<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
Commission File Number: 1-13964
THE SOUTHERN BANC COMPANY, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 63-1146351
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
221 S. 6th Street, Gadsden, Alabama 35901
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(Address of principal executive offices) (Zip Code)
The registrant's telephone number, including area code: (205) 543-3860
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share
The registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the past 12 months and (2) has
been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained in this form, and disclosure will not be contained, to the best of the
registrant's knowledge, in the definitive proxy statement incorporated by
reference in Part III of this Form 10-KSB.
The registrant's revenues for its most recent fiscal year were $575,073.
The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant at September 13, 1996 was approximately
$13,949,585 (based on 1,073,045 shares at the most recent trading price of which
management was aware ($13.00 on September 13, 1996) (for this purpose, the
registrant's directors and executive officers and stock benefit plans and trusts
have not been deemed to be non-affiliates).
The total number of outstanding shares of the registrant's common stock at
September 13, 1996 was 1,382,013.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 1996 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference in Part III
of this form.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
The Southern Banc Company, Inc. The Southern Banc Company, Inc. (the
"Company") was incorporated under the laws of the State of Delaware in May 1995
at the direction of management of First Federal Savings and Loan Association of
Gadsden (the "Association") for the purpose of serving as a savings institution
holding company of the Association upon the acquisition of all of the capital
stock issued by the Association upon the Conversion. Before the Conversion, the
Company did not engage in any material operations. After the Conversion, the
Company's principal assets have been the outstanding capital stock of the
Association, a portion of the net proceeds of the Conversion and a note
receivable from the Company's Employee Stock Ownership Plan ("ESOP"), and the
Company's principal business has been the business of the Association and its
subsidiaries.
The holding company structure would permit the Company to expand the
financial services offered through the Association. As a holding company, the
Company has greater flexibility than the Association to diversify its business
activities through existing or newly formed subsidiaries or through acquisition
or merger with other financial institutions. The Company is classified as a
unitary savings institution holding company and is subject to regulation by the
Office of Thrift Supervision ("OTS"). As long as the Company remains a unitary
savings institution holding company, under current law the Company could
diversify its activities in such a manner as to include any activities allowed
by law or regulation to a unitary savings institution holding company.
The Company's executive offices are located at 221 S. 6th Street, Gadsden,
Alabama 35901, and its telephone number is (205) 543-3860.
First Federal Savings and Loan Association of Gadsden. The Association is
a conservative and independent community-oriented savings institution dedicated
to providing quality customer service. The Association was organized in 1936
as a federally chartered mutual savings and loan association, at which time it
also became a member of the Federal Home Loan Bank ("FHLB") System and obtained
federal deposit insurance. The Association currently operates through four
banking offices located in Gadsden, Albertville, Guntersville and Centre,
Alabama. At June 30, 1996, the Association had total assets of $107.0 million,
deposits of $85.8 million and stockholders' equity of $20.1 million, or 18.8% of
total assets.
As a federally chartered savings institution, the Association is subject to
extensive regulation by the OTS. The lending activities and other investments
of the Association must comply with various federal regulatory requirements, and
the OTS periodically examines the Association for compliance with various
regulatory requirements. The Federal Deposit Insurance Corporation ("FDIC")
also has the authority to conduct special examinations. The Association must
file reports with OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board").
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RECENT AND PROPOSED LEGISLATIVE CHANGES
The Association's savings deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC. The assessment rate
currently ranges from 0.23% of deposits for well capitalized institutions to
0.31% of deposits for undercapitalized institutions. The FDIC also administers
the Bank Insurance Fund ("BIF"), which has the same designated reserve ratio as
the SAIF (currently 1.25%). The FDIC has lowered the deposit insurance
assessment rate for most commercial banks and other depository institutions with
deposits insured by the BIF to a range of 0.31% of insured deposits for
undercapitalized BIF-insured institutions to the statutory minimum of $2,000 per
year for well capitalized institutions, which constitute over 90% of BIF-insured
institutions. The FDIC has indicated that the assessment rate for SAIF-insured
institutions is not expected to fall below .23% of insured deposits until
approximately the year 2002. The decrease in BIF rates created a substantial
disparity in the deposit insurance premiums paid by BIF and SAIF members and
could place SAIF-insured savings institutions at a significant competitive
disadvantage to BIF-insured institutions.
To alleviate this disparity, one proposal being considered by the U.S.
Department of Treasury, the FDIC, and the U.S. Congress provides that a one-time
assessment of as much as 80 basis points be imposed on all SAIF-insured deposits
to cause the SAIF insurance fund to reach its designated reserve ratio. Once
this occurs, the two funds may be merged into one fund. There can be no
assurance that this proposal or any other proposal will be implemented or that
premiums for either fund will not be adjusted in the future by the FDIC or
legislative action.
The payment of a special assessment would have an adverse effect on the
Association's financial condition and results of operations, resulting in a net
charge of up to approximately $535,000, on an after tax basis. However, if such
a special assessment is imposed and the SAIF is recapitalized, it could have the
effect of reducing the Association's insurance premiums in the future, thereby
equalizing competition between BIF-insured and SAIF-insured institutions.
Legislation has also been introduced in Congress that provides for the
elimination of the distinctions between banks and thrifts under federal law.
The legislation may require the automatic conversion of all federally chartered
savings associations such as the Association into national banks by a specified
deadline. It could impose activities restrictions and restrictions on branches,
and it could also compel the holding companies of such institutions to be
subject to the more restrictive regulations that govern holding companies of
banks rather than thrifts. The legislation also could restrict current or
future activities of the Association and the Company, and it could also increase
regulatory compliance costs because of the new regulatory structure to which the
Association and the Company would be subject. While there currently are
substantial impediments to converting from SAIF to BIF deposit insurance, recent
legislation substantially reduced the adverse federal tax consequences of
thrifts converting to banks (see below). The Bank cannot predict at this time
whether any pending legislation ultimately will be enacted in its current form
or, if enacted, whether such legislation would remedy some or all of the related
adverse financial and tax effects.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Association, which have previously used that method are required to
recapture into taxable income post-1987 reserves in excess of the reserves
calculated under the experience method. Beginning with the first taxable year
beginning after December 31, 1995, savings institutions, such as the
Association, will be treated the same as commercial banks. Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method. The
Association is expected to recapture approximately $131,000 of its tax bad debt
reserves. The recapture will not affect the Association's net income or equity
because the related tax expense has already been accrued.
For additional information, see "Regulation of the Association" and
"Taxation" herein.
BUSINESS STRATEGY
The Association's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Association has sought to implement
this strategy by using retail deposits as its sources of funds and maintaining
most of its assets in mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National
<PAGE>
Mortgage Association ("GNMA") and the Federal National Mortgage Association
("FNMA"), loans secured by owner-occupied one- to four-family residential real
estate located in the Association's market area, U.S. government and agency
securities, interest-earning deposits, cash and equivalents and consumer loans.
The Association's business strategy incorporates the following key elements: (1)
remaining a community-oriented financial institution while maintaining a strong
core customer base by providing quality service and offering customers the
access to senior management and services that a community-based institution can
offer; (2) attracting a relatively strong retail deposit base from the
communities served by the Association's four banking offices; (3) maintaining
asset quality by emphasizing investment in local residential mortgage loans,
mortgage-backed securities and other securities issued or guaranteed by the U.S.
government or agencies thereof; and (4) maintaining liquidity and capital
substantially in excess of regulatory requirements.
MARKET AREA
The Association considers its primary market area to consist of Etowah,
Cherokee and Marshall Counties in which the Association has its four offices.
The City of Gadsden in which the Association's main office is located is in
Etowah County, approximately 65 miles northeast of Birmingham, Alabama. Based
upon the 1990 population census, the combined population of Etowah, Cherokee and
Marshall Counties was approximately 100,000.
The economy in the Association's market area includes a mixture of
manufacturing and agriculture. Large local employers include Goodyear Tire and
Rubber Company which has a plant located in Etowah County and Gulf States Steel
Corp., a local manufacturer of steel. In August 1994, General Motors Corp.
announced that it plans to build a new plant in Etowah County. Construction of
this new plant began in September 1994 and is expected to be completed by the
fall of 1995. Once completed, the plant is expected to become a significant
employer in the area. According to the Alabama Department of Industrial
Relations, the unemployment rates for May 1996 in Etowah, Cherokee and Marshall
Counties were 5.5%, 4.2% and 5.3%, respectively, as compared to 5.8% for the
state of Alabama.
COMPETITION
The Association experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings
institutions, credit unions, regional bank holding companies and commercial
banks located in its primary market area. Significant competition for the
Association's other deposit products and services comes from money market mutual
funds and brokerage firms. The primary factors in competing for loans are
interest rates and loan origination fees and the range of services offered by
various financial institutions. Competition for origination or real estate loans
normally comes from other savings institutions, commercial banks, credit unions,
mortgage bankers, and mortgage brokers.
The Association's primary competition comes from institutions headquartered
in the Association's market area as well as numerous additional commercial banks
which have branch offices located in the Association's market area. Many
competing financial institutions have financial resources substantially greater
than the Association and offer a wider variety of deposit and loan products. For
a discussion of recent and pending legislative and regulatory changes which
could adversely affect the Association's competitive position as compared to
commercial banks, see "Recent and Proposed Legislative Changes" and "Regulation
of the Association -- Deposit Insurance."
LENDING ACTIVITIES
General. The Association's principal lending activity consists of the
origination of loans secured by mortgages on existing one- to four-family
residences in the Association's market area. The Association also makes a
variety of consumer loans and limited amounts of non-residential real estate
loans. Historically, the Association has not made commercial business loans.
Savings institutions generally are subject to the lending limits applicable
to national banks. With certain limited exceptions, the maximum amount that a
savings institution or a national bank may lend to any borrower
<PAGE>
(including certain related entities of the borrower) at one time may not exceed
15% of the unimpaired capital and surplus of the institution, plus an additional
10% of unimpaired capital and surplus for loans fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 15% of unimpaired capital and
surplus.
At June 30, 1996, the maximum amount that the Association could have loaned
to any one borrower without prior OTS approval was $5.0 million. At such date,
the largest aggregate amount of loans that the Association had outstanding to
any one borrower was approximately $189,000.
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Association's loan portfolio by type of loan
at the dates indicated. At June 30, 1996, the Association had no concentrations
of loans exceeding 10% of total loans that are not disclosed below.
<TABLE>
<CAPTION>
At June 30,
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1996 1995
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Amount % Amount %
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
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Real estate loans:
One- to four-family residential (1).. $30,627 92.40% $24,000 90.69%
Non-residential...................... 178 0.54 211 0.80
Consumer and savings account loans..... 2,402 7.30 2,412 9.11]
Other loans............................ 22 0.07 30 0.11
------- ------ ------- ------
Total gross loans...................... 33,247 100.31 26,652 100.71
Less:
Unearned income...................... 124 0.37 122 0.46
Discounts on loans purchased......... (1) -- (1) --
Deferred loan fees (costs), net...... (99) (0.30) (14) (0.05)
Allowance for loan losses............ 78 0.24 80 0.30
------- ------ ------- ------
Total.............................. $33,145 100.00% $26,465 100.00%
======= ====== ======= ======
</TABLE>
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(1) One- to four-family residential includes second mortgage loans on which the
Association also has the first mortgage. The proceeds of these second
mortgage loans were used for improvements and consumer purposes. Second
mortgage loan balances at June 30, 1996 and 1995 were $580,241 and
$580,360, respectively.
<PAGE>
The following table sets forth information at June 30, 1996 regarding
the dollar amount of loans maturing or repricing in the Association's
portfolio, based on contractual terms to maturity or repricing period.
Demand loans, loans having no schedule of repayments and no stated maturity
and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due after Due after Due after
3 through 5 through 10 through
5 years after 10 years after 20 years after
Due during the year ending June 30, June 30, June 30, June 30, June 30,
-----------------------------------------------
1997 1998 1999 1996 1996 1996 Total
----------------- ---------------- ---------- ------------- -------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate (1)....... $ 508 $ 121 $ 199 $ 520 $9,564 $19,893 $30,805
Consumer and savings
accounts............ 679 156 383 1,202 -- -- 2,420
Other................. 4 -- -- 18 -- -- 22
------ ----- ----- ------ ------ -------------- -------
Total................. $1,191 $ 277 $ 582 $1,740 $9,564 $19,893 $33,247
====== ===== ===== ====== ====== ============== =======
</TABLE>
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(1) Real estate mortgage loans includes second mortgage loans on which the
Association also has the first mortgage. The proceeds of these second
mortgage loans were used for improvements and consumer purposes. Second
mortgage loan balances at June 30, 1996 totaled $580,241.
The following table sets forth at June 30, 1996, the dollar amount of
gross loans due after one year after that date, based upon contractual
maturity dates or period to reprice, and whether such loans have fixed or
adjustable rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
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(In thousands)
<S> <C> <C>
Real estate................... $26,191 $4,106
Consumer and savings account.. 1,741 --
Other......................... 18 --
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Total..................... $27,950 $4,106
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</TABLE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans
is substantially less than their contractual terms, due to prepayments. The
average life of mortgage loans tends to increase when current mortgage loan
market rates are higher than rates on existing mortgage loans and tends to
decrease when current mortgage loan market rates are lower than rates on
existing mortgage loans.
<PAGE>
Originations, Purchases and Sales of Loans. The following table sets forth
information with respect to the Association's originations of loans during the
periods indicated. The increase in originations during fiscal 1996 was
attributed to increased marketing efforts.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family (1)...................... $7,283 $3,528 $4,816
Non-residential.............................. -- -- --
Consumer and savings account................... 1,797 2,328 753
------ ------ ------
Total loans originated.................... $9,080 $5,856 $3,242
====== ====== ======
</TABLE>
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(1) One- to four-family residential includes second mortgage loans on which the
Association also has the first mortgage. The proceeds of these second
mortgage loans were used for improvements and consumer purposes. Second
mortgage loans originations for the years ended June 30, 1996, 1995 and
1994 were $167,935, $338,593 and $148,000, respectively.
In recent years, the Association has not purchased any loans, with the
exception of 54 one- to four-family real estate loans totalling $4.2 million
which were purchased in May and November 1995 from other financial institutions
in Florence and Tuscaloosa, Alabama and 43 consumer loans totalling $508,000
which were purchased in May 1994 from another financial institution in
connection with the Association's purchase of a branch located in Centre,
Alabama. The Association has not sold any loans in recent years.
One- to Four-Family Residential Lending. Historically, the Association's
principal lending activity has been the origination of fixed rate loans secured
by first mortgages on existing one- to four-family residences in the
Association's market area. The purchase price or appraised value of most of such
residences generally has been between $24,000 and $290,000, with the
Association's loan amounts averaging approximately $50,000. At June 30, 1996,
$30.6 million, or 92.4%, of the Association's total loans were secured by one-to
four-family residences, a substantial portion of which were existing, owner-
occupied, single-family residences in the Association's market area. At June 30,
1996, $26.5 million, or 86.6%, of the Association's one- to four-family
residential loans had fixed rates and $4.1 million, or 13.4%, had adjustable
rates.
The Association's one- to four-family residential mortgage loans generally
are for terms of up to 21 years, amortized on a monthly basis, with principal
and interest due each month. The majority of the Association's one-to four-
family mortgage loans are underwritten with terms of 15 years or less.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms. These loans customarily contain "due-on-
sale" clauses which permit the Association to accelerate repayment of a loan
upon transfer of ownership of the mortgaged property. In January 1995, the
Association introduced a new mortgage loan product which provides for a term of
up to 21 years with the interest rate increasing one percentage point every
seven years. This increase is not contingent upon any corresponding increase in
market interest rates. As of June 30, 1996, the Association had originated $2.1
million of these graduated rate loans. The Association intends to continue
originating such loans subject to market demands.
The Association's lending policies generally limit the maximum loan-to-
value ratio on one- to four-family residential mortgage loans secured by owner-
occupied properties to 90% of the lesser of the appraised value or purchase
price for loans up to $250,000. The Association's lending policies generally
require private mortgage insurance for any loan that exceeds an 80% loan-to-
value ratio. Pursuant to its "First-Time Home Buyer Plan," the
<PAGE>
Association may lend up to 100% of the purchase price of a one- to four-family
residence provided that the borrower (or third party) provides additional
collateral in the form of a pledge of a savings deposit or certificate of
deposit equal to 25% of the loan amount for loans up to 15 years and 28% of the
loan amount for loans with terms greater than 15 years up to 21 years.
Securities may also be pledged as additional collateral but such securities must
have a current market value equal to 140% of the required collateral amount.
The Association has not originated any adjustable rate, one- to four-family
residential mortgage loans in recent years. However, total loans at June 30,
1996 included adjustable rate loans with an aggregate principal balance of $4.1
million, substantially all of which were purchased during fiscal 1996. The rates
at which interest accrues on these loans are adjustable annually, generally with
limitations on adjustments of 2.0% per adjustment period and 6.0% - 6.5% over
the life of the loan. While such loans may include initial discounted rates,
they were underwritten and borrowers were qualified based on the fully indexed
interest rate. The Association's adjustable rate loans do not permit negative
amortization.
The Association also originates second mortgage loans on properties for
which the Association holds the first mortgage. Such loans, when combined with
the first mortgage, generally are limited to 75% of the appraised value. Such
loans have a fixed rate and a maximum term of 10 years.
The retention of adjustable and graduated rate loans in the Association's
portfolio helps reduce the Association's exposure to increases in prevailing
market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing
of adjustable rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable and graduated rate loans may increase
due to increases in interest costs to borrowers. Further, adjustable and
graduated rate loans which provide for initial rates of interest below the fully
indexed rates may be subject to increased risk of delinquency or default as the
higher, fully indexed rate of interest subsequently replaces the lower, initial
rate. Further, although adjustable rate loans allow the Association to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed rate period
before the first adjustment and the periodic and lifetime interest rate
adjustment limitations and the ability of borrowers to convert the loans to
fixed rates. Accordingly, there can be no assurance that yields on the
Association's adjustable rate loans will fully adjust to compensate for
increases in the Association's cost of funds. Finally, adjustable rate loans
increase the Association's exposure to decreases in prevailing market interest
rates, although decreases in the Association's cost of funds tend to offset this
effect.
