent investment banking firm.
TOTAL RETURN INDEX GRAPH (1)
(1) Data compiled by the Center for Research in Security Prices.
16
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires American
Federal's directors and executive officers, and persons who own more than ten
percent of American Federal's Common Stock, to file with the Office of Thrift
Supervision (the "OTS") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of American Federal.
Directors, executive officers and greater than ten percent shareholders are
required by the OTS regulation to furnish American Federal the copies of all
Section 16(a) reports they file. To American Federal's knowledge, based solely
on a review of the copies of such reports furnished to American Federal and
written representations that no other reports were required, during the fiscal
year ended December 31, 1996, all Section 16(a) filing requirements applicable
to directors, executive officers and greater than ten percent beneficial owners
were complied with by such persons, except that Edmund L. Potter filed one late
report on Form 4 with respect to one transaction.
CERTAIN TRANSACTIONS
Prior to August 1989, American Federal had followed the policy of
making mortgage loans on principal residences and consumer loans to its
directors, officers, and employees at reduced fees and interest rates. Reduced
interest rates under that policy were made available only to directors,
officers, and employees, and only so long as they continued their employment or
service with American Federal. For loans on single-family properties, the terms
were the same as for the general public except that American Federal would waive
the origination fees. On consumer loans, if the term of the loan was 60 months
or less, the rate was 1/2 point below the current new car rate; if the term was
greater than 60 months, the rate was the same as that offered to the general
public. All other terms for consumer loans were the same as those offered to the
general public. With respect to American Federal's All American Credit Line
loans, if the loan was $2,500 or less and unsecured, the rate was 14% versus 18%
charged to the general public. For loans in excess of $2,500 or secured loans,
the rate was the same as that offered to the general public. For all other
loans, the terms, rates, fees, and underwriting were the same as for the general
public. Management believes that those loans do not involve more than the normal
risk of collectibility or present other unfavorable features.
As a result of the enactment of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), effective August 9, 1989,
American Federal changed its policy concerning loans to directors and executive
officers. Under FIRREA, American Federal may not make loans at preferred
interest rates to directors or to executive officers. However, the interest
rates in effect on loans made by American Federal before FIRREA generally will
continue in effect. In addition, employees who are not directors or executive
officers may continue to obtain mortgage loans on principal residences and
consumer loans on the same pre-FIRREA terms that had been offered by American
Federal. Such loans are subject to the rules of the OTS and may be reviewed by
the OTS during its examination of American Federal.
In January, 1997, the Board of Directors adopted a resolution,
complying with changes in Reg "O" , allowing directors and executive officers of
American Federal to obtain loans on rates and terms generally available to all
other employees of American Federal. The Board also resolved to reduce rates on
loans to directors and executive officers to those rates currently available to
employees under the plans.
17
<PAGE>
The table below sets forth certain information regarding loans to
directors and executive officers of American Federal, which loans were
outstanding in amounts greater than $60,000 in the aggregate for any individual
during 1996.
<TABLE>
<CAPTION>
HIGHEST
PRINCIPAL CURRENT PRINCIPAL
DATE BALANCE INTEREST BALANCE AS OF
NAME TYPE OF LOAN MADE IN 1996 (1) RATE 12/31/96
- ---- ------------ ---- ----------- -- --------
<S> <C> <C> <C> <C> <C>
Edwards, James P Mortgage Loan 10-03-96 $ 140,000 8.00% $139,595
Credit Line 12-21-92 1,000 18.00 - 0 -
Commercial Loan 09-27-96 275,000 8.75% - 0 -
Credit Card (2) 01-01-91 6,000 16.05% - 0 -
Joyner, C. Dan Credit line 11-20-86 $ 100,000 10.25% $ 56,307
Credit Card (2) 11-01-90 5,000 18.60% - 0 -
Skelton, B.J Commercial Line (3) 10-19-95 $ 50,000 8.75% $ 49,000
Mortgage Loan 07-11-78 21,462 8.00 - 0 -
Credit Line 03-19-93 2,501 11.25% - 0 -
Credit Card (2) 08-01-91 9,000 16.05% - 0 -
</TABLE>
(1) Credit line balances reflect highest available credit for the period.
(2) Credit Card portfolio was sold in 1996.
(3) Commercial revolving line of credit.
