<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One) FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 1-13964
THE SOUTHERN BANC COMPANY, INC.
________________________________________________________
(Name of Small Business Issuer in Its Charter)
Delaware 63-1146351
_____________________________________________ _______________
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
221 S. 6th Street, Gadsden, Alabama 35901
_________________________________________ ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (256) 543-3860
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.01 per share American Stock Exchange
- -------------------------------------- --------------------------------------
(Title of Class) (Name of Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _______
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant's revenues for the fiscal year ended June 30, 1998: $542,885
As of September 21, 1998, the aggregate market value of the 801,362 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $11.1 million based on the closing sales price of
$13.875 per share of the registrant's Common Stock on September 21, 1998 as
listed on the American Stock Exchange. For purposes of this calculation, it is
assumed that directors, executive officers and beneficial owners of more than
10% of the registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of September 21, 1998: 1,230,313
Transitional Small Business Disclosure Format Yes _____ No X
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DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the part of this
report into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1998 (the "Annual Report"). (Parts I and II)
2. Portions of the Proxy Statement for the registrant's 1998 Annual Meeting of
Stockholders (the "Proxy Statement"). (Part III)
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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 permits 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. See "Proposed
Regulatory Changes" below.
The Company's executive offices are located at 221 S. 6th Street, Gadsden,
Alabama 35901, and its telephone number is (256) 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, 1998, the Association had total assets of $105.1 million,
deposits of $85.9 million and stockholders' equity of $18.6 million, or 17.67%
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"). See
"Proposed Regulatory Changes" below.
PROPOSED REGULATORY CHANGES
On May 13, 1998, the U.S. House of Representatives by one vote passed H.R.
10 (the "Act"), the "Financial Services Competition Act of 1998," which calls
for a sweeping modernization of the banking system that would permit
affiliations between commercial banks, securities firms, insurance companies
and, subject to certain limitations, other commercial enterprises. The stated
purposes of the Act are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition.
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H.R. 10 removes the restrictions contained in the Glass-Steagall Act of
1933 and the Bank Holding Company Act of 1956, thereby allowing qualified
financial holding companies to control banks, securities firms, insurance
companies, and other financial firms. Conversely, securities firms, insurance
companies and financial firms would be allowed to own or affiliate with a
commercial bank. Under the new framework, the Federal Reserve would serve as an
umbrella regulator to oversee the new financial holding company structure.
Securities affiliates would be required to comply with all applicable federal
securities laws, including registration and other requirements applicable to
broker-dealers. The Act also provides that insurance affiliates be subject to
applicable state insurance regulations and supervision. The Act preserves the
thrift charter and all existing thrift powers, but restricts the activities of
new unitary thrift holding companies.
The Senate is now considering the legislation but may further modify the
Act. At this time, it is unknown whether the Act will be enacted, or if
enacted, what form the final version of such legislation might take.
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 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. According to the Alabama Department of
Industrial Relations, the unemployment rates for May 1998 in Etowah, Cherokee
and Marshall Counties were 5.2%, 4.1% and 5.6%, respectively, as compared to
4.0% 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
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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.
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 (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, 1998, the maximum amount that the Association could have loaned
to any one borrower without prior OTS approval was $4.6 million. At such date,
the largest aggregate amount of loans that the Association had outstanding to
any one borrower was approximately $237,000.
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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, 1998, the Association had no concentrations
of loans exceeding 10% of total loans that are not disclosed below.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1998 1997
----------------- -----------------
Amount % Amount %
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans:
One- to four-family residential (1).. $36,528 88.77% $32,678 90.32%
Non-residential...................... 216 0.52 278 0.77
Consumer loans......................... 3,748 9.11 2,617 7.23
Savings account loans.................. 657 1.60 609 1.68
------- ------ ------- ------
Total gross loans...................... 41,149 100.00% 36,182 100.00%
====== ======
Less:
Unearned income...................... 245 133
Discounts on loans purchased......... -- --
Deferred loan fees (costs), net...... (325) (207)
Allowance for loan losses............ 76 76
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Total.............................. $41,153 $36,180
======= =======
</TABLE>
_____________
(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, 1998 and 1997 were approximately
$974,000 and $1.1 million, respectively.
The following table sets forth information at June 30, 1998 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 Within 1 Due After 1 through Due After 5
Year After 5 Years After Years After
6/30/98 6/30/98 6/30/98 Total
-------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage (1).. $ 1,580 $ 2,311 $ 32,853 $36,744
Consumer and savings
accounts................ 2,049 2,110 246 4,405
-------- -------- -------- -------
Total................ $ 3,629 $ 4,421 $ 33,099 $41,149
======== ======== ======== =======
</TABLE>
____________
(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, 1998 totaled $974,000.
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The following table sets forth at June 30, 1998, 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
------------- ----------------
<S> <C> <C>
(In thousands)
Real estate................... $35,081 $1,663
Consumer and savings account.. 4,405 --
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Total........................ $39,486 $1,663
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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.