Consumer Lending. The Association's consumer loans consist of home equity
lines of credit secured by first or second mortgages on single-family residences
in the Association's market area, new and used automobile loans and demand loans
secured by savings accounts at the Association. These loans totaled
approximately $647,710, $1,316,419 and $784,942, respectively, at June 30, 1996.
Management plans to continue the Association's expansion of these programs as
part of the Association's plan to provide a wider range of financial services to
the Association's customers while increasing the Association's portfolio yields.
The Association makes home equity lines of credit secured by the borrower's
residence. These loans, combined with the first mortgage loan, which usually is
from the Association, generally are limited to 75% of the appraised value of the
residence as long as the first mortgage is held by the Association and 65% if
the first mortgage is held by another lender. Home equity lines of credit are
open-end with the rate on such loans adjusting monthly based on the Prime Rate
as published in the Wall Street Journal as of the first day of the month plus
1.5%.
The Association's new and used automobile loans generally are underwritten
in amounts up to 85% of the purchase price, dealer cost or the loan value as
published by the National Automobile Dealers Association or the "Black Book."
The terms of such loans generally do not exceed 60 months with loans for older
used cars underwritten for shorter terms. The Association requires that the
vehicles be insured and that the Association be listed as loss payee on the
insurance policy. The Association originates a portion of its automobile loans
on an indirect basis through various dealerships located in its market area. See
" -- Loan Solicitation and Processing."
<PAGE>
The Association generally makes savings account loans for up to 80% of the
balance of the account. The interest rate on these loans is generally two
percentage points above the rate paid on the account, and interest is billed on
a monthly basis. These loans are payable on demand, and the account must be
pledged as collateral to secure the loan.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Association, and a borrower may be able to assert against
the Association claims and defenses which it has against the seller of the
underlying collateral. In underwriting consumer loans, the Association considers
the borrower's credit history, an analysis of the borrower's income, expenses
and ability to repay the loan and the value of the collateral.
Loan Solicitation and Processing. The Association's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers as well as walk in customers. In addition, the Association
originates a portion of its automobile loans on an indirect basis through
various dealerships located in the Association's market area. The Association's
solicitation programs consist of calls by the Association's officers to local
realtors and builders and advertisements in local newspapers, billboards and
real estate-related periodicals. Real estate loans are originated by the
Association's staff loan officers and executive officers, none of whom receives
commissions for loan originations. Loan applications are accepted at each of the
Association's offices for processing and approval.
Upon receipt of a loan application from a prospective borrower, the
Association's staff preliminarily reviews the information provided and makes an
initial determination regarding the qualification of the borrower. If not
disapproved, the application then is placed in processing, and a credit report,
verifications and other information is generally gathered relating to the loan
applicant's employment, income and credit standing. It is the Association's
policy to obtain an appraisal of the real estate intended to secure a proposed
mortgage loan from an Association-approved appraiser. The Association requires
that all borrowers complete an environmental questionnaire. Except when the
Association becomes aware of a particular risk of environmental contamination,
the Association generally does not obtain a formal environmental report on the
real estate at the time a loan is made.
It is the Association's policy to record a lien on the real estate securing
the loan and, in most instances, to obtain a title insurance policy which
insures that the property is free of prior encumbrances. Borrowers must also
obtain hazard insurance policies prior to closing and, when the property is
in a designated flood plain, paid flood insurance policies.
The Board of Directors has the overall responsibility and authority for
general supervision of the Association's loan policies. The Board has
established written lending policies for the Association. All mortgage loans are
approved by a loan committee consisting of three members of the Board of
Directors. Consumer loans up to $15,000 may be approved by individual loan
officers. Consumer loans of $15,000 or greater must be approved by at least two
members of the Association's consumer loan committee which is comprised of all
of the Association's loan officers. Loan applicants are promptly notified of the
decision of the Association. It has been management's experience that
substantially all approved loans are funded.
Interest Rates and Loan Fees. Interest rates charged by the Association
on mortgage loans are primarily determined by competitive loan rates offered in
its market area and the Association's minimum yield requirements. Mortgage loan
rates reflect factors such as prevailing market interest rate levels, the supply
of money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic
<PAGE>
conditions, the monetary policies of the federal government, including the
Federal Reserve Board, the general supply of money in the economy, tax policies
and governmental budget matters.
The Association receives fees in connection with loan originations, loan
modifications, late payments and changes of property ownership and for
miscellaneous services related to its loans. Loan origination fees are
calculated as a percentage of the loan principal. The Association typically
receives fees of up to 1.0% in connection with the origination of fixed rate
mortgage loans. The excess, if any, of loan origination fees over direct loan
origination expenses is deferred and accreted into income over the contractual
life of the loan using the interest method. If a loan is prepaid, refinanced or
sold, all remaining deferred fees with respect to such loan are taken into
income at such time.
Collection Policies. When a borrower fails to make a payment on a loan,
the Association generally takes prompt steps to have the delinquency cured and
the loan restored to current status. Once the payment grace period has expired
(in most instances 15 days after the due date), a late notice is mailed to the
borrower, and a late charge is imposed, if applicable. All loans on which
payments are 30 or more days delinquent are designated as "special mention." The
Association's Board of Directors reviews a list of all classified assets on a
monthly basis. See "-- Asset Classification, Allowance for Losses and Non-
performing Assets." If a loan remains delinquent 90 days or more, the
Association generally makes demand for payment and/or initiates foreclosure or
other legal proceedings.
Asset Classification, Allowances for Losses and Non-performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose an institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require an institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, an institution must either
establish a specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount. Federal examiners may disagree
with an institution's classifications. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS Regional Director. The Association regularly reviews its assets to determine
whether any assets require classification or re-classification. The Board of
Directors reviews and approves all classifications on a monthly basis. At June
30, 1996, the Association had no assets classified as loss, no assets classified
as doubtful, no assets classified as substandard, and $1,666,901 of assets
designated as special mention.
In extending credit, the Association recognizes that losses will occur and
that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the term of the
obligation, general economic conditions and, in the case of a secured
obligation, the quality of the security. It is management's policy to maintain
allowances for losses based on, among other things, regular reviews of
delinquencies and credit portfolio quality, character and size, the
Association's and the industry's historical and projected loss experience and
current and forecasted economic conditions. The Association increases its
allowance for loan losses by charging provisions for losses against the
Association's income. Federal examiners may disagree with an institution's
allowance for loan losses.
Management actively monitors the Association's asset quality and charges
off loans against the allowance for losses on such loans and makes additional
loss provisions in its discretion. Although management believes it uses the best
information available to make determinations with respect to the allowance for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
The Association's methodology for maintaining the allowance for loan losses
takes into consideration probable losses that have been identified in connection
with specific assets as well as losses that have not yet been
<PAGE>
identified. Management conducts regular reviews of the Association's assets and
evaluates the adequacy of its allowance for loan losses based on an assessment
of risk in the Association's assets taking into consideration the composition
and quality of the portfolio, delinquency trends, current charge-off and loss
experience, the state of the real estate market, regulatory reviews conducted in
the regulatory examination process and economic conditions generally. Allowances
are provided for individual assets, or portions of assets, when ultimate
collection is considered improbable by management based on the current payment
status of the assets and the fair value or net realizable value of the security.
At the date of foreclosure or other repossession, the Association transfers
the property to real estate acquired in settlement of loans at the lower of
recorded investment in the loan or fair value, net of estimated cost of
disposition. Fair value is defined as the amount in cash or cash-equivalent
value of other consideration that a property would yield in a current sale
between a willing buyer and a willing seller. Fair value is measured by market
transactions. If a market does not exist, fair value of the property is
estimated based on selling prices of similar properties in active markets or, if
there are no active markets for similar properties, by discounting a forecast of
expected cash flows at a rate commensurate with the risk involved. Fair value
generally is determined through an appraisal at the time of foreclosure. Any
amount of the recorded investment in the loan in excess of fair value is
charged-off against the allowance for loan losses. Subsequent to foreclosure,
the property is periodically evaluated by management and an allowance is
established if the estimated fair value of the property, less estimated costs to
sell, declines. If, upon ultimate disposition of the property, net sales
proceeds exceed the net carrying value of the property, a gain on sale of real
estate may be recorded if certain conditions are met. At June 30, 1996, the
Association had no properties acquired in settlement of loans.
<PAGE>
The following table sets forth an analysis of the Association's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1996 1995 1994
------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period.................................... $ 80 $ 40 $ 40
Charge-offs....................................................... (2) -- --
Recoveries........................................................ -- -- --
Provision for loan losses......................................... -- 40 --
----- ----- ------
Balance at end of period.......................................... $ 78 $ 80 $ 40
===== ===== ======
</TABLE>
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential.... $24 92.11% $24 90.05% $29 92.93%
Non-residential.................... -- 0.54 -- 0.79 2 0.94
Consumer and savings account loans... 30 7.28 32 9.05 9 5.99
Other loans.......................... 24 0.07 24 0.11 -- 0.14
--- ------ --- ------ --- ------
Total allowance for loan losses.. $78 100.00% $80 100.00% $40 100.00%
=== ====== === ====== === ======
</TABLE>
The Association ceases accrual of interest on a loan when payment on the
loan is delinquent in excess of 90 days. Income is subsequently recognized only
to the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has been
reestablished, in which case the loan is returned to accrual status.
<PAGE>
The following table sets forth information with respect to the
Association's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1996 1995 1994
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate loans:
One- to four-family residential................. $ -- $ 48 $ 58
Non-residential................................. -- -- --
Consumer and savings account loans................ -- -- --
Other loans....................................... -- -- --
------ ----- ------
Total........................................... $ -- $ 48 $ 58
====== ===== ======
Accruing loans which are contractually
past due 90 days or more:
Real estate loans:
One- to four-family residential................. $ -- $ -- $ --
Non-residential................................. -- -- --
Consumer and savings account loans................ -- -- --
Other loans....................................... -- -- --
------ ----- ------
Total........................................... $ -- $ -- $ --
====== ===== ======
Total of non-accrual and accruing
loans 90 days past due loans................... $ -- $ 48 $ 58
====== ===== ======
Percentage of total loans........................... --% 0.18% 0.23%
====== ===== ======
Other non-performing assets (2)..................... $ -- $ -- $ --
====== ===== ======
Percentage of total assets.......................... --% 0.05% 0.06%
====== ===== ======
</TABLE>
__________________
(1) The Association ceases accrual of interest on a loan when payment on the
loan is delinquent in excess of 90 days. Income is subsequently recognized
only to the extent that cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments has been reestablished, in which case the loan is returned to
accrual status.
(2) Other non-performing assets may include real estate or other assets
acquired by the Association through foreclosure or repossession. Real
estate owned is recorded at the lower of the recorded investment in the
loan or fair value of the property, less estimated costs of disposition.
Interest income foregone on non-accrual loans was considered insignificant
for the year ended June 30, 1996.
At June 30, 1996, management had identified no loans which were not
reflected in the preceding table but as to which known information about
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms.
INVESTMENT ACTIVITIES
The Association is permitted under federal law to make certain investments,
including investments in securities issued by FNMA, FHLMC, GNMA, various federal
agencies and state and municipal governments, deposits at the FHLB of Atlanta,
certificates of deposits in federally insured institutions, certain bankers'
acceptances and federal funds. The Association may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Association to maintain an investment in FHLB of Atlanta stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
which savings institutions are required to maintain. For additional information,
see "Regulation -- Regulation of the Association -- Liquidity Requirements."
<PAGE>
The Association invests in investment securities in order to diversify its
assets, manage cash flow and interest rate risk, obtain yield and maintain the
minimum levels of qualified and liquid assets required by regulatory
authorities. The investment activities of the Association consist primarily of
investments in mortgage-backed securities, U.S. Treasury and U.S. Government
agency securities and other securities. Investment decisions are generally made
by the President of the Association and are ratified by the Board of Directors.
Investment and aggregate investment limitations and credit quality parameters of
each class of investment are prescribed in the Association's investment policy.
The Association's investment policy does not permit the Association to invest in
any futures, options or high risk mortgage derivatives, including residual
interests in collateralized mortgage obligations and other real estate mortgage
investment conduits, stripped mortgage-backed securities and other investments
that exhibit a high degree of price volatility.
The Association adopted SFAS No. 115 as of June 30, 1993. Upon
implementation of SFAS No. 115, certain investment and mortgage-backed
securities were transferred to a portfolio of securities designated as available
for sale. The remaining securities are considered to be held to maturity.
Securities designated as available for sale are carried at their fair value with
unrealized gains or losses, net of tax effect, recognized in equity. Securities
designated as held to maturity are carried at amortized cost. At June 30, 1996,
investment securities with an aggregate amortized cost of $13.6 million and an
aggregate fair value of $13.5 million were included in the portfolio of
securities designated as available for sale. The aggregate impact on equity was
a decrease of $79,587 at June 30, 1996. Securities designated as "held to
maturity" are those assets which the Association has the ability and management
has the intent to hold to maturity. Upon acquisition, securities are classified
as to the Association's intent. For additional information, see Notes 6 and 7 of
Notes to Consolidated Financial Statements in Item 7 of this report.
Mortgage-Backed Securities. The Association maintains a substantial
portfolio of mortgage-backed securities in the form of GNMA, FHLMC and FNMA
participation certificates. GNMA, FHLMC and FNMA certificates are each
guaranteed by their respective agencies as to principal and interest. Mortgage-
backed securities generally entitle the Association to receive a pro rata
portion of the cash flows from an identified pool of mortgages. Although
mortgage-backed securities generally yield less than the loans which are
exchanged for such securities, they present substantially lower credit risk,
they are more liquid than individual mortgage loans, and they may be used to
collateralize obligations of the Association. In addition, the Association's
portfolio of mortgage-backed securities qualify as "Qualified Thrift
Investments" for purposes of determining the Association's compliance with the
"Qualified Thrift Lender" test and may also be considered for purposes of
meeting certain definitional tests prescribed by the Internal Revenue Code which
entitle thrift institutions to favorable tax treatment. See "Regulation of the
Association -- Qualified Thrift Lender Test" and "Taxation -- Federal Income
Taxation."
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated life of the securities using a
level yield method. Prepayments of the underlying mortgages depend on many
factors, including the type of mortgage, the coupon rate, the age of the
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates. The
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. During periods of falling mortgage interest rates, prepayments
generally increase, and, conversely, during periods of rising mortgage interest
rates, prepayments generally decrease. If the coupon rate of the underlying
mortgage significantly exceeds the prevailing market interest rates offered for
mortgage
<PAGE>
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages. Prepayment experience is more difficult to estimate for
adjustable-rate mortgage-backed securities.
The Association's mortgage-backed securities portfolio consists primarily
of seasoned fixed-rate and adjustable rate mortgage-backed securities. At June
30, 1996, the Association had $48.3 million in mortgage-backed securities
(representing 45.1% of total assets) all of which are considered to be held to
maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA.
Agency Notes. The Association has also invested in notes issued by the
FHLB of Atlanta, FNMA and the Student Loan Marketing Association ("SLMA"). Such
notes had an aggregate balance of $243,828 at June 30, 1996 and are neither
insured nor guaranteed by the United States.
These notes provide for interest rates to increase at specified intervals
to pre-established rates. The issuing agency has the right to prepay such notes
at face value at certain pre-established dates. The weighted average maturity
and coupon rate of the Association's agency notes were 26 months and 5.55%,
respectively, at June 30, 1996.
The following table sets forth the carrying value of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------
1996 1995
--------- ----------
(In thousands)
<S> <C> <C>
Securities available for sale: (1)
U.S. Treasury and U.S. government agencies...... $ 7,143 $ 6,924
Mortgage-backed securities...................... 1,424 --
Federal Home Loan Bank stock.................... 765 643
Other........................................... 4,172 3,882
------- -------
Total securities available for sale............ $13,504 $11,449
======= =======
Securities held to maturity: (2)
U.S. Treasury and U.S. government agencies...... $ 2,003 $ 2,505
Mortgage-backed securities...................... 48,308 45,126
Other........................................... 2,511 5,495
------- -------
Total securities held to maturity.............. $52,822 $53,126
======= =======
Total securities................................. $66,326 $64,575
======= =======
</TABLE>
____________
(1) The carrying value is the approximate fair value of the security at each
reporting date.
(2) The carrying value is the amortized cost of the security at each reporting
date.
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized costs, fair value and weighted average yields for the
Association's investment securities at June 30, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years Other
------------------ ------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale: (1)
U.S. treasury and government
obligations.......................... $1,000 6.0% $ 9,870 6.5% $ 500 7.3% $ -- -- %
Mortgage-backed securities............. -- -- 935 7.0 513 7.5 -- --
Federal Home Loan Bank stock........... 765 7.3 -- -- -- -- -- --
------ ------- ------- --------
Total securities available for sale...... $1,765 6.6% $10,805 6.5% $ 1,013 7.4% $ -- -- %
====== ======= ======= ========
Securities held to maturity: (2)
U.S. treasury and government
obligations.......................... $1,002 6.6% $ 2,003 6.9% $ 1,509 7.2% $ -- -- %
Mortgage-backed securities............. 2 15.5 1,934 8.0 13,615 7.6 32,757 7.3
------ ------- ------- --------
Total securities held to maturity........ 1,004 6.6 3,937 7.4 15,124 7.6 32,757 7.3
------ ------- ------- --------
Total securities......................... $2,769 6.6% $14,742 6.7% $16,137 7.6% $32,757 7.3%
====== ======= ======= ========
<CAPTION>
Total Investment Portfolio
---------------------------
Carrying Fair Average
Value Value Yield
-------- ------- --------
<S> <C> <C> <C>
Securities available for sale: (1)
U.S. treasury and government
obligations.......................... $11,370 $11,314 6.5%
Mortgage-backed securities............. 1,448 1,424 7.2
Federal Home Loan Bank stock........... 765 765 7.3
------- -------
Total securities available for sale...... $13,583 $13,503 6.6%
======= =======
Securities held to maturity: (2)
U.S. treasury and government
obligations.......................... $ 4,514 $ 4,488 6.9%
Mortgage-backed securities............. 48,308 48,370 7.4
------- -------
Total securities held to maturity........ 52,822 52,858 7.4
------- -------
Total securities......................... $66,405 $63,361 7.2%
======= =======
</TABLE>
_________________
(1) Carrying values of securities available for sale is their approximate fair
value at the reporting date. Average yield on securities available for sale
is based on their amortized historical costs at the reporting date.