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit Committee,
has appointed KPMG Peat Marwick LLP, independent certified public accountants,
as independent accountants for American Federal and its subsidiaries for the
current fiscal year ending December 31, 1997, subject to ratification by the
shareholders. KPMG Peat Marwick LLP has served as independent accountants for
American Federal since 1982. KPMG Peat Marwick LLP has advised American Federal
that neither the firm nor any of its partners has any direct or material
interest in American Federal except as auditors and independent certified public
accountants of American Federal.
A representative of KPMG Peat Marwick LLP is expected to attend the
1997 Annual Meeting and will be given the opportunity to make a statement on
behalf of the firm if such representative desires to do so. A representative of
KPMG Peat Marwick LLP is also expected to be available to respond to appropriate
questions from shareholders.
The affirmative vote of the holders of a majority of the shares of
American Federal Common Stock represented and entitled to vote at the 1997
Annual Meeting at which a quorum is present is required to ratify the
appointment of KPMG Peat Marwick LLP as independent accountants.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION
OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT
18
<PAGE>
ACCOUNTANTS FOR AMERICAN FEDERAL FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
OWNERSHIP OF EQUITY SECURITIES
The following table lists, as of December 31, 1996, each holder of
record of American Federal Common Stock who had filed with American Federal a
copy of a Schedule 13D or Schedule 13G indicating that it is or may be deemed to
be a beneficial owner of 5% or more of the outstanding shares of American
Federal Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C> <C>
Common Stock, General Electric Pension Trust 1,274,755(1)(2) 11.61%
$1.00 par value G.E. Investment Corporation
3003 Summer Street
Stamford, CT 06904
Common Stock, Keefe, Bruyette & Woods, Inc. 572,188(3) 5.21
$1.00 par value 2 World Trade Center
85th Floor
New York, NY 10048
Common Stock, Beck, Mack & Oliver 644,950 5.87
$1.00 par value 330 Madison Avenue
New York, NY 10017
Common Stock, Westport Asset Management, Inc. 616,500 5.61
$1.00 par value 253 Riverside Avenue
Westport, CT 06880
</TABLE>
(1) Under OTS regulations, any person or entity which beneficially owns more
than 10% (but less than 25%) of American Federal Common Stock and is one
of the two largest shareholders of American Federal is presumed, subject
to rebuttal, to control American Federal. In accordance with OTS
regulations, General Electric Pension Trust has made a rebuttal of
control filing with the OTS, including a rebuttal of control agreement
evidencing that its acquisition of the shares of American Federal Common
Stock did not constitute an acquisition of control of American Federal.
On March 2, 1993, the OTS accepted the rebuttal of control filing and
determined that General Electric Pension Trust had effectively rebutted
the presumption of control.
(2) On June 4, 1996, warrants to purchase 210,000 shares of American Federal
Common Stock at a price of $5.00 per share were redeemed.
(3) On June 21, 1996, warrants to purchase 20,000 shares of American Federal
Common Stock at a price of $5.00 per share were redeemed.
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SHAREHOLDERS' PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of American Federal shareholders intended to be presented at
the 1998 Annual Meeting of Shareholders must be received by American Federal at
its principal executive offices on or before November 14, 1997, in order to be
included in American Federal's Proxy Statement and Form of Proxy relating to the
1998 Annual Meeting of Shareholders.
OTHER INFORMATION
PROXY SOLICITATION
The cost of soliciting proxies for the 1997 Annual Meeting will be paid
by American Federal. In addition to the solicitation of shareholders of record
by mail, telephone, or personal contact, American Federal will be contacting
brokers, dealers, banks, or voting trustees or their nominees, who can be
identified as record holders of American Federal Common Stock. Such holders,
after inquiry by American Federal, will provide information concerning
quantities of proxy materials and Annual Reports needed to supply such materials
to beneficial owners, and American Federal will reimburse them for the expense
of mailing proxy materials and 1996 Annual Reports to such persons.
MISCELLANEOUS
The management of American Federal knows of no other matters that are
to be brought before the 1997 Annual Meeting. If any other matters come properly
before the 1997 Annual Meeting, the persons designated as proxies will vote on
such matters in accordance with their best judgment.
Upon the written request of any person whose proxy is solicited by this
Proxy Statement, American Federal will furnish to such person without charge
(other than for exhibits) a copy of American Federal's Annual Report on Form
10-K for its fiscal year ended December 31, 1996, including financial statements
and schedules thereto, as filed with the OTS. Requests may be made to American
Federal Bank, FSB, P.O. Box 1268, Greenville, South Carolina 29602, Attention:
Mary Margaret Dragoun, Vice President.
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