Originations, Purchases and Sales of Loans. The Association's loans are
primarily originated by salaried loan officers of the Association. In addition,
from time to time, the Association purchases loans. During fiscal 1998, the
Association purchased six real estate loans totaling $682,000 from a financial
institution in Tuscaloosa, 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, 1998,
$36.5 million, or 88.77%, 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, 1998, $35.0 million, or 95.47%, of the Association's one- to four-family
residential loans had fixed rates and $1.7 million, or 4.53%, 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, 1998, the Association had originated $6.1
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 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.
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The Association has not originated any adjustable rate, one- to four-
family residential mortgage loans in recent years. However, total loans at June
30, 1998 included adjustable rate loans with an aggregate principal balance of
$1.7 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 $734,000, $2.3 million and $657,000, respectively, at June
30, 1998. 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."
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.
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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. The Association
generally does not obtain a formal environmental report on the real estate at
the time a loan is made, except when the Association becomes aware of a
particular risk of environment contamination.
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 are required.
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. The Association has
established a loan committee which is comprised of Board members and Executive
Officers. Any loan committee member has the authority to approve mortgage loans
of $200,000 or under. Mortgage loans over $200,000 require the approval of one
committee member accompanied by the approval of the Chairman of the Board.
Consumer loans up to $15,000 may be approved by individual loan officers.
Consumer loans greater than $15,000 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 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.
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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, Allowances 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, 1998, the Association had no assets classified
as loss or doubtful, $11,000 of assets classified as substandard and $757,000 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
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
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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, 1998, the
Association had no properties acquired in settlement of loans.
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,
-------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Balance at beginning of period................... $ 76 $ 78
Charge-offs...................................... -- (2)
Recoveries....................................... -- --
Provision for loan losses........................ -- --
----- -----
Balance at end of period......................... $ 76 $ 76
===== =====
</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,
------------------------------------------
1998 1997
--------------------- -------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential.... $ 48 88.77% $ 48 90.87%
Non-residential.................... -- 0.52 -- 0.77
Consumer and savings account loans... 28 10.71 28 8.36
----- ------ ----- ------
Total allowance for loan losses.. $ 76 100.00% $ 76 100.00%
===== ====== ===== ======
</TABLE>
9
<PAGE>
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.
The following table sets forth information with respect to the
Association's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------
1998 1997
-------- -------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate loans:
One- to four-family residential............................... $ 11 $ --
Non-residential............................................... -- --
Consumer and savings account loans.............................. -- --
Other loans..................................................... -- --
----- -----
Total......................................................... $ 11 $ --
===== =====
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................................. $ 11 $ --
===== =====
Percentage of total loans......................................... 0.03 --%
===== =====
Other non-performing assets (2)................................... $ -- $ --
===== =====
Percentage of total assets........................................ 0.01% --%
===== =====
</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 insignficant
for the year ended June 30, 1998.
At June 30, 1998, 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.
10
<PAGE>
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."
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, 1998, investment securities with an aggregate amortized cost and an
aggregate fair value of $22.2 million were included in the portfolio of
securities designated as available for sale. The aggregate impact on equity was
an increase of $110,000 for the year ended June 30, 1998. 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 8 and 9 of Notes to Consolidated Financial Statements in the Annual Report
filed as Exhibit 13 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, and GNMA
certificates are backed by the full faith and credit of the U.S. Government.
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,
11
<PAGE>
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 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, 1998, the Association had $37.5 million in mortgage-backed securities
(representing 35.68% total assets) 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, FHLMC and FNMA. Such notes had an aggregate balance of $18.0 million at
June 30, 1998 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 44.7 months and 6.12%,
respectively, at June 30, 1998.
The following table sets forth the carrying value of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Securities available for sale: (1)
U.S. Treasury securities................ $ 7,938 $ 6,661
U.S. Government agency securities....... 13,506 10,165
Federal Home Loan Bank stock............ 795 795
------- -------
Total securities available for sale.. $22,239 $17,621
======= =======
Securities held to maturity: (2)
U.S. Treasury securities................ $ -- $ 1,000
U.S. Government agency securities....... 34,077 44,157
------- -------
Total securities held to maturity.... $34,077 $45,157
======= =======
Total securities.......................... $56,316 $62,778
======= =======
</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.