(2) Carrying values of securities held to maturity is their amortized
historical cost at their reporting date. Average yield on securities held
to maturity is based on their amortized historical cost at the reporting
date.
For additional information, see Notes 6, 7 and 9 of Notes to Consolidated
Financial Statements.
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Association's funds for
lending and other investment purposes. In addition to deposits, the Association
derives funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions.
Deposits. The Association attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit which range in term from seven
days to ten years. Deposit terms vary, principally on the basis of the minimum
balance required, the length of time the funds must remain on deposit and the
interest rate. The Association also offers Individual Retirement Accounts
("IRAs").
The Association's policies are designed primarily to attract deposits from
local residents through the Association's branch network rather than from
outside the Association's market area. The Association's interest rates,
maturities, service fees and withdrawal penalties on deposits are established by
management on a periodic basis. Management determines deposit interest rates and
maturities based on the Association's funds acquisition and liquidity
requirements, the rates paid by the Association's competitors, the Association's
growth goals and applicable regulatory restrictions and requirements. The
Association does not solicit deposits from brokers and currently does not bid
for public unit funds.
The Association plans to remain competitive in its primary market area by
introducing new products and services which include various checking account
products, enhancements to the savings portfolio, offering competitive interest
rates and fees, and to attract new customers by providing full service banking.
<PAGE>
Deposits in the Association as of June 30, 1996 were represented by the
various programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate Term Category Amount Balances Total Savings
- -------- ------- -------- ------ -------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
1.997% None NOW Accounts $ 100 $ 683 0.80%
2.748% None Passbook Statement Accounts 100 4,816 5.61
3.993% None Gold Star Savings Account 100 598 0.70
3.753% None Money Market Deposit Account 1,500 748 0.87
3.753% None High Yield Account 100 3,160 3.68
2.227% None Best Checking Account 50 366 0.43
1.894% None Merit Checking 50 651 0.76
2.210% None Classic 55 Checking 50 1,652 1.92
-- % None Free Checking -- 147 0.17
-- % None Business checking 50 23 0.03
Certificates of Deposit
-----------------------
2.750% 91 Days 3-Month Money Market 1,000 67 0.08
2.750% 5 Month Fixed Term, Fixed Rate 1,000 249 0.29
4.982% 182 Days 6-Month Money Market 1,000 4,681 5.45
3.250% 7 Month Fixed Term, Fixed Rate 1,000 106 0.12
4.600% 8 Month Fixed Term, Fixed Rate 1,000 143 0.17
5.000% 9 Month Fixed Term, Fixed Rate 1,000 1,520 1.77
5.223% 10 Month Fixed Term, Fixed Rate 1,000 1,940 2.26
2.568% 12 Month Fixed Term, Fixed Rate 1,000 5,560 6.48
4.750% 14 Month Fixed Term, Fixed Rate 1,000 38 0.04
5.037% 18 Month Fixed Term, Fixed Rate 1,000 1,304 1.52
5.820% 18 Month Fixed Term, Fixed Rate - IRA 250 2,991 3.48
5.704% 20 Month Fixed Term, Fixed Rate 1,000 15,771 18.37
2.820% 24 Month Fixed Term, Fixed Rate 1,000 8,741 10.18
4.911% 30 Month Fixed Term, Fixed Rate 1,000 3,087 3.60
5.904% 36 Month Fixed Term, Fixed Rate 1,000 12,348 14.38
5.521% 48 Month Fixed Term, Fixed Rate 1,000 3,344 3.90
6.170% 60 Month Fixed Term, Fixed Rate 1,000 6,853 7.98
6.378% 72 Month Fixed Term, Fixed Rate 1,000 1,662 1.94
5.953% 96 Month Fixed Term, Fixed Rate 1,000 109 0.13
5.850% 120 Month Fixed Term, Fixed Rate 1,000 764 0.89
4.987% 3-Month-State Fixed Term, Fixed Rate 1,000 1,425 1.66
6.000% Negotiated Negotiated Jumbo 100,000 300 0.35
------- ------
Total $85,847 100.00%
======= ======
</TABLE>
<PAGE>
The following tables set forth the average balances and average interest
rates paid based on month-end balances for deposits as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------------------
1996 1995
------------------------------------------------ ---------------------------------------------
Interest- Interest-
Bearing Certificates Bearing Certificates
Passbook Demand of Passbook Demand of
Savings Deposits Deposit Savings Deposits Deposit
-------- --------- ------------ -------- --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance..................... $7,199 $7,523 $73,710 $7,032 $6,738 $75,382
Average interest rate............... 2.69% 3.39% 5.78% 2.89% 2.89% 5.14%
<CAPTION>
Year Ended June 30,
-------------------------------------------------------
1994
-------------------------------------------------------
Interest-
Bearing Certificates
Passbook Demand of
Savings Deposits Deposit
-------- ---------- ------------
<C> <C> <C>
Average balance..................... $6,716 $4,074 $63,030
Average interest rate............... 2.89% 2.41% 4.82%
</TABLE>
<PAGE>
The following tables set forth the change in dollar amount of deposits in
the various types of accounts offered by the Association between the dates
indicated.
<TABLE>
<CAPTION>
Increase Increase
Balance at (Decrease) Balance at (Decrease) Balance at
June 30, % of from June June 30, % of from June June 30, % of
1996 Deposit 30, 1995 1995 Deposits 30, 1994 1994 Deposits
---------- ------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing and
non-interest-bearing
demand deposits........... $ 7,430 8.65% $ 232 $ 7,198 7.88% $ 397 $ 6,801 7.67%
Passbook savings........... 5,413 6.31 (870) 6,283 6.87 (1,969) 8,252 9.31
Certificates of deposit.... 73,004 85.04 (4,922) 77,926 85.25 4,307 73,619 83.02
------- -------- ------- ------- ------ --------- ------- ------
Total $85,847 100.00% $(5,560) $91,407 100.00% $ 2,735 $88,672 100.00%
======= ======== ======= ======= ====== ========= ======= ======
</TABLE>
<PAGE>
The following table sets forth the certificates of deposit in the
Association classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------
1996 1995
------- --------
(In thousands)
<S> <C> <C>
2.00 - 4.00%........................ $ 576 $ 3,699
4.01 - 6.00%........................ 47,238 45,454
6.01 - 8.00%........................ 24,749 26,122
8.01 - 10.00%........................ 441 2,651
------- -------
$73,004 $77,926
======= =======
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit in the Association at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- --------- -------- --------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00%.............................. $ 403 $ 110 $ 63 $ -- 576
4.01 - 6.00%.............................. 28,664 10,563 5,356 655 472,238
6.01 - 8.00%.............................. 13,864 8,950 1,632 303 24,749
8.01 - 10.00%.............................. 3 6 320 112 441
------- ------- ------- -------
$42,934 $19,629 $ 7,371 $ 3,070 $ 73,004
======= ======= ======= ======= =========
</TABLE>
The following table indicates the amount of the certificates of deposit of
$100,000 or more in the Association by time remaining until maturity at June 30,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less........... $ 3,827
Over three through six months.. 1,073
Over six through 12 months..... 1,109
Over 12 months................. 4,120
-------
Total........................ $10,129
=======
</TABLE>
<PAGE>
The following table sets forth the deposit activities of the Association
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1996 1995 1994
-------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Deposits.................................................... $12,583 $13,229 $14,177
Withdrawals................................................. 21,102 13,000 (18,232)
------- -------- -------
Net increase (decrease) before interest credited............ (8,519) 229 (4,055)
Interest credited........................................... 2,959 2,506 2,414
Savings deposits assumed in acquisition..................... -- -- 19,034
------- -------- -------
Net increase (decrease) in savings deposits............. $(5,560) $ 2,735 $17,393
======= ======== =======
</TABLE>
In May 1994, the Association acquired a branch located in Centre Alabama
from another financial institution. In connection with the acquisition, the
Association assumed $19.0 million of deposits. For additional information, see
Note 16 of Notes to Consolidated Financial Statements.
Borrowings. Savings deposits historically have been the primary source of
funds for the Association's lending, investment and general operating
activities. The Association is authorized, however, to use advances from the
FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Atlanta functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB system, the Association is required to own
stock in the FHLB of Atlanta and is authorized to apply for advances. Advances
are made pursuant to several different programs, each of which has its own
interest rate and range of maturities. The Association does not have any
borrowings from the FHLB, and management currently does not expect to borrow
from the FHLB in the future.
SUBSIDIARY ACTIVITIES
Federally chartered savings institutions are permitted to invest up to 2%
of their assets in subsidiary service corporations, plus an additional 1% in
subsidiaries engaged in specific community purposes. Under such limitation, as
of June 30, 1996, the Association was authorized to invest approximately $2.1
million in the stock of or loans to subsidiaries. The Association has one wholly
owned subsidiary, First Service Corporation of Gadsden, Alabama, Inc. ("First
Service"), an Alabama corporation, which holds the Association's investment in
data processing operations. At June 30, 1996, the Association's total investment
in the subsidiary was $35,819.
REGULATION OF THE ASSOCIATION
General. As a federally chartered savings institution, the Association is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Association must comply with various federal regulatory
requirements, and the OTS periodically examines the Association for compliance
with various regulatory requirements. The FDIC also has the authority to conduct
special examinations. The Association must file reports with OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of depositors. See also
"Recent and Proposed Legislative Changes."
Federal Home Loan Bank System. The Association is a member of the FHLB
System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Atlanta, the Association is required to acquire and hold shares of
capital stock in the FHLB of Atlanta in an amount at least equal to a percentage
of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or a fraction
of its advances (borrowings) from the FHLB of
<PAGE>
Atlanta, whichever is greater. The Association was in compliance with this
requirement with an investment in FHLB of Atlanta stock at June 30, 1996 of
$765,300.
The FHLB of Atlanta serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the OTS and the Board of Directors of the FHLB of Atlanta. Long-term advances
may only be made for the purpose of providing funds for residential housing
finance. At June 30, 1996, the Association had no advances outstanding with the
FHLB of Atlanta. See "Deposit Activity and Other Sources of Funds --Borrowings."
Liquidity Requirements. The Association is required to maintain average
daily balances of liquid assets (cash, deposits maintained pursuant to Federal
Reserve Board requirements, time and savings deposits in certain institutions,
obligations of the United States and states and political subdivisions thereof,
shares in mutual funds with certain restricted investment policies, highly rated
corporate debt and mortgage loans and mortgage-related securities with less that
one year to maturity or subject to pre-arranged sale within one year) equal to
the monthly average of not less than a percentage of its net withdrawable
savings deposits plus short-term borrowings. The Association is also required to
maintain average daily balances of short-term liquid assets at a percentage of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity ratio of the Association for the month
of June 1996 was 20.75%.
Qualified Thrift Lender Test. The Association is subject to OTS
regulations which use the concept of a Qualified Thrift Lender to determine
eligibility for Federal Home Loan Bank advances and for certain other purposes.
To qualify as a Qualified Thrift Lender, a savings institution must maintain at
least 65% of its "portfolio" assets in Qualified Thrift Investments. Portfolio
assets are defined to include total assets less intangibles, property used by a
savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans,
equity positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions and (iii) stock in a Federal Home
Loan Bank or the FHLMC. In addition, subject to a 20% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. Qualified
Thrift Investments may also include mortgage loans subject to sale under certain
conditions. To be qualified as a Qualified Thrift Lender, a savings institution
must maintain its status as a Qualified Thrift Lender for nine out of every 12
months. Failure to qualify as a Qualified Thrift Lender results in a number of
sanctions, including the imposition of certain operating restrictions imposed on
national banks and a restriction on obtaining additional advances from the
Federal Home Loan Bank System. Upon failure to qualify as a Qualified Thrift
Lender for two years, a savings institution must convert to a commercial bank.
At June 30, 1996, approximately substantially more than 65% of the
Association's portfolio assets were invested in Qualified Thrift Investments as
currently defined.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8% of "risk-weighted" assets. In addition, the OTS has recently adopted
regulations which impose certain restrictions on institutions that have a total
risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted
total assets of less than 4.0% (or 3.0% if the institution is rated CAMEL 1
under the OTS examination rating system). For purposes of these regulations,
Tier 1 capital has the same definition as core capital. See "Prompt Corrective
Regulatory Action." Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Core capital is generally reduced by the
amount of an
<PAGE>
institution's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights, purchased credit card relationships and qualifying supervisory
goodwill held by an eligible institution. Tangible capital is given the same
definition as core capital but does not include an exception for qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationships.
Core and tangible capital generally are required to be reduced by an amount
equal to a savings institution's debt and equity investments in subsidiaries
engaged in activities not permissible to national banks. As of June 30, 1996,
the Association had no material investments in, or extensions of credit to, non-
includible subsidiaries.
OTS regulations further provide that core and tangible capital need not be
reduced by the amount of core deposit intangibles resulting from branch purchase
transactions consummated (or under firm contract) prior to March 4, 1994, to the
extent permitted by OTS, provided that such core deposit intangibles are valued
in accordance with generally accepted accounting principles, supported by
credible assumptions, and have their amortization adjusted at least annually to
reflect decay rates (past and present) in the acquired customer base. As of June
30, 1996, the Association had $222,438 of core deposit intangibles resulting
from the acquisition of its Centre, Alabama branch.
Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts, and increased by a pro rated portion of the assets of
subsidiaries in which the institution holds a minority interest and which are
not engaged in activities for which the capital rules require the institution to
net its debt and equity investments against capital, as well as a pro rated
portion of the assets of other subsidiaries for which netting is not fully
required under phase-in rules. Adjusted total assets are reduced by the amount
of assets that have been deducted from capital, the portion of the institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill. At June 30, 1996, the Association's adjusted total assets
for purposes of the core and tangible capital requirements were $107.0 million.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
institution's core capital. Supplementary capital is defined to include certain
preferred stock issues, nonwithdrawable accounts and pledged deposits that do
not qualify as core capital, certain approved subordinated debt, certain other
capital instruments and a portion of the institution's general loss allowances.
Total core and supplementary capital are reduced by the amount of capital
instruments held by other depository institutions pursuant to reciprocal
arrangements and, after July 1, 1990, by an increasing percentage of the
institution's high loan-to-value ratio land loans, non-residential construction
loans and equity investments other than those deducted from core and tangible
capital. As of June 30, 1996, the Association had no high ratio land or non-
residential construction loans and no equity investments for which OTS
regulations require a deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with original loan-to-value ratios under 80% are assigned a risk
weight of 50%. Consumer and residential construction loans are assigned a risk
weight of 100%. Mortgage-backed securities issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC are assigned a 20% risk weight.
Cash and U.S. Government securities backed by the full faith and credit of the
U.S. Government are given a 0% risk weight. As of June 30, 1996, the
Association's risk-weighted assets were approximately $21.7 million.
<PAGE>
At June 30, 1996, the Association exceeded all regulatory minimum capital
requirements. The table below presents certain information relating to the
Association's regulatory capital compliance at June 30, 1996.
<TABLE>
<CAPTION>
To Be Well
Minimum for Capitalized for
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- ---------------- ------------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity and ratio
to total assets.................... 14.4% $ 15,397
Investments in and advances to
"nonincludable subsidiaries".......
Unrealized losses on available for
sale securities.................... 80
Intangible assets.................... (222)
--------
Tangible capital, and ratio to
adjusted total assets.............. 14.3 15,255 1.5% $ 1,603
---- -------- --- --------
Tier 1 (core) capital, and ratio to
adjusted total assets.............. 14.3 15,255 3.0% 3,205 5.0% $ 5,342
---- -------- --- -------- ---- -------
Tier 1 capital, and ratio to
risk-weighted assets............... 70.4 15,255 6.0 $ 1,299
Tier 2 capital (general allowance
for loan losses)................... 78
Total capital, and ratio to
risk-weighted assets............... 70.8 15,333 8.0% 1,732 10.0% $ 2,166
-------- --- -------- ----
Total assets......................... 106,979
--------
Adjusted total assets................ 106,837
--------
Risk-weighted assets................. 21,655
--------
</TABLE>
The capital standards for savings institutions must be no less stringent
than the capital standards applicable to national banks. Effective December 31,
1990, regulations of the Office of the Comptroller of the Currency ("OCC")
established a new minimum core capital ratio of 3% for the most highly rated
national banks, with an additional 100 to 200 basis point "cushion" amount of
additional capital required on a case-by-case basis, considering the quality of
risk management systems and the overall risk in individual banks. The OTS has
proposed an amendment to its capital regulations establishing a minimum core
capital ratio of 3% for institutions rated CAMEL 1 under the OTS examination
rating system. For all other institutions, the minimum core capital ratio will
be 3% plus at least an additional 100 to 200 points. In determining the amount
of additional core capital, the OTS will assess both the quality of risk
management systems and the level of overall risk in each individual institution
through the supervisory process on a case-by-case basis.
The OTS has adopted an amendment to its risk-based capital requirements
that requires savings institutions with more than a "normal" level of interest
rate risk to maintain additional total capital. An institution's interest rate
risk will be measured in terms of the sensitivity of its "net portfolio value"
to changes in interest rates. Net portfolio value is defined, generally, as the
present value of expected cash inflows from existing assets and off-balance
sheet contracts less the present value of expected cash outflows from existing
liabilities. An institution will be considered to have a "normal" level of
interest rate risk exposure if the decline in its net portfolio value after an
immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than two percent of the
current estimated economic value of its assets. An institution with a greater
than normal interest rate risk will be required to deduct from total capital,
for purposes of calculating its risk-based capital requirement, an
<PAGE>
amount (the "interest rate risk component") equal to one-half the difference
between the institution's measured interest rate risk and the normal level of
interest rate risk, multiplied by the economic value of its total assets.
The OTS will calculate the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%
are generally exempt from filing the interest rate risk schedule with their
Thrift Financial Reports. However, the OTS will require any exempt institution
that it determines may have a high level of interest rate risk exposure to file
such schedule on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its peers.
The Association has been informed by the OTS that it is expected to become
required to file such reports on a quarterly basis at some time in the future
although implementation of this requirement has been indefinitely delayed by the
OTS. Based on the Association's substantial capital level, management does not
expect that implementation of this requirement will have a material effect on
the Association.