12
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized costs, fair values and weighted average yields for the
Association's investment securities at June 30, 1998.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------ ----------------- ----------------- -------------------
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 securities........... $4,101 6.7% $ 3,837 5.0% $ -- --% $ -- --%
U.S. Government agency
securities....................... 1,965 5.8 3,291 6.4 5,862 6.6 2,387 6.7
Federal Home Loan Bank stock....... 795 7.3 -- -- -- -- -- --
------ ------- ------- -------
Total securities available for sale. $6,861 6.3% $ 7,128 5.7% $ 5,862 6.6% $ 2,387 6.7%
====== ======= ======= =======
Securities held to maturity: (2)
U.S. Government agency
securities........................ $ 28 9.6% $ 4,764 7.5% $10,412 7.3% $18,873 7.1%
------ ------- ------- -------
Total securities held to maturity... $ 28 9.6% $ 4,764 7.5% $10,412 7.3% $18,813 7.1%
====== ======= ======= =======
Total securities.................... $6,889 6.3% $11,892 6.5% $16,274 7.1% $21,260 7.0%
====== ======= ======= =======
<CAPTION>
Total Investment Portfolio
----------------------------
Amortized Fair Average
Cost Value Yield
--------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Securities available for sale: (1)
U.S. treasury securities........... $ 7,879 $ 7,938 5.8%
U.S. Government agency
securities....................... 13,488 13,505 6.4
Federal Home Loan Bank stock....... 795 795 7.3
------- -------
Total securities available for sale. $22,162 $22,238 6.3%
======= =======
Securities held to maturity: (2)
U.S. Government agency
securities........................ $34,077 $34,811 7.2%
------- -------
Total securities held to maturity... $34,077 $34,811 7.2%
======= =======
Total securities.................... $56,239 $57,049 6.9%
======= =======
</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 8 and 9 of Notes to Consolidated
Financial Statements in the Annual Report filed as Exhibit 13 to this
report.
13
<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.
14
<PAGE>
Deposits in the Association as of June 30, 1998 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>
1.978% None NOW Accounts $ 100 $ 646 0.75%
2.748 None Passbook Statement Accounts 100 4,597 5.35
3.998 None Gold Star Savings Account 100 599 0.70
4.625 None Money Market Deposit Account 1,500 400 0.47
4.625 None High Yield Account 100 4,208 4.90
2.250 None Best Checking Account 50 275 0.32
1.802 None Merit Checking 50 722 0.84
2.248 None Classic 55 Checking 50 1,857 2.16
-- None Free Checking -- 151 0.18
-- None Business checking 50 20 0.02
Certificates of Deposit
-----------------------
2.750 91 Days 3-Month Money Market 1,000 19 0.02
2.750 5 Month Fixed Term, Fixed Rate 1,000 119 0.14
4.900 182 Days 6-Month Money Market 1,000 2,520 2.93
5.271 7 Month Fixed Term, Fixed Rate 1,000 454 0.53
5.366 8 Month Fixed Term, Fixed Rate 1,000 119 0.14
5.000 9 Month Fixed Term, Fixed Rate 1,000 820 0.95
5.564 10 Month Fixed Term, Fixed Rate 1,000 3,776 4.39
5.540 12 Month Fixed Term, Fixed Rate 1,000 5,410 6.30
5.397 14 Month Fixed Term, Fixed Rate 1,000 12,062 14.04
5.629 18 Month Fixed Term, Fixed Rate 1,000 4,353 5.07
5.649 18 Month Fixed Term, Fixed Rate - IRA 250 4,363 5.08
5.411 20 Month Fixed Term, Fixed Rate 1,000 5,764 6.71
5.652 24 Month Fixed Term, Fixed Rate 1,000 4,804 5.59
5.010 30 Month Fixed Term, Fixed Rate 1,000 3,550 4.13
5.670 36 Month Fixed Term, Fixed Rate 1,000 4,304 5.01
7.494 48 Month Fixed Term, Fixed Rate 1,000 10,572 12.30
5.994 60 Month Fixed Term, Fixed Rate 1,000 5,495 6.40
5.592 72 Month Fixed Term, Fixed Rate 1,000 1,549 1.80
6.035 96 Month Fixed Term, Fixed Rate 1,000 57 0.07
5.778 120 Month Fixed Term, Fixed Rate 1,000 764 0.89
5.050 3-Month-State Fixed Term, Fixed Rate 1,000 1,425 1.66
5.466 Negotiated Negotiated Jumbo 100,000 152 0.18
------- ------
Total $85,926 100.00%
======= ======
</TABLE>
15
<PAGE>
The following tables set forth the average balances and average interest
rates paid based on month-end balances for deposits in the Association as of the
dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Interest- Interest-
Bearing Bearing
Passbook Demand Certificates Passbook Demand Certificates
Savings Deposits of Deposit Savings Deposits of Deposit
--------- ---------- ------------- --------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance.......... $7,210 $7,829 $73,157 $8,102 $7,612 $73,494
Average interest rate.... 2.85% 3.07% 5.65% 2.88% 3.20% 5.72%
</TABLE>
The following table sets forth the certificates of deposit in the
Association classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------
1998 1997
----------- ----------
(In thousands)
<S> <C> <C>
2.00 - 4.00%....... $ 310 $ 326
4.01 - 6.00%....... 68,465 62,271
6.01 - 8.00%....... 3,553 11,404
8.01 - 10.00%....... 122 119
------- -------
$72,450 $74,120
======= =======
</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, 1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less........... $ 2,788
Over three through six months.. 2,131
Over six through 12 months..... 1,719
Over 12 months................. 4,021
-------
Total........................ $10,659
=======
</TABLE>
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.
16
<PAGE>
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, 1998, 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, 1998, the Association's
total investment in the subsidiary was $37,000.
In July 1998, First Service Corporation of Gadsden transferred its
assets and assigned its liabilities to the Association. Following the transfer
and assignment, the Association sold First Service Corporation to the Company.
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 "Proposed Regulatory Changes" above.
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 Atlanta, whichever is greater.
The Association was in compliance with this requirement with an investment in
FHLB of Atlanta stock at June 30, 1998 of $795,000.
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, 1998, 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
(currently 4%) of its net withdrawable savings deposits plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity ratio of the Association for the
month of June 1998 was 26.02%.
Qualified Thrift Lender Test. The Association is currently subject to
OTS regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for FHLB advances and for certain other purposes. A
savings institution that does not meet the QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the institution may not engage in any new activity or make any new investment,
directly or
17
<PAGE>
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
an institution in its business and liquidity investments in an amount not
exceeding 20% of assets. All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home equity loans,
loans made for educational purposes, small business loans and credit card loans
and shares of stock issued by the FHLB. Subject to a 20% of portfolio assets
limit, savings institutions are also able to treat the following as Qualified
Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans
subject to sale under certain conditions, (ii) investments, both debt and
equity, in the capital stock or obligations of any other security issued by a
service corporation or operating subsidiary, provided that such subsidiary
derives at least 80% of its annual gross revenues from activities directly
related to purchasing, financing, constructing or improving, repairing domestic
residential housing or manufactured housing, (iii) 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, and (iv) loans for personal, family,
household or educational purposes, provided that the dollar amount treated as
Qualified Thrift Investments may not exceed 10% of the savings institution's
portfolio assets.
A savings institution shall be deemed a Qualified Thrift Lender as
long as its percentage of Qualified Thrift Investments continues to equal or
exceed 65% in at least nine out of each 12 months. An institution will cease to
be a Qualified Thrift Lender if its percentage of Qualified Thrift Investments
as measured by monthly averages over the immediately preceding 12-month period
falls below 65% for four or more months. An institution that fails to maintain
QTL status will be permitted to requalify once, and if it fails the QTL test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired.
At June 30, 1998, 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 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 CAMELS 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 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.
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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, 1998, 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, 1998, the Association had $137,000 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. 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, 1998, the
Association's adjusted total assets for purposes of the core and tangible
capital requirements were $105.6 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, all equity investments and that portion of the institution's land
loans and non-residential construction loans in excess of 80% loan-to-value
ratio. As of June 30, 1998, 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, 1998,
the Association's risk-weighted assets were approximately $27.8 million.
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At June 30, 1998, 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, 1998 and 1997.
<TABLE>
<CAPTION>
To Be Well
Capitalized for
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
June 30, 1998:
Total capital (to risk-weighted
assets)............................ $15,845 56.9% $2,228 8.0% $2,785 10.0%
Tier 1 (core) capital (to risk-
weighted assets)................... 15,769 56.6 N/A N/A 1,671 6.0
Tier 1 (core) capital (to adjusted
total assets)...................... 15,769 14.9 3,165 3.0 5,276 5.0
Tangible capital (to adjusted
total assets)...................... 15,769 14.9 1,583 1.5 N/A N/A
June 30, 1997:
Total capital (to risk-weighted
assets)............................ $14,857 60.7% $1,956 8.0% $2,446 10.0%
Tier 1 (core) capital (to risk-
weighted assets)................... 14,781 60.4 N/A N/A 1,467 6.0
Tier 1 (core) capital (to adjusted
total assets)...................... 14,781 14.0 3,165 3.0 5,275 5.0
Tangible capital (to adjusted
total assets)...................... 14,781 14.0 1,580 1.5 N/A N/A
</TABLE>
The OTS' risk-based capital requirements require that 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 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 calculates the sensitivity of a savings 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 requires 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
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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
savings institutions, the Director of the OTS is authorized to establish the
minimum level of capital for a savings 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. Such circumstances would include a high degree of exposure of
interest rate risk, prepayment risk, credit risk and concentration of credit
risk and certain risks arising from non-traditional activities. 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 Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to 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
indicating 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 depends 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 consists 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 FDIC adopted the current assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings is zero and institutions in
the lowest risk assessment classification are assessed at the rate of 0.31% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for these obligations at the rate of 1.3 basis points. After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments. Since the SAIF now meets its designated reserve ratio, SAIF members
are permitted to convert to the status of members of the BIF and may merge with
or transfer assets to a BIF member. However, substantial entrance and exit fees
apply to conversions from SAIF to BIF insurance and such fees may make a SAIF to
BIF conversion prohibitively expensive.
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
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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 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 Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of June 30, 1998, the
Association met its reserve requirements.
Dividend Limitations. 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 quarters; 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 the ratio of its fully phased-in risk-based capital ratio
requirement to its assets 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 its 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 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."
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
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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, 1998, the maximum amount that the Association could have
lent to any one borrower under the 15% limit was approximately $2.8 million. At
such date, the largest aggregate amount of loans that the Association had
outstanding to any one borrower was approximately $237,000.