In addition to requiring generally applicable capital standards for
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for an institution at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The
Director of the OTS may treat the failure of any institution to maintain capital
at or above such level as an unsafe or unsound practice and may issue a
directive requiring any institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an order
issued by the FDIC.
Deposit Insurance. The Association is required to pay assessments based on
a percent of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIA, the FDIC is required to set semi-annual assessments
for SAIF-insured institutions to achieve and maintain the designated reserve
ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
The FDIC has established a risk-based assessment system for insured
depository institutions. Under the system, the assessment rate for an insured
depository institution will depend on the assessment risk classification
assigned to the institution by the FDIC which will be determined by the
institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See "Prompt Corrective Regulatory Action." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A will consist of financially sound institutions with
only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The SAIF assessment rate ranges from 0.23% of deposits for well
capitalized institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C.
The FDIC has recently amended the BIF risk-based assessment schedule to
eliminate the deposit insurance premiums for most commercial banks and other
depository institutions with deposits insured by the BIF. The FDIC has indicated
it anticipates that the assessment rate for SAIF-insured institutions in even
the lowest risk-based premium category will not fall below the current 0.23% of
insured deposits before the year 2002 absent a recapitalization. The FDIC action
has resulted in a substantial disparity between the deposit insurance premiums
paid by BIF and SAIF members and could place SAIF-insured savings associations
at a significant competitive disadvantage to BIF-insured institutions.
Legislation recently proposed in Congress would require savings
<PAGE>
associations with deposits insured by the SAIF to pay a one-time special in
order to increase the reserve level of the SAIF to the statutorily required
1.25% of insured deposits. See "Recent and Proposed Legislative Changes."
SAIF members generally are prohibited from converting to the status of
members of the BIF administered by the FDIC or merging with or transferring
assets to a BIF member before the later of August 9, 1994 or the date on which
the SAIF first meets or exceeds the designated reserve ratio. The FDIC, however,
may approve such a transaction in the case of a SAIF member in default or if the
transaction involves an insubstantial portion of the deposits of each
participant. In addition, mergers, transfers of assets and assumptions of
liabilities may be approved by the appropriate bank regulator so long as deposit
insurance premiums continue to be paid to the SAIF for deposits attributable to
the SAIF members plus an adjustment for the annual rate of growth of deposits in
the surviving bank without regard to subsequent acquisitions. An institution may
adopt a commercial bank or savings bank charter if the resulting bank remains a
SAIF member.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the institution is meeting with the Tier
1 capital requirement for state non-member banks of 4% of total assets for all
but the most highly rated state non-member banks.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to
various percentages of its accounts. The percentages are subject to adjustment
by the Federal Reserve Board. Because required reserves must be maintained in
the form of vault cash or in a non-interest bearing account at a Federal Reserve
Association, the effect of the reserve requirement is to reduce the amount of
the institution's interest-earning assets. As of June 30, 1996, the Association
met its reserve requirements.
Dividend Restrictions. Under OTS regulations, the Association would not be
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the remaining balance of the liquidation account
established for the benefit of certain depositors of the Association at the time
of the Conversion. In addition, the Association is required by OTS regulations
to give the OTS 30 days' prior notice of any proposed declaration of dividends
to the Company.
OTS regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Association. Under these regulations, an institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (a)
75% of its net income for the previous four quarter; or (b) 100% of its net
income to date during the calendar year plus an amount that would reduce by one-
half the amount by which its ratio of total capital to assets exceeded its fully
phased-in risk-based capital ratio requirement at the beginning of the calendar
year. An institution with total capital in excess of current minimum capital
ratio requirements but not in excess of the fully phased-in requirements (a
"Tier 2 Association") is permitted, after notice, to make capital distributions
without OTS approval of up to 75% of its net income for the previous four
quarters, less dividends already paid for such period. An institution that fails
to meet current minimum capital requirements (a "Tier 3
<PAGE>
Association") is prohibited from making any capital distributions without the
prior approval of the OTS. A Tier 1 Association that has been notified by the
OTS that its is in need of more than normal supervision will be treated as
either a Tier 2 or Tier 3 Association. The Association is a Tier 1 Association.
Despite the above authority, the OTS may prohibit any institution from making a
capital distribution that would otherwise be permitted by the regulation, if the
OTS were to determine that the distribution constituted an unsafe or unsound
practice.
Under the OTS prompt corrective action regulations, the Association would
be prohibited from making any capital distributions if, after making the
distribution, it 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%. See "Prompt Corrective Regulatory Action."
Furthermore, during the first year following completion of the Conversion, the
Association will not pay dividends to the Company if, as a result of any such
dividend, the Association's tangible capital would be reduced below 10% of its
adjusted total assets.
In addition to the foregoing, earnings of the Association appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other distributions to the Company without
payment of taxes at the then current tax rate on the amount of earnings removed
from the reserves for such distributions. See "Taxation." The Company intends to
make full use of this favorable tax treatment afforded to the Association and
the Company and does not contemplate use of any post-Conversion earnings of the
Association in a manner which would limit either company's bad debt deduction or
create federal tax liabilities.
Limits on Loans to One Borrower. Savings institutions generally are subject
to the lending limits applicable to national banks. With certain limited
exceptions, an institution's loans and extensions of credit outstanding to a
person at one time shall not exceed 15% of the unimpaired capital and surplus of
the institution. An institution may lend an additional amount, equal to 10% of
unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of the OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the institution is in compliance with
its fully phased-in capital requirements; (iii) the loans comply with applicable
loan-to-value requirements, and; (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. The
lending limits generally do not apply to purchase money mortgage notes taken
from the purchaser of real property acquired by the institution in satisfaction
of debts previously contracted if no new funds are advanced to the borrower and
the institution is not placed in a more detrimental position as a result of the
sale. Certain types of loans are excepted from the lending limits, including
loans secured by savings deposits.
At June 30, 1996, the maximum amount that the Association could have lent
to any one borrower under the 15% limit was approximately $3.0 million. At such
date, the largest aggregate amount of loans that the Association had outstanding
to any one borrower was $189,000.
Transactions with Related Parties. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of an institution is any company or entity
which controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of an
institution (such as the Company) and any companies which are controlled by such
parent holding company are affiliates of the savings institution. Generally,
Sections 23A and 23B (i) limit the extent to which the savings institution or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks,
<PAGE>
bonds, debentures, notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and to
a greater than 10% stockholder of an institution and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the institution's loans-to-one-
borrower limit (generally equal to 15% of the institution's unimpaired capital
and surplus). Section 22(h) also prohibits the making of loans above amounts
prescribed by the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of an institution, and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the institution with any "interested" director not
participating in the voting. Regulation O prescribes the loan amount (which
includes all other outstanding loans to such person) as to which such prior
board of director approval is required as being the greater of $25,000 or 5% of
capital and surplus (up to $500,000). Further, Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act and Regulation O on loans to
executive officers and the restrictions of 12 U.S.C. (S)1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement, and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments
<PAGE>
of principal or interest on its subordinated debt, with certain exceptions. If
an institution's ratio of tangible capital to total assets falls below the
"critical capital level" established by the appropriate federal banking
regulator, the institution is subject to conservatorship or receivership within
90 days unless periodic determinations are made that forbearance from such
action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized.
Under the OTS regulation implementing the prompt corrective action
provisions of FDICIA, the OTS measures an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). An institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
CAMEL 1 rating). An "undercapitalized institution" is an institution that has
(i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or
3.0% if the institution has a CAMEL 1 rating). A "significantly
undercapitalized" institution is defined as an institution that has: (i) a total
risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" savings institution is defined as an institution
that has a ratio of core capital to total assets of less than 2.0%. The OTS may
reclassify a well capitalized savings institution as adequately capitalized and
may require an adequately capitalized or undercapitalized institution to comply
with the supervisory actions applicable to institutions in the next lower
capital category if the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in an unsafe or unsound condition or
that the institution has received and not corrected a less-than-satisfactory
rating for any CAMEL rating category.
Standards for Safety and Soundness. FDICIA requires each federal bank
regulatory agency to prescribe, by regulation, safety and soundness standards
for institutions under its authority. In 1995, these agencies, including the
OTS, released interagency guidelines establishing such standards and adopted
rules with respect to safety and soundness compliance plans. The OTS guidelines
require savings institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure and asset growth. The guidelines further provide that savings
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss and should take into account factors such as comparable compensation
practices at comparable institutions. If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable plan to achieve compliance
with the guidelines. A savings institution must submit an acceptable compliance
plan to the OTS within 30 days of receipt of a request for such a plan. Failure
to submit or implement a compliance plan may subject the institution to
regulatory sanctions. Management believes that the Association meets
substantially all the standards adopted in the interagency guidelines and,
therefore, does not believe that the implementation of these regulatory
standards will materially affect its operations.
Additionally, each federal banking agency is required to establish
standards relating to the adequacy of asset and earnings quality. In 1995, these
agencies, including the OTS, issued proposed guidelines relating to asset and
earnings quality. Under the proposed 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 does not
believe that the asset and earnings standards, in the form proposed by the OTS,
would have a material effect on the Association.
<PAGE>
REGULATION OF THE COMPANY
General. The Company is a savings institution holding company and, as
such, subject to OTS registration, regulation, examination, supervision and
reporting requirements. As a subsidiary of a savings institution holding
company, the Association is subject to certain restrictions in its dealings with
the Company and affiliates thereof. The Company also is required to file certain
reports with, and otherwise comply with the rules and regulations of, the
Securities and Exchange Commission ("SEC") under the federal securities laws.
Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings institution holding company.
There are generally no restrictions on the activities of a unitary savings
institution holding company. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by an institution
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings institution
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, then such unitary holding company shall also
presently become subject to the activities restrictions applicable to multiple
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "Regulation of the Association --
Qualified Thrift Lender Test." Legislative initiatives have been introduced in
the U.S. Congress which could result in the imposition of restrictions on the
activities of unitary savings institution holding companies in the future.
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings institution holding
company. Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, the activities of the Company and any of its subsidiaries
(other than the Association or other subsidiary savings institutions) would
thereafter be subject to further restrictions. Among other things, no multiple
savings institution holding company or subsidiary thereof which is not an
institution shall commence or continue for a limited period of time after
becoming a multiple savings institution holding company or subsidiary thereof,
any business activity, upon prior notice to, and no objection by, the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings institution holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. A multiple savings institution holding
company must obtain the approval of the OTS prior to engaging in the activities
described in (vii) above.
Restrictions on Acquisitions. Savings institution holding companies may
not acquire, without prior approval of the Director of the OTS, (i) control of
any other savings institution or savings institution holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of an institution or holding company thereof which is not a subsidiary. Under
certain circumstances, a registered savings institution holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings institution holding company's other subsidiaries must have tangible
capital of at least 6-1/2% of total assets, there must not be more than one
common director or officer between the savings institution holding company and
the issuing savings institution, and transactions between the savings
institution and the savings institution holding
<PAGE>
company and any of its affiliates must conform to Sections 23A and 23B of the
Federal Reserve Act. Except with the prior approval of the Director of the OTS,
no director or officer of an institution holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings institution holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings institution holding company which controls
savings institutions in more than one state if: (i) the multiple savings
institution holding company involved controls an institution which operated a
home or branch office in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the FDIC Act; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings institution holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
OTS regulations permit federal savings institutions to branch in any
state or states of the United States and its territories. Except in supervisory
cases or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal institution may not establish an out-of-state
branch unless (i) the federal institution qualifies as a "domestic building and
loan association" under (S)7701(a)(19) of the Internal Revenue Code and the
total assets attributable to all branches of the institution in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings holding company or (b) a violation of
certain statutory restrictions on branching by savings institution subsidiaries
of banking holding companies. Federal associations generally may not establish
new branches unless the institution meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the institution's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application. Legislative initiatives have been introduced in the U.S. Congress
which could result in the imposition of restrictions on the branching activities
of federal savings institutions in the future.
Under the Bank Holding Company Act of 1956, as amended, bank holding
companies are specifically authorized to acquire control of any savings
institution. Pursuant to rules promulgated by the Federal Reserve Board,
owning, controlling or operating an institution is a permissible activity for
bank holding companies, if the savings institution engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies. A bank holding company that controls an institution may
merge or consolidate the assets and liabilities of the savings institution with,
or transfer assets and liabilities to, any subsidiary bank which is a member of
the BIF with the approval of the appropriate federal banking agency and the
Federal Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
Federal Securities Law. The Common Stock is registered with the SEC
under the Securities Exchange Act of 1934, as amended ("Securities Exchange
Act"), and under OTS regulations, generally may not be deregistered for at least
three years after the Conversion. The Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
Securities Exchange Act.
TAXATION
General. The Company, the Association and the Association's subsidiaries
file a consolidated federal income tax return on a calendar year basis.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur.
<PAGE>
Federal Income Taxation. Thrift institutions, such as the Association,
generally are subject to the provisions of the Internal Revenue Code of 1986, as
amended, in the same manner as other corporations. For tax years beginning
before December 31, 1995, however, by meeting certain definitional tests and
other conditions prescribed by the Internal Revenue Code, thrift institutions
could benefit from special deductions for annual additions to tax bad debt
reserves with respect to loans. For purposes of the bad debt reserve deduction,
loans were separated into "qualifying real property loans," which generally were
loans secured by interests in improved real property, and "nonqualifying loans,"
which were all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience. The bad debt reserve
deduction with respect to qualifying real property loans could be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method"). The Association historically used whichever method resulted in
the highest bad debt reserve deduction in any given year.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Association, which have previously used that method are required to
recapture into taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period beginning with the
first taxable year beginning after December 31, 1995. The start of such
recapture may be delayed until the third taxable year beginning after December
31, 1995 if the dollar amount of the institution's residential loan originations
in each year is not less than the average dollar amount of residential loan
originated in each of the six most recent years disregarding the years with the
highest and lowest originations during such period. For purposes of this test,
residential loan originations would not include refinancings and home equity
loans.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Association, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will be able
to take a tax deduction only when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method. The
Association is expected to recapture approximately $131,000 of its tax bad debt
reserves. The recapture will not have any effect on the Association's net income
because the related tax expense has already been accrued.
Under the experience method, the bad debt deduction to an addition to the
reserve for qualifying real property loans is an amount determined under a
formula based generally on the bad debts actually sustained by a savings
institution over a period of years. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real property loans was
computed as 8% of the thrift's taxable income. The maximum deduction could be
taken as long as not less than 60% of the total dollar amount of the assets of
an institution fell within certain designated categories. If the amount of
qualifying assets fell below 60%, the institution would get no deduction and
could be required to recapture, generally over a period of years, its existing
bad debt reserves (although net operating loss carryforwards could be used to
offset such recapture).
The bad debt deduction under the percentage of taxable income method was
limited to the extent that the amount accumulated in the reserve for losses on
qualifying real property loans exceeded 6% of such loans outstanding at the end
of the taxable year. In addition, the amount claimed as a bad debt deduction
when added to accumulated loss reserves was limited to the excess, if any, of
12% of total deposits or withdrawable accounts of depositors at year-end in
excess of the sum of surplus, undivided profits and reserves at the beginning of
the year. The percentage bad debt deduction was reduced by the deduction for
losses on nonqualifying loans.
Earnings appropriated to the Association's tax bad debt reserves and
claimed as tax deductions will not be available for the payment of cash
dividends or other distributions to the Company (including distributions made
upon dissolution or liquidation), unless the Association includes the amounts
distributed in taxable income, along with the amounts deemed necessary to pay
the resulting federal income tax. At June 30, 1996, the Association had
approximately $2.8 million of accumulated bad debt reserves for which federal
income taxes have not been provided.
For taxable years beginning after June 30, 1986, the Internal Revenue Code
imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain
<PAGE>
tax preferences ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax-exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years including 1987 through 1989,
50% of the excess of (i) the taxpayer's pre-tax adjusted net book income over
(ii) AMTI (determined without regard to this latter preference and prior to
reduction by net operating losses). For taxable years beginning after 1989, this
latter preference has been replaced by 75% of the excess (if any) of (i)
adjusted current earnings as defined in the Internal Revenue Code, over (ii)
AMTI (determined without regard to this preference and prior to reduction by net
operating losses). For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years. In addition, for taxable years after 1986 and before 1992, corporations,
including savings institutions, are also subject to an environmental tax equal
to 0.12% of the excess of AMTI for the taxable year (determined without regard
to net operating losses and the deduction for the environmental tax) over $2.0
million. The Association is not currently paying any amount of alternative
minimum tax but may, depending on future results of operations, be subject to
this tax.
The Association's federal income tax returns have not been examined by the
regulatory authorities within the past five years. For additional information,
see Note 12 of Notes to Consolidated Financial Statements contained elsewhere
herein.
STATE INCOME TAXATION
The state of Alabama imposes a 6.0% excise tax on the earnings of financial
institutions such as the Association and the Company. In addition to the excise
taxes, the state of Alabama imposes an annual state franchise tax for domestic
and foreign corporations. A domestic corporation, including a federally
chartered stock savings bank domiciled in Alabama, is assessed a domestic
franchise tax of approximately 1.0% based on the aggregate par value of its
[outstanding/authorized] common stock. Foreign corporations, such as the Company
which is incorporated in Delaware, are assessed a foreign franchise tax of 0.3%
based on a total of capital (as defined by statute) deemed to be employed in the
state of Alabama. The foreign corporation's investment in the capital of an
Alabama corporation is excluded from the taxable base. The Company also is
subject to the Delaware franchise tax.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive officers
of the Company who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
June 30,
Name 1996 Principal Title
- ---- ------ ---------------
<S> <C> <C>
Ruth Perkins 70 Senior Vice President of the Association
Rodney Rich 44 Vice President of the Association
Margaret Stewart 66 Secretary/Treasurer of the Association
</TABLE>
RUTH PERKINS serves as Senior Vice President of the Association. She
joined the Association in 1946 as a teller and assumed her current position in
1991. Ms. Perkins retired on August 15, 1996.
RODNEY RICH serves as Vice President and the Association's chief lending
officer. He joined the Association in 1984 as Assistant Vice President. He was
promoted to Vice President in 1989.
<PAGE>
MARGARET STEWART serves as Secretary/Treasurer of the Association. She
joined the Association in 1960 as teller. She was appointed Secretary/Treasurer
in 1966.