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 a savings 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 a savings 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, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution. Section 106 of the Bank
Holding Company Act of 1956, as amended ("BHCA") which also applies to the
Association, prohibits the Association 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.
Further, savings institutions are subject to the restrictions
contained in Section 22(h) and Section 22(g) 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 a savings 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 and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). 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 a savings institution, and their
respective affiliates, unless such loan is approved in advance by a
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<PAGE>
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.
Section 22(g) of the Federal Reserve Act and Regulation O requires
that loans to executive officers of a depository institution requires that loans
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. In addition,
Section 106 of the BHCA 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 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
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<PAGE>
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
regulatory composite rating of 1). An "undercapitalized institution" is an
institution that has (i) a total risk-based capital ratio 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% (or 3.0% if the institution has a regulatory composite rating of
1). A "significantly undercapitalized" institution is defined as an institution
that has: (i) a total risk-based capital ratio of less than 6.0%; (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 tangible equity (core capital, subject to
certain adjustments) to total assets of 2.0% or less. 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 regulatory composite 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.
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. See "Proposed Regulatory Changes" above.
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
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<PAGE>
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 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 a savings 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
26
<PAGE>
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 QTL or 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 QTL or 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 savings
institutions 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.
Under the BHCA, 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 a savings 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 BHCA.
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.
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.
27
<PAGE>
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. 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. At June 30, 1998, the Association's post-1987
tax bad debt reserve subject to recapture was approximately $185,000. The
Association recaptured approximately $103,000 of this reserve into taxable
income in the current year. The recapture did not have any effect on the
Association's net income because the related tax expense had 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, 1998, the Association had
approximately $2.8 million of pre-1988 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
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
28
<PAGE>
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 13 of Notes to Consolidated Financial Statements in the
Annual Report filed as Exhibit 13 to this report.
State 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 issued and outstanding 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 and/or the Association during fiscal 1998 who do not
serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
June 30,
Name 1998 Principal Title
- ------------------ ------ ---------------------------------
<S> <C> <C>
Rodney Rich 46 Vice President of the Association
Margaret Stewart 68 Secretary of the Association
Peggy Smith 42 Treasurer of the Association
</TABLE>
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.
MARGARET STEWART serves as Secretary of the Association. She joined
the Association in 1960 as teller. She was appointed Secretary in 1966.
PEGGY SMITH serves as Treasurer of the Association. She joined the
Association in 1980.
EMPLOYEES
As of June 30, 1998, the Association had 28 full-time and one part-
time employees, none of whom was represented by a collective bargaining
agreement.
29
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth information regarding the Association's
offices at June 30, 1998.
<TABLE>
<CAPTION>
Net Book Owned
Year Value at Approximate or
Opened June 30, 1998 Square Footage Leased
------ ------------- -------------- ------
<S> <C> <C> <C> <C>
MAIN OFFICE:
221 South 6th Street 1968 $200,645 6,500 Owned
Gadsden, Alabama 35901
BRANCH OFFICES:
202 Sand Mountain Drive 1965 3,379 1,405 Leased
Albertville, Alabama 35950
395 Gunter Avenue 1971 97 1,000 Leased
Guntersville, Alabama 35976
390 W. Main Street 1994 5,894 2,263 Leased
Centre, Alabama 35960
</TABLE>
The net book value of the Association's investment in furnishings and
equipment totaled $41,358 at June 30, 1998.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, the Association is a party to various legal proceedings
incident to its business. At June 30, 1998, 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
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The information required by this item is incorporated by reference to "Item
1. Business -- Regulation -- Dividend Limitations" herein and "Market
Information," "Market Price of Common Stock and Dividend Information" and Note 4
of the Notes to Consolidated Financial Statements in the portions of the Annual
Report filed as Exhibit 13 to this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
The information required by this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the portions of the Annual Report filed as Exhibit 13 to this
report.
30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements required by this item are incorporated by
reference to the Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Independent Auditors' Report in the portions of the
Annual Report filed as Exhibit 13 to this report.
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
is incorporated herein by reference to the sections captioned "Executive
Officers Who Are Not Directors" in Item 1 of this report and "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 "Election of Directors -- 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 Beneficial Ownership" and
"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 "Election of Directors -- Transactions with Management"
in the Proxy Statement.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) The following exhibits are filed as part of this report.
No. Description
--- -----------
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.
31
<PAGE>
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
10.5 + 1997 Amendments to Employment Agreements between the Southern
Banc Company, Inc. and First Federal Savings and Loan
Association and James B. Little, Jr.
10.6 + Employment Agreements between The Southern Banc Company, Inc.
and First Federal Savings and Loan Association of Gadsden and
Gates Little.
13 Annual Report to Stockholders
21 Subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- -------------------------
* 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).
+ Management compensation plan or arrangement.
(b) Reports on Form 8-K. There were no Current Reports on Form 8-K filed
during the last quarter of fiscal year 1998.
32
<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 23, 1998 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.