EMPLOYEES
As of June 30, 1996, the Association had 29 full-time and 2 part-time
employees, none of whom was represented by a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth information regarding the Association's
offices at June 30, 1996.
<TABLE>
<CAPTION>
Net Book Value Owned
Year at June 30, Approximate or
Opened 1996 Square Footage Leased
------ -------------- -------------- ------
<S> <C> <C> <C> <C>
MAIN OFFICE:
221 South 6th Street 1968 $209,099 6,500 Owned
Gadsden, Alabama
BRANCH OFFICES:
202 Sand Mountain Drive 1965 1,066 1,405 Leased
Albertville, Alabama
395 Gunter Avenue 1971 439 1,000 Leased
Guntersville, Alabama
390 W. Main Street 1994 7,465 2,263 Leased
Centre, Alabama
</TABLE>
The net book value of the Association's investment in furnishings and
equipment totaled $70,059 at June 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, the Association is a party to various legal proceedings
incident to its business. At June 30, 1996, there were no legal proceedings to
which the Company, the Association or its subsidiary was a party, or to which
any of their property was subject, which were expected by management to result
in a material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On April 10, 1996, the registrant held a special meeting of stockholders.
At the meeting, The Southern Banc Company, Inc. 1996 Stock Option and Incentive
Plan was approved by the stockholders as follows:
Votes
--------------- Broker
For Against Abstentions Non-Votes
------ ------- ----------- ---------
1,015,458 53,530 18,520 19,304
<PAGE>
At the meeting, the First Federal Savings and Loan Association of Gadsden
Management Recognition Plan was approved by the stockholders as follows:
Votes
----------------- Broker
For Against Abstentions Non-Votes
------ ------- ----------- ---------
1,036,142 54,000 16,670 19,304
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The information set forth (i) under "Dividend Restrictions" in Item 1 of
this report and (ii) in the Notes to Consolidated Financial Statements in Item 7
of this report is incorporated herein by reference.
The Company's common stock began trading on the American Stock Exchange on
October 5, 1995, under the symbol "SRN." At June 30, 1996, there were 1,382,012
shares of the common stock outstanding and approximately 372 stockholders of
record.
The payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors of the Company. The Board of
Directors has adopted a policy of paying quarterly cash dividends on the Common
Stock. In addition, from time to time, the Board of Directors may determine to
pay special cash dividends in addition to, or in lieu of, regular cash
dividends. The payment of future dividends will be subject to the requirements
of applicable law and the determination by the Board of Directors of the Company
that the net income, capital and financial condition of the Company and the
Association, thrift industry trends and general economic conditions justify the
payment of dividends, and there can be no assurance that dividends will be paid
or, if paid, will continue to be paid in the future.
The following table sets forth information as to high and low sales prices
of the Company's common stock and cash dividends per share of common stock for
the calendar quarters indicated.
<TABLE>
<CAPTION>
Price Per Share Dividends Per Share
--------------- -------------------
High Low Regular Special
---- --- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1996
Second Quarter $13.125 $12.000 $.0875 $ --
Third Quarter $12.875 $11.250 $.0875 $.1750
Fourth Quarter $13.375 $11.500 $.0875 $ --
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
GENERAL
The principal business of the Association consists of accepting deposits
from the general public through its main and branch offices and investing those
funds in loans secured by one- to four-family residential properties located in
the Association's primary market area. Due to the limited demand for one- to
four-family mortgage loans in the Association's market area, the Association
maintains a substantial portfolio of investment and mortgage-backed securities
and originates a limited amount of consumer loans. The Association's mortgage-
backed securities are all guaranteed as to principal and interest by GNMA, FHLMC
or FNMA. The Association's securities portfolio consist primarily of U.S.
Treasury notes and government agency securities, including agency notes. See
"Business of the Association -- Investment Activities" for a description of
these investments. The Association maintains a substantial amount in interest-
bearing deposits in other banks, which consists primarily of an interest-bearing
account with the
<PAGE>
FHLB of Atlanta. Although the Association has originated a limited amount of
commercial real estate loans in the past, the Association is not currently
seeking such loans.
The Association's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on its loans,
mortgage-backed securities and securities portfolio and interest paid on
customers' deposits. The Association's net income is also affected by the level
of non-interest income, such as service charges on customers' deposit accounts,
net gains or losses on the sale of securities and other fees. In addition, net
income is affected by the level of non-interest expense primarily consisting of
compensation and employee benefit expense, SAIF deposit insurance premiums and
other expenses.
The operations of the Association and the thrift industry as a whole are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by demand for and supply of housing and competition among lenders and
the level of interest rates in the Association's market area. The Association's
deposit flows and costs of funds are influenced by prevailing market rates of
interest, primarily on competing investments, account maturities and the levels
of personal income and savings in the Association's market area.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND JUNE 30, 1995
Total assets increased $5.3 million or 5.16% from $101.8 million at June
30, 1995 to $107.0 million at June 30, 1996. The increase in total assets was
primarily attributable to the capital raised during the initial public offering.
During the period ended June 30, 1996, net loans increased $6.7 million and
securities available for sale increased $2.1 million. Interest-bearing deposits
in other banks decreased by $4.4 million during the period ended June 30, 1996.
During the period ended June 30, 1996, mortgage-backed securities, held to
maturity increased by $3.2 million. Securities held to maturity decreased by
$3.5 million during the period ended June 30, 1996. This decrease was
attributable to repayments and maturities.
Prepaid expenses and other assets increased $1.2 million from $660,526 at
June 30, 1995 to $1,888,891 at June 30, 1996. This increase was primarily
attributable to the reclassification as a receivable of two matured securities
which totaled approximately $1.5 million on June 30, 1996. This increase was
partially offset by transferring certain stock conversion costs which had been
deferred at June 30, 1995.
Total deposits decreased $5.6 million or 6.08% from $91.4 million at June
30, 1995 to $85.9 million at June 30, 1996. The decrease in total deposits was
primarily attributable to depositor withdrawals to purchase stock during the
public offering.
Total equity increased $10.4 million or 106.35% from $9.8 million at June
30, 1995 to $20.1 million at June 30, 1996. This increase was attributable to
the conversion of the Association and the subsequent sale of stock.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND
1995
The Association reported net income for the years ended June 30, 1996 and
1995 of $575,073 and $158,634, respectively. The $416,439 increase was primarily
attributable to the net loss of $722,975 recognized on the sale of securities
available for sale during the year ended June 30, 1995.
Net Interest Income. Net interest income increased $267,046 or 9.69% from
$2.8 million at June 30, 1995 to $3.0 million at June 30, 1996. This increase
was attributable to an increase in total interest income of $685,645 which
resulted primarily from volume increases in loan and mortgage-backed securities
from the investment of stock conversion proceeds. This increase was partially
offset by an increase in interest paid on deposits of $418,599.
<PAGE>
Provision for Loan Losses. During the period ended June 30, 1996, the
Association made no provisions for loan losses. The allowance for loan losses is
maintained at a level believed adequate to absorb losses inherent in the
Association's loan portfolio. Management's determination of the allowance is
based on an evaluation of the loan portfolio's past loss experience, current
economic conditions, volume, growth and composition of the loan portfolio, and
other relevant factors.
Non-interest Income. Non-interest income increased $715,396 or 112.14%.
This increase was primarily attributable to a loss of $722,975 on the sale of
securities during fiscal 1995.
Non-interest Expense. Non-interest expense increased $387,551 or 21.02%
from $1.8 million at June 30, 1995 to $2.2 million at June 30, 1996. The
increase in non-interest expense was primarily attributable to an increase of
$246,620 in salaries and employee benefits relating to the establishment of the
employee benefit plans. Other expenses increased $120,212 during the period
ended June 30, 1996. This increase was primarily attributable to increases in
professional fees resulting from the increased reporting and compliance
responsibilities of a public company.
Provision for Income Taxes. During the period ended June 30, 1996, the
provision for income taxes increased $218,178. This increase was primarily
attributable to an increase in income before taxes of $634,617.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1995 AND
1994
The Association reported net income for the year ended June 30, 1995 and
1994 of $164,000 and $696,000, respectively. The $532,000 decrease was
attributable to the net loss of $723,000 recognized on the sale of securities
available for sale during the year ended June 30, 1995. The Association
reevaluated its securities portfolio in the rising interest rate environment and
determined to sell its lower yielding securities in order to invest these funds
in those with higher yields. As a result of this net loss, net income for 1995
resulted in a return on average assets of 0.17% compared to 0.83% for 1994, and
a return on average equity of 1.79% for 1995 as compared to 7.54% for 1994.
Net Interest Income. Net interest income increased $293,000 from $2.5
million to $2.8 million for the years ended June 30, 1995 and 1994,
respectively. The increase in net interest income was due to the increase in
volume of interest-earning assets, primarily mortgage-backed securities, loans
and interest-bearing deposits in other banks. The Association's interest rate
spread remained relatively stable, decreasing 5 basis points to 2.53% for the
year 1995.
Provision for Loan Losses. The Association provided $40,000 to the
allowance for loan losses during the last quarter of 1995 as compared to no
provision taken during 1994. The provision to the allowance for loan losses
taken during 1995 was due to the increased loan volume and other factors, such
as interest rates, local economic factors and the level of non-performing loans.
Non-interest Income. Non-interest income for 1995 declined $707,000 from
the $69,000 level for 1994. The decrease in non-interest income was due to the
$723,000 in net losses taken on the sale of securities available for sale. As a
result of the rising market interest rates, management determined to sell its
lower yielding securities and invest these funds in higher yielding instruments.
Non-interest Expense. Non-interest expense for 1995 and 1994 was $1.8
million and $1.5 million, respectively. The $344,000 increase in non-interest
expense was primarily due to the $156,000 increase in salaries and employee
benefits expense, and approximately $150,000 in other operating expenses. The
$156,000 increase in salaries expense was due to the addition of the employees
from the Centre, Alabama branch which was acquired in May 1994 and general
salary increases. The $150,000 increase in other operating expense was due to
the $61,000 increase in amortization expense arising from the core deposit
premium intangible incurred in connection with the Centre branch acquisition and
increases in data processing, forms, supplies, utilities, advertising and other
expenses due to the acquisition of the Centre branch. The Association's ratio of
non-interest expense to average total assets
<PAGE>
was 1.87% for the year ended June 30, 1995 and 1.79% for the year ended June 30,
1994. There were no significant non-recurring non-interest expense items
recorded during 1995 and 1994.
Provision for income taxes. The Association's effective income tax rate
was 36% for 1995 and 34% for 1994.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Association's net income,
is determined by the difference or "spread" between the yield earned on the
Association's interest-earning assets and the rates paid on its interest-bearing
liabilities and the relative amounts of such assets and liabilities. Key
components of a successful asset/liability strategy are the monitoring and
managing of interest rate sensitivity on both the interest-earning assets and
interest-bearing liabilities. The matching of the Association's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on an institution's net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Association's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Association's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Association's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the
Association's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates. The Association's policy has been to mitigate the interest rate
risk inherent in the historical savings institution business of originating long
term loans funded by short term deposits by pursuing the following strategies:
(i) the Association has historically maintained substantial liquidity and
capital levels to sustain unfavorable movements in market interest rates; and
(ii) in order to minimize the adverse effect of interest rate risk on future
operations, the Association purchases adjustable- and fixed-rate securities with
maturities of primarily one to five years and originates limited amounts of
shorter term consumer loans.
Historically, the Association measured its interest rate sensitivity by
computing the "gap" between the assets and liabilities which were expected to
mature or reprice within certain periods, based on assumptions regarding loan
prepayment and deposit decay rates formerly provided by the OTS. However, the
OTS now requires the Association to measure its interest rate risk by computing
estimated changes in the net present value of its cash flows from assets,
liabilities and off-balance sheet items ("NPV") in the event of a range of
assumed changes in market interest rates. These computations estimate the effect
on the Association's NPV of sudden and sustained 1% to 4% increases and
decreases in market interest rates. The Association's Board of Directors has
adopted an interest rate risk policy which establishes maximum decreases in the
Association's estimated NPV of 25%, 50%, 77% and 93% and 25%, 35%, 50% and 50%
in the event of 1%, 2%, 3% and 4% increases and decreases in market interest
rates, respectively. At June 30, 1996, based on the most recent information
provided by the OTS, it was estimated that the Association's NPV could decrease
12%, 26%, 38% and 51% in the event of 1%, 2%, 3% and 4% increases in market
interest rates, and no decreases were estimated in the event of equivalent
decreases in market interest rates. These calculations indicate that the
Association's net portfolio value could be adversely affected by increases in
interest rates. Changes in interest rates also may affect the Association's net
interest income, with increases in rates expected to decrease income and
decreases in rates expected to increase income, as the Association's interest-
bearing liabilities would be expected to mature or reprice more quickly than the
Association's interest-earning assets.
While management cannot predict future interest rates or their effects on
the Association's NPV or net interest income, management does not expect current
interest rates to have a material adverse effect on the Association's NPV or net
interest income in the future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments and deposit run-offs and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in such computations. Although certain assets and liabilities may
have similar maturity or periods of repricing they may react at different times
and in different degrees to changes in the market interest rates. The interest
rates on
<PAGE>
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets, such as adjustable
rate mortgages, generally have features which restrict changes in interest rates
on a short term basis and over the life of the asset. In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase. Finally, virtually all of the adjustable rate loans in the
Association's portfolio contain conditions which restrict the periodic change in
interest rate.
The Association's Board of Directors is responsible for reviewing the
Association's asset and liability policies. On at least a quarterly basis, the
Board reviews interest rate risk and trends, as well as liquidity and capital
ratios and requirements. The Association's management is responsible for
administering the policies and determinations of the Board of Directors with
respect to the Association's asset and liability goals and strategies.
Management expects that the Association's asset and liability policies and
strategies will continue as described above so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods indicated.
The table also presents information for the periods indicated and at June
30, 1996 with respect to the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net yield on interest-
earning assets," which is its net interest income divided by the average balance
of interest-earning assets. Net interest income is affected by the interest rate
spread and by the relative amounts of interest-earning assets and interest-
bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- -------- ------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable....................... $ 30,183 $2,467 8.17% $25,582 $2,111 8.25% $25,523 $2,124 8.32%
Securities............................. 20,681 1,314 6.35 18,426 1,219 6.62 17,529 994 5.67
Mortgage-backed securities............. 47,779 3,500 7.33 45,290 3,167 6.99 32,483 2,483 7.64
Other interest-earning assets.......... 6,436 420 6.53 6,901 519 7.52 6,465 213 3.29
-------- ------ ------- ------ ------- ------
Total interest-earning assets........ 105,079 7,701 7.33 96,199 7,016 7.29 82,000 5,814 7.09
Non-interest-earning assets.............. 3,083 3,604 1,687
-------- ------- -------
Total assets......................... $108,162 $99,803 $83,687
======== ======= =======
Interest-bearing liabilities:
Deposits............................... $ 88,785 4,679 5.27 $89,153 4,261 4.78 $73,820 3,330 4.51
-------- ------ ------- ------ ------- ------
Total interest-bearing liabilities.. 88,785 4,679 5.27 89,153 4,261 4.78 73,820 3,330 4.51
------ ------ ------
Non-interest-bearing liabilities......... 1,886 1,396 637
-------- ------- -------
Total liabilities.................... 90,671 90,549 74,457
Equity................................... 17,491 9,254 9,230
-------- ------- -------
Total liabilities and equity......... $108,162 $99,803 $83,687
======== ======= =======
Net interest income...................... $3,022 $2,755 $2,484
====== ====== ======
Interest rate spread..................... 2.06% 2.51% 2.58%
====== ====== ======
Net interest margin...................... 2.88% 2.86% 3.03%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 118.35% 107.90% 111.08%
====== ====== ======
</TABLE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (change in
rate multiplied by old volume).
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------- ------------------------------
Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans................................. $ (20) $376 $356 $ (18) $ 5 $ (13)
Investment securities................. (45) 140 95 172 53 225
Mortgage-backed securities............ 155 178 333 (189) 873 684
Other interest-earning assets......... (66) (33) (99) 291 15 306
----- ---- ---- ----- ---- ------
Total interest-earning assets....... 24 661 685 256 946 1,202
----- ---- ---- ----- ---- ------
Interest expense:
Deposits.............................. 436 (18) 418 207 724 931
----- ---- ---- ----- ---- ------
Total interest-bearing liabilities.. 436 (18) 418 207 724 931
----- ---- ---- ----- ---- ------
Change in net interest income........... $(412) $679 $267 $ 49 $222 $ 271
===== ==== ==== ===== ==== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Association continues to maintain a high level of liquid assets in
order to meet its funding requirements. At June 30, 1996 the Association had
approximately $4.5 million in cash on hand and interest-bearing deposits in
other banks which represented 4.23% of total assets. At June 30, 1996, the
Association's level of liquid assets, as measured for regulatory compliance
purposes was 20.75%, or $14.2 million, in excess of the minimum liquidity
requirement of 5%.