By: /s/ James B. Little By: /s/ Thomas F. Dowling
------------------- ---------------------
James B. Little Thomas F. Dowling
Chairman, President and Chief Executive Director
Officer (Director and Principal
Executive, Financial and Accounting
Officer)
By: /s/ Craig G. Cantrell By: /s/ W. Roscoe Johnson, III
--------------------- --------------------------
Craig G. Cantrell W. Roscoe Johnson, III
Director Director
By: /s/ Grady Gillam By: /s/ Gates Little
---------------- ----------------
Grady Gillam Gates Little
Director Director
By: /s/ Rex G. Keeling, Jr. By:
----------------------- ---------------
Rex G. Keeling, Jr. Fred Taylor
Director Director
33
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
BETWEEN
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
AND JAMES B. LITTLE, JR.
-------------------------------
1997 Amendment
-------------------------------
WHEREAS, on August 17, 1995, First Federal Savings and Loan Association
(the "Association") entered into an Employment Agreement (the "Agreement") with
James B. Little, Jr. (the "Employee"); and
WHEREAS, the Board of Directors of the Association and the Employee have
deter mined that it is in their respective best interests to amend the Agreement
(i) to improve the change-in-control protections provided thereunder, (ii) to
reflect an extension of the term of his Agreement, and (iii) to make other
adjustments to the Agreement as the interested parties have deemed appropriate;
NOW, THEREFORE, the Agreement shall be amended as follows, with such
amendment to become effective immediately.
1. The first sentence in Section 5 of the Agreement shall be amended by
replacing the words "36 months thereafter" with "August 17, 2000".
2. The last sentence in Section 6(a) of the Agreement shall be amended by
deleting the following phrase at the end thereof:
, or be gainfully employed in any other position or job other than as
provided above
3. Section 9 of the Agreement shall be amended by deleting the following
words from its first sentence:
(which shall only be applicable during the twelve-month period following a
"Change in Control" as defined in Section 11 hereof)
4. The first sentence of Section 9(d)(1) of the Agreement shall be amended
by replacing the words "set forth in Section 11(b) hereof" with the words "that
begins on the date six months before a "Change in Control" (as defined in
Section 11 hereof) and ends on the later of the second annual anniversary of the
Change in Control or the expiration date of this Agreement (the "Protected
Period")".
5. The first sentence of Section 9(d)(2) of the Agreement shall be
amended by replacing the words "within the time period set forth in Section
11(b) hereof" with the words "during the Protected Period,".
6. Section 9(d)(2) shall further be amended by adding the word "or"
between "at Section 1;" and "(iv) a material diminution".
<PAGE>
1997 Amendment
Page 2 of 3
7. Section 9(f) of the Agreement shall be amended by (i) replacing the
words "time period set forth in Section 11(b) hereof" with the words "Protected
Period," and by (ii) adding a closing parentheses at the end thereof.
8. Section 11(a)(1) of the Agreement shall be amended in its entirety to
provide as follows:
Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the
Association, without the Employee's prior written consent and for a reason
other than Just Cause during the Protected Period, the Employee shall,
subject to paragraph (2) of this Section 11(a), be paid an amount equal to
the difference between (i) the product of 2.99 times his "base amount" as
defined in Section 280G(b)(3) of the Code and regulations promulgated
thereunder (the "Maximum Amount"), and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the
Employee receives on account of the Change in Control.
The amount payable under this Section 11(a)(2) shall be paid either
(i) in one lump sum within ten days of the later of the date of the Change
in Control and Employee's last day of employment, or (ii) if prior to the
date which is 90 days before the date on which a Change in Control occurs,
the Employee filed a duly executed irrevocable written election in the form
attached hereto as Exhibit "A", payment of such amount shall be made
according to the elected schedule. Deferred amounts shall bear interest
from the date on which they would otherwise be payable until the date paid
at a rate equal to 120% of the applicable federal rate, compounded
semiannually, as determined under Code Section 1274(d) and the regulations
thereunder.
9. The last sentence of Section 11(a)(2) of the Agreement shall be
amended in its entirety to provide as follows:
Within five business days of the earlier of the Association's receipt
of the Employee's determination pursuant to this paragraph or the
Association's determination in lieu of a determination by the Employee, the
Association shall pay to, or distribute for the benefit of, the Employee
such amounts as are then due the Employee under this Agreement.