At June 30, 1996 the Association had $20.1 million of total equity or
18.81% of total assets. The Association continues to exceed its regulatory
capital requirements ratios at June 30, 1996. Tangible capital and core capital
were $15.3 million, which represented 14.3% of adjusted total assets and risk-
based capital was $15.4 million which represented 70.9% of total risk-weighted
assets at June 30, 1996. Such amounts exceeded the minimum required ratios of
1.5%, 3.0% and 8.0%, respectively by 12.8%, 11.3% and 62.9%, respectively. At
June 30, 1996, the Association continued to meet the definition of a "well-
capitalized" institution the highest of the five categories under the FDICIA
prompt corrective action standards.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Southern Banc Company, Inc.:
We have audited the accompanying consolidated statements of financial condition
of THE SOUTHERN BANC COMPANY, INC. (a Delaware corporation) as of June 30, 1996
and 1995 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These consolidated financial statements are the responsibility of the Company'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 Southern Banc
Company, Inc. and Subsidiary as of June 30, 1996 and 1995 and the results of
their operations and cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Birmingham, Alabama
August 30, 1996
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------------------------------------------------ ------------ ------------
CASH AND EQUIVALENTS:
<S> <C> <C>
Cash on hand and in other banks $ 934,559 $ 985,974
Interest-bearing deposits in other banks 3,599,989 8,005,172
4,534,548 8,991,146
SECURITIES AVAILABLE FOR SALE 13,503,758 11,449,369
SECURITIES HELD TO MATURITY (FAIR VALUES
OF $4,488,438 AND $8,086,442, RESPECTIVELY) 4,513,683 7,999,891
LOANS RECEIVABLE, NET 33,144,955 26,465,136
MORTGAGE-BACKED SECURITIES HELD TO
MATURITY (FAIR VALUES OF $48,369,979 AND
$45,731,671, RESPECTIVELY) 48,307,508 45,125,868
PREMISES AND EQUIPMENT, NET 279,088 333,364
ACCRUED INTEREST AND DIVIDENDS
RECEIVABLE 856,381 747,431
PREPAID EXPENSES AND OTHER ASSETS 1,888,891 660,526
------------- ------------
Total assets $107,028,812 $101,772,731
------------- ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS EQUITY 1996 1995
- ------------------------------------------------ ------------- ------------
<S> <C> <C>
DEPOSITS $ 85,846,600 $ 91,406,800
OTHER LIABILITIES:
Accrued interest payable 59,165 65,916
Advance payments by borrowers for taxes and
insurance 99,816 148,278
Taxes payable 136,924 288,275
Other 751,552 106,045
------------- ------------
Total liabilities 86,894,057 92,015,314
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY:
Preferred stock, par value $.01 per share;
500,000 shares authorized; shares issued
and outstanding--none 0 0
Common stock, par value $.01 per share;
3,500,000 shares authorized; 1,454,750
shares issued 14,548 0
Additional paid-in capital 13,572,806 0
Retained earnings 9,701,971 9,706,101
Unearned compensation (2,117,393) 0
Treasury stock at cost, 72,737 shares (957,590) 0
Unrealized gain (loss) on securities available
for sale, net (79,587) 51,316
------------- ------------
Total stockholders equity 20,134,755 9,757,417
------------- ------------
Total liabilities and stockholders equity $107,028,812 $101,772,731
============= ============
</TABLE>
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,466,817 $2,110,821 $2,124,013
Interest on mortgage-backed securities
held to maturity 3,499,610 3,167,189 2,483,263
Interest and dividends on securities
available for sale 790,809 932,757 868,095
Interest and dividends on securities
held to maturity 523,636 286,393 125,884
Other interest income 420,827 518,894 212,998
---------- ---------- ----------
Total interest income 7,701,699 7,016,054 5,814,253
INTEREST EXPENSE ON DEPOSITS 4,679,246 4,260,647 3,330,184
---------- ---------- ----------
Net interest income 3,022,453 2,755,407 2,484,069
PROVISION FOR LOAN LOSSES 0 39,726 0
---------- ---------- ----------
Net interest income after
provision for loan losses 3,022,453 2,715,681 2,484,069
---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees 77,420 68,465 62,485
Loss on sale of securities available
for sale, net 0 (722,975) (1,869)
Miscellaneous income, net 0 16,534 8,530
---------- --------- ----------
Total noninterest income
(expense) 77,420 (637,976) 69,146
---------- --------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,327,274 1,080,654 925,149
Deposit insurance expense 213,229 191,811 168,032
Office building and equipment expense 120,975 121,674 111,793
Other expense 569,664 449,452 294,314
---------- ---------- ----------
Total noninterest expense 2,231,142 1,843,591 1,499,288
---------- ---------- ----------
Income before provision for
income taxes 868,731 234,114 1,053,927
PROVISION FOR INCOME TAXES 293,658 75,480 358,346
---------- ---------- ----------
Net income $ 575,073 $ 158,634 $ 695,581
========== ========== ==========
EARNINGS PER SHARE $.34 N/A N/A
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED UNEARNED
STOCK CAPITAL EARNINGS COMPENSATION
---------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ 0 $ 0 $8,851,886 $ 0
Net income 0 0 695,581 0
Change in unrealized gain (loss) on securities
available for sale, net 0 0 0 0
---------- -------------- ------------ --------------
BALANCE, JUNE 30, 1994 0 0 9,547,467 0
Net income 0 0 158,634 0
Change in unrealized gain (loss) on securities
available for sale, net 0 0 0 0
---------- -------------- ------------ --------------
BALANCE, JUNE 30, 1995 0 0 9,706,101 0
Net income 0 0 575,073 0
Issuance of common stock 14,548 13,653,822 0 (1,163,800)
Change in unrealized gain (loss) on securities
available for sale, net 0 0 0 0
Purchase of treasury stock, at cost 0 0 0 0
Repurchase of stock for stock plans 0 (105,790) 0 (1,117,665)
Amortization of unearned compensation 0 27,084 0 168,097
Valuation adjustment on unallocated stock
plan shares 0 (2,310) 0 2,310
Contributions to stock plans 0 0 0 (6,335)
Dividends declared ($.4375 per share) 0 0 (579,203) 0
---------- -------------- ------------ --------------
BALANCE, JUNE 30, 1996 $14,548 $13,572,806 $9,701,971 $(2,117,393)
========== ============== ============ ==============
<CAPTION>
TREASURY UNREALIZED
STOCK GAIN (LOSS) TOTAL
------------ ---------------- -------------
<S> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ 0 $ 282,798 $ 9,134,684
Net income 0 0 695,581
Change in unrealized gain (loss) on securities
available for sale, net 0 (721,204) (721,204)
------------ ---------------- -------------
BALANCE, JUNE 30, 1994 0 (438,406) 9,109,061
Net income 0 0 158,634
Change in unrealized gain (loss) on securities
available for sale, net 0 489,722 489,722
------------ ---------------- -------------
BALANCE, JUNE 30, 1995 0 51,316 9,757,417
Net income 0 0 575,073
Issuance of common stock 0 0 12,504,570
Change in unrealized gain (loss) on securities
available for sale, net 0 (130,903) (130,903)
Purchase of treasury stock, at cost (957,590) 0 (957,590)
Repurchase of stock for stock plans 0 0 (1,223,455)
Amortization of unearned compensation 0 0 195,181
Valuation adjustment on unallocated stock
plan shares 0 0 0
Contributions to stock plans 0 0 (6,335)
Dividends declared ($.4375 per share) 0 0 (579,203)
------------ ---------------- -------------
BALANCE, JUNE 30, 1996 $(957,590) $ (79,587) $20,134,755
============ ================ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
Page 1 of 2
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 575,073 $ 158,634 $ 695,581
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 62,568 52,572 65,045
Amortization (accretion), net 7,884 (15,823) 68,712
Amortization of intangible asset 49,706 60,815 11,382
Amortization of unearned compensation 195,181 0 0
Loss on sale of securities available for sale, net 0 722,975 1,869
Provision for loan losses 0 39,726 0
Deferred income tax provision (benefit) 44,747 21,256 (41,670)
FHLB stock dividends 0 0 (25,100)
Change in assets and liabilities:
Increase in accrued interest and dividends receivable (108,950) (153,676) (6,889)
(Increase) decrease in prepaid expenses and other assets 221,929 (237,657) (137,547)
Increase (decrease) in accrued interest payable (6,751) (33,391) 87,165
Increase (decrease) in income taxes payable (123,645) 52,355 0
Increase (decrease) in other liabilities 645,507 72,921 (89,990)
-------------- -------------- --------------
Net cash provided by operating activities 1,563,249 740,707 628,558
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (7,714,153) (5,677,063) (10,433,015)
Proceeds from sales of securities available for sale 0 5,561,815 1,735,464
Proceeds from maturities and principal payments on
securities available for sale 3,962,049 4,299,648 9,564,267
Purchases of securities held to maturity (2,512,813) (6,494,031) (2,010,674)
Proceeds from maturities of securities held to maturity 6,000,000 500,000 0
Purchases of mortgage-backed securities held to maturity (11,087,408) (11,937,229) (15,312,463)
Principal payments received on mortgage-backed
securities held to maturity 7,891,264 4,725,661 8,518,610
Purchase of loans (4,178,768) 0 0
Net loan (originations) repayments (2,501,051) (782,412) 144,770
Capital expenditures (8,292) (55,890) (32,359)
-------------- -------------- --------------
Net cash used in investing activities (10,149,172) (9,859,501) (7,825,400)
-------------- -------------- --------------
</TABLE>
<PAGE>
Page 2 of 2
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net proceeds from issuance of common $12,504,570 $ 0 $ 0
stock
Contributions to plan trusts (6,335) 0 0
Repurchase of common stock for stock (1,223,455) 0 0
plans
Purchase of treasury stock (957,590) 0 0
Dividends paid (579,203) 0 0
Increase (decrease) in deposits, net (5,560,200) 2,734,441 (1,640,897)
Decrease in advance payments by
borrowers for taxes and insurance (48,462) (9,819) (6,802)
Proceeds received from deposit 0 0 18,194,009
assumptions, net
-------------- ------------ ------------------
Net cash provided by financing
activities 4,129,325 2,724,622 16,546,310
-------------- ------------ ------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,456,598) (6,394,172)
CASH AND CASH EQUIVALENTS, BEGINNING OF 8,991,146 15,385,318 6,035,850
PERIOD -------------- ------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,534,548 $ 8,991,146 $15,385,318
============== ============ =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes, net of refund received $ 427,767 $ 70,000 $ 417,969
============= ============ =================
Interest $ 4,685,997 $ 4,294,038 $ 3,243,019
Noncash transactions: ============= ============ =================
Transfer of matured securities to
prepaid expenses $ 1,500,000 $ 0 $ 0
and other assets
Transfer of securities available for
sale to mortgage- 0 700,672 0
backed securities held to maturity
at fair value
Change in unrealized net gain (loss)
on securities available for sale,
net of deferred taxes (benefit) of
$72,453, $11,616, and $(375,808),
respectively (130,903) (34,166) (72,204)
============= ============ =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, NATURE OF OPERATIONS, AND PRINCIPLES OF CONSOLIDATION
The Southern Banc Company, Inc. (the "Company") was incorporated in the State
of Delaware in May 1995, for the purpose of becoming a holding company to own
all of the outstanding capital stock of First Federal Savings and Loan
Association of Gadsden (the "Association") upon the Association's conversion
from a federally chartered mutual savings association to a federally
chartered stock savings association (the "Conversion"). The accounting for
the conversion is in a manner similar to that utilized in a pooling of
interests.
The Association received its federal charter in 1936 and was converted to a
federally chartered stock organization on October 5, 1995 through the sale of
all of its common stock to the Company. The Association is primarily engaged
in the business of obtaining funds in the form of various savings deposits
products and investing those funds in mortgage loans or single family real
estate and, to a lesser extent, in consumer loans. The Association operates
from its four offices in the northeast portion of Alabama, and originates the
majority of its loans in this market area.
The accompanying consolidated financial statements include the accounts of
the Company, the Association, and the Association's wholly owned subsidiary,
First Service Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SECURITIES
Securities have been classified as either trading, available for sale, or
held to maturity based on Management's intentions at the time of purchase.
Securities classified as available for sale are carried at fair value. The
unrealized difference between amortized cost and fair value on securities
available for sale is excluded from earnings and is reported net of deferred
taxes as a separate component of stockholders' equity. The available for
sale classification includes securities that Management intends to use as
part of its asset/liability management strategy or that may be sold in
response to changes in interest rates, liquidity needs, or for other
purposes.
<PAGE>
Securities designated as held to maturity are carried at amortized cost, as
the Company has both the ability and positive intent to hold these securities
to maturity. The Company had no securities classified as trading at June 30,
1995 and 1996.
Amortization of premiums and accretion of discounts are computed using the
level yield method. The adjusted cost of the specific security sold is used
to compute gain or loss on the sale of securities.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are stated at amortized cost,
because of Management's positive intent and the Company's ability to hold
such securities to maturity. Amortization of premiums and accretion of
discounts are calculated using the level yield method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, discounts/rebates on loans, unearned interest income, and
net deferred loan fees/costs. Unearned interest income on consumer loans is
amortized to income by use of a method which approximates level yield over
the lives of the related loans.
The Company ceases accrual of interest on a loan when payment on the loan is
in excess of 90 days past due. Income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has been
reestablished, in which case the loan is returned to accrual status.
The allowance for loan losses is maintained at a level which management
considers adequate to absorb losses inherent in the loan portfolio at each
reporting date. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries). Management's
process for estimation of this amount includes a review of all loans for
which full collectibility is not reasonably assured and considers, among
other factors, prior years' loss experience, economic conditions,
distribution of portfolio loans by risk class, and the estimated value of
underlying collateral. Though management believes the allowance for loan
losses to be adequate, ultimate losses may vary from their estimates;
however, estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known.
The Company adopted Statement of Financial Accounting Standards ("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, as of July 1, 1995. SFAS No. 114 requires that certain impaired
loans be measured based on the present value of expected future cash flows
discounted at each loan's original effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment of the loan, the impairment is recorded through a valuation
allowance. The Company had previously measured the allowance for loan losses
using methods similar to those prescribed in SFAS No. 114. Accordingly, as a
result of adopting these statements, no additional provision to the allowance
for loan losses was required as of July 1, 1995. Because the Company's loan
portfolio consists primarily of one-to-four family residential mortgages and
consumer installment
<PAGE>
loans, which are exempt from SFAS No. 114 when evaluated collectively for
impairment, as is done by the Company, the Company had no loans designated
as impaired under the provisions of SFAS No. 114 at June 30, 1996.
LOAN ORIGINATION FEES AND RELATED COSTS AND DISCOUNTS
Loan fees and certain direct costs of loan origination are deferred, and
the net fee or cost is recognized as an adjustment to "Interest and fees on
loans" in the accompanying consolidated statements of income using the
level yield method over the contractual life of the loans. Discounts
associated with loans purchased are deferred and accreted to income using
the level yield method.
PREMISES AND EQUIPMENT
Land is carried at cost. Property and equipment are stated at cost, less
accumulated depreciation. Depreciation methods and estimated service lives
are as follows:
<TABLE>
<S> <C> <C>
Building 10-40 years Accelerated/Straight-line
Leasehold improvements 10 years Straight-line
Furniture and equipment 5-20 years Accelerated/Straight-line
Automobile 3 years Straight-line
</TABLE>
REAL ESTATE OWNED
Real estate owned is recorded at the fair value of the property, less
estimated costs of disposition. Any excess of the recorded investment over
fair value of the property is charged to the allowance for loan losses at
the time of foreclosure. Costs relating to improvement of property incurred
subsequent to acquisition are capitalized, whereas costs relating to the
holding of property are expensed. Subsequent to foreclosure, real estate
owned is evaluated on an individual basis for changes in fair value. Future
declines in fair value of the asset, less cost of disposition, below its
carrying amount increases the valuation allowance account. Future increases
in fair value of the asset, less costs of disposition, above its carrying
amount reduce the valuation allowance account, but not below zero.
Increases or decreases in the valuation allowance are charged or credited
to income. The Association had no real estate owned at June 30, 1996 and
1995.
The recognition of gains and losses on the sale of real estate owned is
dependent upon whether the nature and terms of the sale and future
involvement of the Company in the property meet certain requirements. If
the transaction does not meet these requirements, income recognition is
deferred and recognized under an alternative method in accordance with SFAS
No. 66, Accounting for Sales of Real Estate.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of nontaxable income) and deferred income
taxes on temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period
in which the deferred tax assets and liabilities are expected to be
<PAGE>
realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income
taxes in the period of enactment.
CORE DEPOSIT PREMIUM
The premium paid to acquire the deposits of another financial institution
(see Note 16) has been shown as an intangible asset and is included in
"Prepaid expenses and other assets" in the accompanying consolidated
statements of financial condition. This net core deposit premium ($222,438
and $272,144 at June 30, 1996 and 1995, respectively) is being amortized
using an accelerated method over a ten year period which approximates the
expected lives of the purchased deposit relationships (amortization expense
of $49,706, $60,815 and $11,382 in fiscal years 1996, 1995, and 1994,
respectively).
EARNINGS PER SHARE
Earnings per share for the period from October 5, 1995, the date of
Conversion, to June 30, 1996, has been computed based on the earnings
during that period and on the weighted average number of shares of common
stock and common stock equivalents outstanding during that period. Common
stock outstanding is comprised of issued shares less treasury stock,
unallocated Employee Stock Ownership Plan ("ESOP") shares, and shares
repurchased for the Management Recognition Plan ("MRP") and Stock Option
and Incentive Plan ("Option Plan"). Common stock equivalents include the
number of shares issuable on exercise of the outstanding stock options and
MRP options less the number of shares that could have been purchased with
the proceeds from the exercise of the options based on the average price of
the common stock during the period. The weighted average number of shares
used for the period from October 5, 1995 through June 30, 1996, was
1,340,743.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
considers "Cash on hand and in other banks" and "Interest-bearing deposits
in other banks" to be cash and cash equivalents.
PRIOR YEAR CLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of. SFAS No. 121 establishes accounting
standards for the impairment and disposal of long-lived assets and certain
identifiable intangibles. It requires that such assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the review for
recoverability, based on undiscounted expected future cash flows, indicates
that impairment exists, the loss should be measured based on the fair value
of the asset. The Company adopted SFAS No. 121, as was required, effective
July 1, 1996, with no significant impact on the Company's financial
position or on the results of its operations as long-lived assets are not
significant.
<PAGE>
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights, an amendment to SFAS No. 65. This statement eliminates
the accounting distinction between rights to service mortgage loans for
others that are acquired through loan origination activities and those
acquired through purchase transactions. The Company adopted SFAS No. 122,
as was required, effective July 1, 1996 with no impact on the financial
statements as the Company does not currently participate in the sale or
securitization of any loans in its loan portfolio.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123 established a fair value based method for accounting
for stock based compensation plans but still granted entities the option of
accounting for stock based compensation plans under the provisions of APB
Opinion No. 25 if they provide disclosures required by SFAS No. 123. The
Company adopted the provisions of this Standard, as was required, effective
July 1, 1996, and elected to account for these plans under the Provisions
of APB No. 25 and will provide the required disclosures in future periods.
2. STOCK CONVERSION
On October 5, 1995, the Conversion of the Association from a Federally-
chartered mutual institution to a Federally-chartered stock savings
association through amendment of its charter and issuance of common stock
to the Company was completed. Related thereto, the Company sold 1,454,750
shares of common stock, par value $.01 per share, at an initial price of
$10 per share in subscription and community offerings. Costs associated
with the Conversion were approximately $880,000, including underwriting
fees. These conversion costs were deducted from the gross proceeds of the
sale of the common stock.