10. The first sentence of Section 11(b) of the Agreement shall be amended
in its entirety to provide as follows:
Notwithstanding any other provision of this Agreement to the contrary,
but subject to Section 11(a)(2) hereof, the Employee shall be entitled to
collect the severance benefits set forth in Section 11(a)(1) hereof in the
event that either (i) the Employee voluntarily terminates his employment
under this Agreement for any reason with a 30-day period beginning on the
date of a Change in Control, or (ii) the Employee voluntarily terminates
his employment within ninety (90) days following the occurrence of any of
the following events, which has not been consented to in advance
<PAGE>
1997 Amendment
Page 3 of 3
by the Employee in writing and occur during the Protected Period: (i) the
---
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the change in control; (ii) a material reduction
in the Employee's base compensation as in
effect on the date of the change in control or as the same may be increased
from time to time; (iii) the failure by the Association to continue to
provide the Employee with compensation and benefits provided for under this
Agreement, as the same may be increased from time to time, or with benefits
substantially similar to those provided to him under any of the employee
benefit plans in which the Employee now or hereafter becomes a participant,
or the taking of any action by the Association which would directly or
indirectly reduce any of such benefits or deprive the Employee of any
material fringe benefit enjoyed by him at the time of the change in
control; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with his position as
referenced at Section 1; (v) a failure to elect or reelect the Employee to
the Board of Directors of the Association, if the Employee is serving on
the Board on the date of the change in control; (vi) a material diminution
or reduction in the Employee's responsibilities or authority (including
reporting responsibilities) in connection with his employment with the
Association; or (vii) a material reduction in the secretarial or other
administrative support of the Employee.
11. The first sentence of Section 11(d)(2) of the Agreement shall be
amended by replacing "twelve (12)" with "twenty-seven (27)".
12. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Agreement other than as stated
above.
WHEREFORE, the undersigned hereby approve this 1997 Amendment to the
Agreement.
Date of Execution: October ___, 1997
JAMES B. LITTLE, JR.
_____________________
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
By_____________________________ Attest:_________________________
Its Chairman of the Board
CORPORATE SEAL
<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
THE SOUTHERN BANC COMPANY, INC.
AND JAMES B. LITTLE, JR.
-------------------------------
1997 Amendment
-------------------------------
WHEREAS, on August 17, 1995, The Southern Banc Company, Inc.(the "Company")
entered into an Employment Agreement (the "Agreement") with James B. Little, Jr.
(the "Employee"); and
WHEREAS, the Board of Directors of the Company and the Employee have deter
mined that it is in their respective best interests to amend the Agreement (i)
to improve the change-in-control protections provided thereunder, (ii) to
reflect an extension of the term of his Agreement, and (iii) to make other
adjustments to the Agreement as the interested parties have deemed appropriate;
NOW, THEREFORE, the Agreement shall be amended as follows, with such
amendment to become effective immediately.
1. The first sentence in Section 5 of the Agreement shall be amended by
replacing the words "36 months thereafter" with "August 17, 2000".
2. The last sentence in Section 6(a) of the Agreement shall be amended by
deleting the following phrase at the end thereof:
, or be gainfully employed in any other position or job other than as
provided above
3. Section 9 of the Agreement shall be amended by deleting the following
words from its first sentence:
(which shall only be applicable during the twelve-month period following a
"Change in Control" as defined in Section 11 hereof)
4. The first sentence of Section 9(d)(1) of the Agreement shall be
amended by replacing the words "set forth in Section 11(b) hereof" with the
words "that begins on the date six months before a "Change in Control" (as
defined in Section 11 hereof) and ends on the later of the second annual
anniversary of the Change in Control or the expiration date of this Agreement
(the "Protected Period"),".
5. Section 11(a)(1) of the Agreement shall be amended in its entirety to
provide as follows:
Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Company,
without the Employee's prior written consent and for a reason other than
Just Cause during the Protected Period, the Employee shall be paid an
amount equal to the difference between
<PAGE>
1997 Amendment
Page 2 of 3
(i) the product of 2.99 times his "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder, and (ii) the sum of any other
parachute payments (as defined under Section 280G(b)(2) of the Code) that
the Employee receives on account of the change in control. Said sum shall
be paid in the manner set forth in the Employee's Employment Agreement with
the Association.
6. The first sentence of Section 11(b) of the Agreement shall be amended
in its entirety to provide as follows:
Notwithstanding any other provision of this Agreement to the contrary,
the Employee shall be entitled to collect the severance benefits set forth
in Section 11(a) hereof in the event that either (i) the Employee
voluntarily terminates his employment under this Agreement for any reason
within the 30-day period beginning on the date of a Change in Control, or
(ii) the Employee voluntarily terminates his employment within ninety (90)
days following the occurrence of any of the following events, which have
not been consented to in advance by the Employee in writing and occur
---
during the Protected Period: (i) the requirement that the Employee move his
personal residence, or perform his principal executive functions, more than
thirty-five (35) miles from his primary office as of the date of the change
in control; (ii) a material reduction in the Employee's base compensation
as in effect on the date of the change in control or as the same may be
increased from time to time; (iii) the failure by the Company to continue
to provide the Employee with compensation and benefits provided for under
this Agreement, as the same may be increased from time to time, or with
benefits substantially similar to those provided to him under any of the
employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Company which would
directly or indirectly reduce any of such benefits or deprive the Employee
of any material fringe benefit enjoyed by him at the time of the change in
control; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with his position as
referenced at Section 1; (v) a failure to elect or reelect the Employee to
the Board, if the Employee is serving on the Board on the date of the
change in control; or (vi) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Company.
7. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Agreement other than as stated
above.
<PAGE>
1997 Amendment
Page 3 of 3
WHEREFORE, the undersigned hereby approve this 1997 Amendment to the
Agreement.