In connection with the Offering, the Association established a liquidation
account in an amount equal to its regulatory capital as of the latest
practicable date prior to consummation of the Offering.
The Company's ability to pay dividends will be largely dependent upon
dividends to the Company from the Association. Pursuant to OTS regulations,
the Association will not be permitted to pay dividends on its capital stock
or repurchase shares of its stock if its stockholders' equity would be
reduced below the amount required for the liquidation account or if
stockholders' equity would be reduced below the amount required by the OTS.
3. INTEREST-RATE SENSITIVITY
Fixed-rate mortgage loans and mortgage-backed securities comprise a
substantial portion of the Association's interest-earning assets
(approximately 73% at June 30, 1996), while its principal source of funds
consists of savings deposits with maturities of three years or less (97%).
Because of the short-term nature of the savings deposits, their cost
generally reflects returns currently available in the market. Accordingly,
the Association's savings deposits have a high degree of interest-rate
sensitivity while its earning assets are relatively fixed and are much less
sensitive to changes in current market rates. Therefore, changes in market
interest rates tend to directly affect the level of net interest income
related to such earning assets.
<PAGE>
At June 30, 1996, based on information provided by the Office of Thrift
Supervision ("OTS"), it was estimated that the Association's net portfolio
value ("NPV") (the net present value of the Association's cash flows from
assets, liabilities, and off-balance sheet items) would decrease 12%, 26%,
38%, and 51% and increase 10%, 15%, 17%, and 18% in the event of 1%, 2%,
3%, and 4% increases and decreases in market interest rates, respectively.
These calculations indicate that the Association's NPV could be adversely
affected by increases in interest rates but could be favorably affected by
decreases in interest rates. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments, and
deposit run-offs and should not be relied upon as indicative of actual
results. Certain shortcomings are inherent in such computations. In order
to mitigate its interest rate risk, the Association maintains substantial
liquidity and capital levels that management believes are sufficient to
sustain unfavorable movements in market interest rates. As a result of the
Association's exposure to interest rate risk, the Association has been
notified by the OTS that the Association may be subject to an additional
capital requirement (see Note 4--Regulatory Matters).
4. REGULATORY MATTERS
Under regulations promulgated by the Association's primary regulator, OTS,
the Association must maintain capital levels to comply with the following
minimum capital requirements: (1) tangible capital equal to 1.5% of
adjusted total assets; (2) leverage capital, or core capital, required to
be maintained at 3% of adjusted total assets (although most institutions
are required by regulators to maintain a core capital ratio of an
additional 100 to 200 basis points); and (3) risk-based capital equal to 8%
of its aggregate assets and off-balance sheet financial instruments as
adjusted to reflect that relative credit risk.
The Association is also subject to additional capital standards established
by the Federal Deposit Insurance Corporation Improvement Act of 1991. These
regulations established capital standards in five categories ranging from
"critically undercapitalized" to "well capitalized", and defined "well
capitalized" as at least 5% for core (leverage) capital, 6% for Tier 1
risk-based capital and at least 10% for total risk-based capital.
Institutions with a core capital ratio less than 4%, a Tier 1 risk-based
capital ratio less than 4%, or a total risk-based capital ratio less than
8% are considered "undercapitalized," and subject to increasingly stringent
prompt corrective action measures. The Association's capital ratios place
it in the "well capitalized" category at June 30, 1996.
<PAGE>
A reconciliation of the Association's consolidated stockholders' equity to
the Association's tangible, core, and risk-based capital available to meet
its regulatory capital requirements is as follows:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM FOR CAPITALIZED FOR
CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------- ----------------- -------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- ----------- ------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity and ratio to total
assets 14.4% $ 15,397
-----
Unrealized losses on available for sale
securities 80
Intangible assets (222)
---------
Tangible capital, and ratio to adjusted
total assets 14.3% $ 15,255 1.5% $1,603
----- ========= ------ ========
Tier I (core) capital, and ratio to 0
adjusted total assets 14.3% $ 15,255 3.0% $3,205 5.0% $5,342
----- ========= ------ -------- ---- =======
Tier I capital, and ratio to
risk-weighted assets 70.4% $ 15,255 4.0% $ 866 6.0% $1,299
----- --------- ------ -------- ---- =======
Tier 2 capital (general allowance for
loan losses) 78
--------
Total risk-based capital, and ratio to
risk-weighted assets 70.8% $ 15,333 8.0% $1,732 10.0% $2,166
----- ======== ---- ======== ----- =======
Total assets $106,979
========
Adjusted total assets $106,837
========
Risk-weighted assets $ 21,655
========
</TABLE>
Capital requirements continue to be under study by the OTS. Management
continues to monitor these requirements and contemplated changes and
believes that the Association will continue to exceed its regulatory
minimum requirements.
The OTS has adopted an amendment to its risk-based capital requirements
that generally requires savings institutions with more than a "normal"
level of interest-rate risk to maintain additional total capital. An
institution will be considered to have a "normal" level of interest-rate
risk exposure if the decline in its NPV after an immediate 200 basis point
increase or decrease in market interest rates (whichever results in the
greater decline) is less than 2% of the current estimated economic value of
its assets. An institution with a greater than normal interest rate risk
will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest-rate risk
component") equal to one-half the difference between the institution's
measured interest-rate risk and normal level of interest-rate risk as
determined by the OTS, multiplied by the economic value of its total
assets. The Association has been notified by the OTS that it will be
required to incorporate the interest-rate risk component to the risk-based
capital requirement. However, the interest-rate risk component of risk-
based
<PAGE>
capital requirement has been waived until the OTS finalizes the
process under which institutions may appeal such capital requirements.
Based on the Association's capital level, management does not expect that
implementation of this requirement will cause the Association to fall below
its capital requirements.
Pursuant to OTS regulations, an institution that exceeds all fully phases-
in capital requirements before and after a proposed capital distribution
and has not been advised by the OTS that it is in need of more than the
normal supervision can, 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 over the most
recent four-quarter period. Any additional capital distributions require
prior regulatory approval.
The Company is also subject to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of a
corporation's net assets (the amount by which total assets exceed total
liabilities) over its statutory capital or, if there is no such excess, to
its net profits for the current and immediately preceding fiscal year.
5. RETIREMENT AND SAVINGS PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Association established an ESOP for
eligible employees. The ESOP purchased 116,380 shares of the Company's
common stock with the proceeds of a $1,163,800 note payable from the
Association and secured by the Common Stock owned by the ESOP. Principal
payments under the note are due in equal and annual installments through
December 2005; interest is payable annually at a variable rate which is
adjusted each January 1. Impact of this financing is eliminated in the
consolidated financial statement presentation.
Expense related to the ESOP for fiscal 1996 was approximately $168,000, a
significant portion of which was to provide for individuals' service prior
to Conversion. Unearned compensation related to the ESOP was approximately
$1,023,000 at June 30, 1996, and is shown as a reduction of stockholders'
equity in the accompanying consolidated statements of financial condition.
Unearned compensation is amortized into compensation expense based on
employee services rendered in relation to shares which are committed to be
released.
MANAGEMENT RECOGNITION PLAN
During fiscal 1996, the Association established a MRP which purchased
58,190 shares of the Company's common stock on the open market subsequent
to the Conversion. The MRP provides for awards of common stock to directors
and officers of the Association. The aggregate fair market value of the
shares purchased by the MRP is considered unearned compensation at the time
of purchase and compensation is earned ratably over the stipulated vesting
period. The expense related to the MRP for fiscal 1996 was approximately
$28,000. At June 30, unearned compensation related to the MRP was
approximately $668,000 and is shown as a reduction to stockholders' equity
in the accompanying consolidated statements of financial condition.
<PAGE>
STOCK OPTION PLANS
The Company has a stockholder approved Option Plan. The Option Plan
provides for the grant of incentive stock options (ISO's) to employees and
non-incentive stock options (non-ISO's) to non-employee directors.
<TABLE>
<CAPTION>
EMPLOYEE DIRECTOR TOTAL
-------- -------- -------
<S> <C> <C> <C>
Options granted 82,734 43,642 126,376
Exercised 0 0 0
------- --------- -------
Outstanding, June 30, 1996 82,734 43,642 126,376
Authorized for future grants,
June 30, 1996 19,099 0 19,099
======= ========= ========
</TABLE>
Exercise price is $11.69 per share; 20% of the optioned shares are
exercisable upon the participant's completion of each of five years of
service.
SIMPLIFIED EMPLOYEE PENSION PLAN
The Company established a Simplified Employee Pension Plan ("SEP") for all
employees who have completed one year of service, pursuant to Section
408(k) of the Internal Revenue Code of 1986. The SEP makes a discretionary
contribution to the SEP each year. The cost to the Company under the SEP
was $88,095, $94,659, and $86,100 for fiscal years 1996, 1995, and 1994,
respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
During fiscal 1996, the Company entered into a Supplemental Executive
Retirement Agreement ("SERA") with an executive of the Company. Under the
provisions of the SERA, the Company will establish an account for the
executive and will credit to the executive's account an amount equal to the
difference between 25% of his compensation for the plan year and the annual
additions credited to him under any tax-qualified plans sponsored by the
Company (including the ESOP and the SEP). For each plan year, the amount
credited to the executive's account shall appreciate at a rate equal to the
highest rate paid by the Association on certificates of deposit (regardless
of their term). Said account shall be paid to the executive in five
substantially equal annual installments, with the first installment due on
the first day of the second month after he leaves employment.
In the event that the Executive retires before the Company and the
Association fully repay the loan by which the ESOP purchased common stock
in the initial public offering, the Company will pay the executive an
amount having a fair market value equal to (i) the benefits he would have
accrued under the ESOP if the loan had been discharged on the date of his
retirement through a contribution, on said date, by the Company to the
ESOP, and if all assets of the ESOP were thereupon allocated to the
accounts of participants, plus (ii) a tax bonus equal to 40% of the amount
he recognizes as ordinary income pursuant to clause (i) hereof. The
executive will forfeit the right to receive any benefits under this Article
if he is discharged from employment for just cause.
<PAGE>
In the event that the executive dies before he has received all benefit
payments provided under this plan (calculated as if the executive retired
on the date of his death), the Company shall pay to the executive's
beneficiary a lump sum payment, within 60 days following the executive's
death, in an amount equal to the balance of the executive's account.
The Company recognized $49,900 in compensation expense for the year ended
June 30, 1996, related to the SERA. The projected benefit obligation,
accumulated benefit obligation, and vested benefit obligation were all
$176,444 at June 30, 1996. The components of the net periodic cost are
service cost of $4,769, interest cost of $11,231, and net amortization and
deferred cost of $33,900. In determining the actuarial present value of the
projected benefit obligation, the discount rate was 7% and the increase in
share value was 10%.
EMPLOYMENT AGREEMENT
The Company has a 36 month employment agreement with its President. This
agreement provides that if his employment under the agreement is terminated
by the Company in connection with or within twelve months after any change
in control of the Company, he shall be paid approximately 3 times his
salary.
6. SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gain and loss, and fair value of
securities designated as available for sale are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY AND U.S. GOVERNMENT
AGENCIES $ 7,138,729 $86,184 $ (82,413) $ 7,142,500
MORTGAGE-BACKED SECURITIES 1,448,030 0 (23,556) 1,424,474
FEDERAL HOME LOAN BANK STOCK 765,300 0 0 765,300
OTHER SECURITIES 4,230,968 13,301 (72,785) 4,171,484
----------- ------- ---------- -----------
$13,583,027 $99,485 $(178,754) $13,503,758
=========== ======= ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, 1995
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 6,818,945 $150,897 $(45,341) $ 6,924,501
Federal Home Loan Bank stock 642,900 0 0 642,900
Other securities 3,843,927 38,841 (800) 3,881,968
------------- --------------- --------------- -------------
$11,305,772 $189,738 $(46,141) $11,449,369
============= =============== =============== =============
</TABLE>
The amortized cost and fair value of debt securities available for sale by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
AMORTIZED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 999,859 $ 1,003,437
Due after one year through five years 10,805,318 10,739,167
Due after five years through ten years 1,012,550 995,854
------------ ------------
12,817,727 12,738,458
Federal Home Loan Bank stock 765,300 765,300
------------ ------------
$13,583,027 $13,503,758
============ ============
</TABLE>
During fiscal year 1995, the Company transferred mortgage-backed securities
from available for sale to held to maturity at their fair values at the
date of transfer of $700,062 with an unrealized loss at the date of
transfer of $71,931 and an unrealized loss at June 30, 1996 of $50,613. The
unrealized loss on these transferred securities is being amortized against
interest income using a method that approximates level yield over the
period to maturity.
There were no sales of securities during fiscal year 1996.
Proceeds from sales of securities available for sale during fiscal 1995
were $5,561,815. Gross losses of $722,975 were recognized on the sale of
securities available for sale during 1995.
A security designated as available for sale with a carrying value (fair
value) of $1,552,500 has been pledged as collateral for certain large
deposits (public funds) with an aggregate balance of $1,425,000 at June 30,
1996.
<PAGE>
7. SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gain and loss, and fair value of
securities designated as held to maturity are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
U.S. TREASURY AND U.S.
GOVERNMENT AGENCIES $2,002,478 $22,522 $ 0 $2,025,000
OTHER SECURITIES 2,511,205 0 (47,767) 2,463,438
------------ --------------- --------------- -------------
$4,513,683 $22,522 $(47,767) $4,488,438
============ =============== =============== =============
June 30, 1995
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
------------- --------------- --------------- -------------
<CAPTION>
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies $2,504,900 $41,819 $ 0 $2,546,719
Other securities 5,494,991 44,888 (156) 5,539,723
$7,999,891 $86,707 $ (156) $8,086,442
============= =============== =============== =============
</TABLE>
The amortized cost and fair value of debt securities held to maturity by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
AMORTIZED
COST FAIR VALUE
----------- ------------
<S> <C> <C>
Due in one year or less $1,002,244 $1,007,188
Due after one year through five years 2,002,825 2,010,781
Due after five years through ten years 1,508,614 1,470,469
----------- ------------
$4,513,683 $4,488,438
=========== ============
</TABLE>
<PAGE>
8. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Mortgage loans:
Secured by one to four family residential properties $30,626,408 $23,999,775
Secured by nonresidential properties 178,000 211,000
Agency for International Development--Housing
Guaranty Project loans 22,410 29,923
Consumer loans 1,634,663 1,533,000
Savings account loans 784,942 879,000
------------ ------------
33,246,423 26,652,698
Less:
Unearned interest income 123,501 122,071
Discount (rebate) on loans (1,156) (643)
Deferred loan fees (costs), net (98,947) (13,866)
Allowance for loan losses 78,070 80,000
------------ ------------
Loans receivable, net $33,144,955 $26,465,136
============ ============
</TABLE>
Loans secured by one to four family residential properties include second
mortgage loans on properties for which the Company holds the first
mortgage. The proceeds on these second mortgage loans were used for
improvements and consumer purposes. Second mortgage loan balances at June
30, 1996 and 1995 were approximately $580,241 and $540,360, respectively.
As a savings and loan institution, the Company has a credit concentration
in residential real estate mortgage loans. Substantially all of the
Association's customers are located in its trade area of Etowah, Marshall,
and Cherokee Counties in Alabama. Although the Company has generally
conservative underwriting standards, including a collateral policy calling
for low loan to collateral values, the ability of its borrowers to meet
their residential mortgage obligations is dependent upon local economic
conditions.
In the normal course of business, loans are made to officers, directors,
and employees of the Company. These loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing
for comparable transactions with others. As of June 30, 1996 and 1995,
$301,238 and $301,427, respectively, of these loans were outstanding.
During fiscal 1996, $122,772 of new loans were made and repayments totaled
$122,961.
<PAGE>
An analysis of the Company's allowance for loan losses is as follows:
<TABLE>
<CAPTION>
For the Years Ended
June 30,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $80,000 $40,274 $40,274
Provision for loan losses 0 39,726 0
Charge-offs, net of recovery (1,930) 0 0
-------- -------- --------
Balance, end of year $78,070 $80,000 $40,274
======== ======== ========
</TABLE>
The Association had loans on nonaccrual status in the amount of $0 and
$47,957 at June 30, 1996 and 1995, respectively. Interest income foregone
on these nonaccrual loans was not significant for fiscal years 1996 and
1995.
9. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Types and amortized cost amounts of mortgage-backed securities designated
as held to maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
GNMA certificates $38,288,728 $42,291,689
FNMA certificates 6,960,326 2,569,975
FHLMC certificate 3,058,454 264,204
----------- ------------
$48,307,508 $45,125,868
=========== ============
</TABLE>
Mortgage-backed securities designated as held to maturity at June 30, 1996
bear interest at fixed and adjustable rates ranging from 4.6% to 15.5% with
an average yield of 5.9% for fiscal year 1996. These mortgage-backed
securities contractually mature at various dates ranging from July 1996 to
June 2022. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
At June 30, 1996, the fair value of mortgage-backed securities held to
maturity was $48,369,979. Gross unrealized gains totaled $638,375 and gross
unrealized losses totaled $575,904 at June 30, 1996. At June 30, 1995, the
fair value of mortgage-backed securities held to maturity was $45,737,671.
Gross unrealized gains totaled $949,993 and gross unrealized losses totaled
$338,190 at June 30, 1995.
<PAGE>
10. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
Land $170,085 $ 170,085
Buildings 243,101 240,606
Leasehold improvements 50,402 49,652
Furniture, fixtures, and equipment 485,730 480,683
----------- ------------
949,318 941,026
Less accumulated depreciation (670,230) (607,662)
----------- ------------
$279,088 $ 333,364
============ ============
</TABLE>
Depreciation expense charged to office building and equipment expense in
1996, 1995, and 1994 totaled approximately $63,000, $53,000, and $65,000,
respectively.
11. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
JUNE 30, JUNE 30, 1996 June 30, 1995
------------------------ -----------------------------
1996 AMOUNT PERCENT Amount Percent
-------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Demand, NOW, and Money Market
accounts, including noninterest
bearing deposit of $170,298 and
$122,000 at June 30, 1996 and
June 30, 1995, respectively 2.97% $7,429,124 8.65% $ 7,197,653 7.88%
Passbook savings 2.85 5,413,226 6.31 6,283,297 6.87
--------- ----------- ------- ------------ -------
12,842,350 14.96 13,480,950 14.75
Certificates of deposit:
2.00- 4.00% 576,316 .67 3,699,308 4.05
4.01- 6.00% 47,238,037 55.03 45,453,501 49.72
6.01- 8.00% 24,748,998 28.83 26,122,295 28.58
8.01-10.00% 440,899 .51 2,650,746 2.90
----------- ------ ------------ -----
5.80 73,004,250 85.04 77,925,850 85.25
-------- ----------- ------ ------------ -----
5.25% $85,846,600 100.00% $91,406,800 100.00%
======== =========== ====== ============ ======
</TABLE>
The aggregate amount of jumbo certi ficates of deposit with a minimum
denomination of $100,000 was $10,129,348 and $11,350,820, at June 30, 1996
and 1995, respectively.
<PAGE>
Scheduled maturities of certificates of deposit at June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
---------------------------------------
1997 1998 1999 2000 TOTAL
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
2.00- 4.00% $ 403,565 $ 109,946 $ 62,805 $ 0 $ 576,316
4.01- 6.00 28,663,882 10,563,227 5,355,869 2,655,059 47,238,037
6.01- 8.00 13,863,474 8,949,799 1,632,416 303,309 24,748,998
8.01-10.00 3,196 6,455 319,904 111,344 440,899
----------- ----------- ---------- ----------- -----------
Total $42,934,117 $19,629,427 $7,370,994 $ 3,069,712 $73,004,250
=========== =========== ========== =========== ===========
</TABLE>
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
For Years Ended June 30,
-------------------------------------
1996 1995 1994
---------- ---------- -------------
<S> <C> <C> <C>
Passbook savings $ 292,124 $ 203,098 $ 194,177
NOW accounts 255,133 194,548 98,080
Certificates of deposit 4,131,989 3,863,001 3,037,927
---------- ---------- ------------
$4,679,246 $4,260,647 $ 3,330,184
========== ========== ============
</TABLE>
<PAGE>
12. INCOME TAXES
The provision (benefit) for income taxes for the periods indicated is
summarized as follows:
<TABLE>
<CAPTION>
For Years Ended June 30,
---------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Current Provision:
Federal $222,637 $52,400 $360,000
State 26,274 1,824 40,016
248,911 54,224 400,016
Deferred provision (benefit) 44,747 21,256 (41,670)
--------- -------- --------
$293,658 $75,480 $358,346
========= ======== ========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate of 34% to
income before taxes were as follows:
<TABLE>
<CAPTION>
For Years Ended June 30,
--------------------------------
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Pretax income at statutory rates $295,369 $79,602 $358,335
Add (deduct):
State income tax, net of federal tax 20,599 1,204 26,410
benefit
Dividend received deduction 0 (9,807) 0
Other, net (22,310) 4,481 (26,399)
-------- ------- ---------
$293,658 $75,480 $ 358,346
======== ======= =========
Effective income tax rate 34% 32% 34%
======== ======= =========
</TABLE>
<PAGE>
The net deferred tax liability was included in "Taxes payable" at June 30,
1996 and 1995. The components of the net deferred tax asset or liability at
June 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1996 1995
----------- --------------
<S> <C> <C>
Unrealized net loss on securities available for sale $ 50,295 $ 0
Amortization of intangible 27,962 16,860
Other 5,968 2,004
Deferred tax asset 84,225 18,864
----------- ------------
Unrealized net gain on securities available for sale 0 (22,158)
FHLB stock dividend (57,869) (57,869)
Bad debt reserve, net (101,632) (63,561)
Accretion of discount on securities (60,839) (57,637)
Depreciation (4,767) (7,369)
Other (67,332) (46,190)
----------- ------------
Deferred tax liability (292,439) (254,784)
----------- ------------
Net deferred tax liability $(208,214) $(235,920)
=========== ============
</TABLE>
Thrift institutions, in determining taxable income, have historically been
allowed special bad debt deductions based on specified experience formulae
or on a percentage of taxable income before such deductions. The bad debt
deduction based on the latter has been gradually reduced to 8%. On August
2, 1996, Congress passed the Small Business Job Protection Act that, will
among other things, repeal the tax bad debt reserve method for thrifts
effective for taxable years beginning after December 31, 1995. As a result,
thrifts must recapture into taxable income the amount of their post-1987
tax bad debt reserves over a six-year period beginning after 1995. This
recapture can be deferred for up to two years if the thrift satisfies a
residential loan portfolio test. The Association is expected to recapture
approximately $131,000 of its tax bad debt reserves into taxable income
over six years as a result of this new law. The recapture will not have any
effect on the Association's net income because the related tax expense has
already been accrued.
Because of such repeal, thrifts such as the Association may only use the
same tax bad debt reserve that is allowed for banks. Accordingly, a thrift
with assets of $500 million or less may only add to its tax bad debt
reserves based upon its moving six-year average experience of actual loan
losses (i.e., the experience method).
The portion of a thrift's tax bad debt reserve that is not recaptured under
this new law is only subject to recapture at a later date under certain
circumstances. These include stock repurchases redemptions by the thrift or
if the thrift converts to a type of institution (such as a credit union)
that is not considered a bank for tax purposes. However, no further
recapture would be required if the thrift converted to a commercial bank
charter or was acquired by a bank. The Association does not anticipate
engaging in any transactions at this time that would require the recapture
of its pre-1988 tax bad debt reserves of approximately $2.8 million.
<PAGE>
13. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------
1996 1995
-------- ---------
<S> <C> <C>
Securities available for sale $290,580 $201,884
Securities held to maturity 87,184 127,732
Mortgage-backed securities held to 299,357 284,762
maturity
Loans receivable 178,817 132,016
Interest-bearing deposits in other banks 443 1,037
-------- --------
$856,381 $747,431
======== ========
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has lease agreements for its branch offices. Rental expense
under these leases aggregated $16,064, $16,064, and $9,582 for fiscal years
1996, 1995, and 1994, respectively. The aggregate annual minimum rental
commitments under the terms of all noncancelable leases at June 30, 1996
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
---------------------- --------
<S> <C>
1997 $16,689
1998 16,964
1999 14,264
2000 6,165
2001 and thereafter 6,678
--------
$60,760
========
</TABLE>
OFF-BALANCE SHEET ITEMS
The Company's policies as to collateral and assumption of credit risk for
off-balance sheet items are essentially the same as those for extension of
credit to its customers. Generally, the only off-balance sheet exposure the
Association has is its commitments to originate loans; at June 30, 1996,
the Company had $690,500 in outstanding commitments to originate
residential real estate loans at fixed rates between 8.0% and 10.25%.
Additionally, at June 30, 1996, the Association had provided $184,891 in
unused lines of credit.
LITIGATION
Though Management, after consultation with legal counsel, is not aware of
any litigation or claims against the Company, in the normal course of
business the Company may become subject to such litigation or claims.
<PAGE>
FDIC ASSESSMENT
The Association's savings deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The assessment rate is currently 0.23% of
deposits for well capitalized institutions, though proposed legislation
would reduce such assessment from $.23 to $.04, a level consistent with
that charged to members of the Bank Insurance Fund. However, if enacted,
such legislation would likely require a one-time assessment which the
Association believes, under terms of legislative proposals most frequently
discussed, would approximate $810,000. Such an assessment will be
recognized by a charge to income if and when such legislation is enacted.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, Disclosures About Fair
Value of Financial Instruments. SFAS No. 107 requires all entities to
disclose the fair value of financial instruments (both assets and
liabilities recognized and not recognized in the statements of financial
condition) for which it is practicable to estimate the fair value, except
those financial instruments specifically excluded by the Statement.
Financial instruments are defined as cash, evidence of ownership in an
entity, contracts that convey either a right to receive cash or other
financial instrument or an obligation to deliver cash or other financial
instruments, or contracts that convey the right or obligation to exchange
financial instruments on potentially favorable or unfavorable terms. This
disclosure should include the methods and assumptions used to estimate the
fair value of a financial instrument or a class of financial instruments as
well as why it is not practicable to estimate the fair value. This
statement was adopted by the Company for fiscal year 1996 as was required
for entities with assets of less than $150 million.
The Company has a variety of financial instruments which include items
recorded on the consolidated statement of financial condition and items
which, by their nature, are not recorded on the consolidated statement of
financial condition. Quoted market prices, if available, are utilized as an
estimate of the fair value of financial instruments. In cases where quoted
market prices are not available, fair values have been estimated using
present value or other valuation techniques. These methods are highly
sensitive to the assumptions used by management, such as those concerning
appropriate discount rates and estimates of future cash flows. Different
assumptions could significantly affect the estimated fair value amounts
presented below. In this regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instrument.
Further, assets that are not financial instruments are not included in the
following table. Accordingly, the aggregated estimated fair value amounts
presented do not represent the underlying value of the Company.
<PAGE>
This table summarizes the Company's disclosure of fair values of financial
instruments made in accordance with the requirements of SFAS No. 107:
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash on hand and in banks $ 4,535 $ 4,535
Securities--AFS 13,504 13,504
Securities--HTM 4,514 4,488
Loans receivable, net 33,145 33,728
Mortgage-backed securities--HTM 48,308 48,370
LIABILITIES:
Deposits 85,847 86,070
Other liabilities and borrowed funds 159 159
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair values provided above:
CASH AND CASH EQUIVALENTS
The carrying value of highly liquid instruments, such as cash on hand and
cash equivalents are considered to approximate their fair value.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
Substantially all of the Company's securities available for sale have a
readily determinable fair value. Fair values for these securities are based
on quoted market prices, where available. If not available, fair values are
based on market prices of comparable instruments. The carrying value of
accrued interest on these instruments approximates fair value.
LOANS RECEIVABLE, NET
For loans with rates which are repriced in coordination with movements in
market rates and with no significant change in credit risk, fair value
estimates are based on carrying values. The fair values for certain
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitizing transactions, adjusted for differences in
loan characteristics. The fair values of other loans are estimated by
discounting future cash flows using current rates at which loans with
similar terms would be made to borrowers of similar credit ratings. The
carrying amount of accrued interest on loans approximates fair values.
DEPOSITS
The fair value of deposits with no stated maturity, such as interest and
non-interest demand deposits, NOW accounts, savings accounts, and money
market accounts, is, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). Fair values for
<PAGE>
certificates of deposit are estimated using a discounted cash flow analysis
that applies rates currently offered for certificates of similar remaining
maturities. The carrying amount of accrued interest payable on deposits
approximates its fair value.
OTHER LIABILITIES AND BORROWED FUNDS
The carrying amount of accrued interest payable and advance payments by
borrowers approximates its fair value.
OFF-BALANCE-SHEET INSTRUMENTS
Off-balance-sheet financial instruments include commitments to extend
credit. The fair value of such commitments is negligible since the
arrangements are at current rates and are for short periods.
16. ACQUISITION
In May 1994, the Company completed the acquisition of the Centre, Alabama,
branch of another financial institution. The acquisition was accounted for
as a purchase of assets and assumption of liabilities. Under purchase
accounting, the results of operations for the acquired branch, subsequent
to the acquisition date, are included in the accompanying consolidated
financial statements. In connection with the acquisition, the Company
received cash of $18,194,009. The amount consists of the assumption of
deposits of $19,034,472 less loans purchased of $507,504 and a core deposit
premium of $344,341.
The Company also entered into a lease of the branch building with the
selling financial institution. The lease is an operating lease with a five
year term through May 1999. Future minimum lease payments are as follows:
$7,200 for each of the fiscal years 1997 and 1998 and $3,600 in fiscal year
1999.
<PAGE>
17. PARENT COMPANY FINANCIAL STATEMENTS
Separate condensed financial statements of The Southern Banc Company, Inc.
(the "Parent Company") as of and for the year ended June 30, 1996 are
presented below:
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents $ 4,363
Investment in subsidiary 15,399
ESOP loan receivable 1,027
Other assets 51
-----------
Total assets $20,840
===========
LIABILITIES:
Other liabilities $ 705
-----------
STOCKHOLDERS' EQUITY:
Preference stock 0
Common stock 15
Paid-in capital 13,573
Retained earnings 9,702
Unearned compensation (2,117)
Treasury stock (958)
Unrealized loss on securities available for sale, net (80)
-----------
Total stockholders' equity 20,135
-----------
Total liabilities and stockholders' equity $20,840
===========
</TABLE>
<PAGE>
STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
INCOME FROM SUBSIDIARY:
Dividends $ 0
Interest 194
-------
Total income 194
-------
OPERATING EXPENSE 197
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS (3)
INCOME TAXES (BENEFIT) (1)
-------
INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS (2)
EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS 577
-------
Net income $575
=======
</TABLE>
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income $ 575
Equity in undistributed current year earnings of subsidiary (577)
----------
(2)
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in other assets (51)
Increase in other liabilities 705
----------
Net cash provided by operating activities 652
----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 12,505
Purchase of stock for stock plans (531)
Purchase of Association's common stock (6,858)
Capital contributions to plan trust (5)
Payments received on ESOP loan 137
Purchase of treasury stock (958)
Dividends paid (579)
----------
Net cash provided by financing activities 3,711
----------
INCREASE IN CASH AND CASH EQUIVALENTS 4,363
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 0
----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,363
==========
</TABLE>
Earnings are presented on a retroactive basis, recognizing earnings of the
subsidiary for the year ended June 30, 1996. This presentation is based on
the accounting for the Conversion at historical cost, in a manner similar
to that utilized in a pooling of interests.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
Information concerning the directors and executive officers of the Company
and Transactions with Management is incorporated herein by reference to the
sections captioned "Executive Officers Who Are Not Directors" in Item 1 of this
report and "Proposal I -- Election of Directors" in the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Security Ownership" and
"Proposal I -- Election of Directors" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C>
3.1 * Certificate of Incorporation of The Southern Banc Company, Inc.
3.2 * Bylaws of The Southern Banc Company, Inc.
4 * Specimen Common Stock Certificate of The Southern Banc Company,
Inc.
10.1 ** Employment Agreements between The Southern Banc Company, Inc. and
First Federal Savings and Loan Association of Gadsden and James
B. Little, Jr.
10.2 ** First Federal Savings and Loan Association of Gadsden
Supplemental Executive Retirement Agreement
10.3 *** The Southern Banc Company, Inc. 1996 Stock Option and Incentive
Plan and trust
10.4 *** First Federal Savings and Loan Association of Gadsden Management
Recognition Plan and trust
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21 **** Subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
________________
* Incorporated by reference to Registration Statement on Form 8-A (No. 1-
13964).
** Incorporated by reference to Registration Statement on Form S-1 (No. 33-
93218).
*** Incorporated by reference to Registration Statement on Form S-8 (No. 333-
3546).
**** Incorporated by reference to "Subsidiary Activities" in Item 1 of this
report.
(b) A Current Report on Form 8-K dated April 10, 1996 was filed to report
under Item 5 the registrant's announcement that its stock option and incentive
plan and management recognition plan had been approved by the registrant's
stockholders and that, in connection with the plans' implementation, the
trustees of the plans' related trusts may elect to purchase up to 36,366 and
58,190 shares of the registrant's outstanding common stock for the purpose of
funding awards under the plans. A Current Report on Form 8-K dated May 17, 1996
was filed to report under Item 5 the registrant's announcement that it had
commenced a stock repurchase program to acquire up to 72,737 shares, or
approximately 5%, of its outstanding common stock.
<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, as of the date
indicated below.
THE SOUTHERN BANC COMPANY, INC.
Date: September 27, 1996 By: /s/ James B. Little, Jr.
------------------------------------
James B. Little, Jr.
Chairman, President and Chief Executive Officer
(Duly Authorized Representative)
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 in the capacities indicated below as of the date indicated above.
<TABLE>
<S> <C>
By: /s/ James B. Little By: /s/ Janice Stephens
----------------------------------------------- -----------------------------------------------
James B. Little Janice Stephens
Chairman, President and Chief Executive Officer Controller
(Director and Principal Executive and (Principal Accounting Officer)
Financial Officer)
By: /s/ Craig G. Cantrell By: /s/ Thomas F. Dowling
----------------------------------------------- -----------------------------------------------
Craig G. Cantrell Thomas F. Dowling
Director Director
By: /s/ Grady Gillam By: /s/ W. Roscoe Johnson, III
----------------------------------------------- -----------------------------------------------
Grady Gillam W. Roscoe Johnson, III
Director Director
By: /s/ Rex G. Keeling, Jr. By: /s/ Gates Little
----------------------------------------------- -----------------------------------------------
Rex G. Keeling, Jr. Gates Little
Director Director
By: /s/ W. R. Moon By: /s/ Gene B. Rutenberg
----------------------------------------------- -----------------------------------------------
W. R. Moon Gene B. Rutenberg
Director Director
By: /s/ Fred Taylor
-----------------------------------------------
Fred Taylor
Director
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registraton Statements File Nos. 1-13964, 33-93218, and 333-3546.
/s/ Arthur Andersen L.L.P.
---------------------------------------
Arthur Andersen L.L.P.
Birmingham, Alabama
September 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 934,559
<INT-BEARING-DEPOSITS> 3,599,989
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,503,758
<INVESTMENTS-CARRYING> 52,821,191
<INVESTMENTS-MARKET> 52,858,417
<LOANS> 33,246,423
<ALLOWANCE> 78,070
<TOTAL-ASSETS> 107,028,812
<DEPOSITS> 85,846,600
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,047,457
<LONG-TERM> 0
0
0
<COMMON> 14,548
<OTHER-SE> 20,120,207
<TOTAL-LIABILITIES-AND-EQUITY> 107,028,812
<INTEREST-LOAN> 2,466,817
<INTEREST-INVEST> 4,814,055
<INTEREST-OTHER> 420,827
<INTEREST-TOTAL> 7,701,699
<INTEREST-DEPOSIT> 4,679,246
<INTEREST-EXPENSE> 4,679,246
<INTEREST-INCOME-NET> 3,022,453
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,231,142
<INCOME-PRETAX> 868,731
<INCOME-PRE-EXTRAORDINARY> 868,731
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 575,073
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 2.88
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 80,000
<CHARGE-OFFS> 1,930
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 78,070
<ALLOWANCE-DOMESTIC> 78,070
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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