Date of Execution: October ___, 1997
_______________________
JAMES B. LITTLE, JR.
_______________________
THE SOUTHERN BANC COMPANY, INC.
By_____________________________ Attest:_________________________
Its Chairman of the Board
CORPORATE SEAL
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into this 15th day of October 1997 (the
"Effective Date"), by and between First Federal Savings and Loan Association of
Gadsden (the "Association") and Gates B. Little (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association as
Vice President and is experienced in all phases of the business of the
Association; and
WHEREAS, the Board of Directors of the Association believes it is in the
best interests of the Association to enter into this Agreement with the Employee
in order to assure continuity of management of the Association and to reinforce
and encourage the continued attention and dedication of the Employee to his
assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Association and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as Vice President of the
----------
Association. The Employee shall render such administrative and management
services for the Association as are currently rendered and as are customarily
performed by persons situated in a similar executive capacity. The Employee
shall also promote, by entertainment or otherwise, as and to the extent
permitted by law, the business of the Association. The Employee's other duties
shall be such as the Board of Directors (the "Board") of the Association may
from time to time reasonably direct, including normal duties as an officer of
the Association.
2. Base Compensation. The Association agrees to pay the Employee during
-----------------
the term of this Agreement a salary at the rate of $37,060 per annum, payable in
cash not less frequently than monthly. The Board shall review, not less often
than annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an
---------------------
equitable manner with all other senior management employees of the Association
in discretionary bonuses that the Board may award from time to time to the
Association's senior management employees. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. During
----------------------------------------------------
the term of this Agreement, the Employee shall be eligible to participate in the
following benefit plans: group hospitalization, disability, health, dental,
sick leave, life insurance, travel and/or accident insurance, auto
allowance/auto lease, retirement, pension, and/or other present or future
qualified plans provided by the Association, generally which benefits, taken as
a whole, must be at least as favorable as those in effect on the Effective Date.
The Employee shall also be entitled at no expense to himself, to family medical
insurance provided by the Association throughout the term of this Agreement and
for a 3-year period beginning upon the termination of this Agreement, regardless
of his employment status. This 3-year coverage period may be reconsidered and
extended by the Board, in its sole discretion.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
---------------------------
participate in any fringe benefits which are or may become available to the
Association's senior management employees, including for example: any stock
option or incentive compensation plans, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Association.
-1-
<PAGE>
5. Term. The Association hereby employs the Employee, and the Employee
----
hereby accepts such employment under this Agreement, for the period commencing
on the Effective Date and ending thirty-six months thereafter (or such earlier
date as is determined in accordance with Section 9). Additionally, this
Agreement shall be automatically extended to a date thirty-six months after any
"Change in Control" (as defined in Section 11 hereof), and on each annual
anniversary date from the Effective Date, the Board shall duly consider and
determine whether to extend the Employee's term of employment under this
Agreement, and the Employee's term of employment under this Agreement may be
extended to a date up to thirty-six months thereafter provided the Board
determines in a duly adopted resolution that the performance of the Employee has
met the Board's requirements and standards and that this Agreement shall be
extended.
6. Loyalty; Noncompetition.
-----------------------
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, Employee may serve on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which will not
present any conflict of interest with the Association or any of its subsidiaries
or affiliates, or unfavorably affect the performance of Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his or her employment under this Agreement, the Employee
shall not engage in any business or activity contrary to the business affairs or
interests of the Association.
(b) Nothing contained in this Paragraph 6 shall be deemed to
prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Association, or, solely
as a passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Association will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Association.
(b) The Employee shall not receive any additional compensation from
the Association on account of his failure to take a vacation or sick leave, and
the Employee shall not accumulate unused vacation or sick leave from one fiscal
year to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Association for such additional periods
of time and for such valid and legitimate reasons as the Board may in its
discretion determine. Further, the Board may grant to the Employee a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as such Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
-2-
<PAGE>
9. Termination and Termination Pay. Subject to Section 11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his death during the term of this Agreement, in which event the
Employee's designated beneficiary, or if none, the Employee's estate, shall be
entitled to receive the compensation due the Employee through the last day of
the calendar month in which his death occurred.
(b) Disability.
----------
(1) The Association may terminate the Employee's employment
after having established the Employee's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Employee's ability to substantially perform his duties under this Agreement and
which results in the Employee becoming eligible for long-term disability
benefits under the Association's long-term disability plan (or, if the
Association has no such plan in effect, which impairs the Employee's ability to
substantially perform his duties under this Agreement for a period of one
hundred eighty (180) consecutive days). The Employee shall be entitled to the
compensation and benefits provided for under this Agreement for (i) any period
during the term of this Agreement and prior to the establishment of the
Employee's Disability during which the Employee is unable to work due to the
physical or mental infirmity, or (ii) any period of Disability which is prior to
the Executive's termination of employment pursuant to this Section 9(b);
provided that any benefits paid pursuant to the Association's long term
disability plan will continue as provided in such plan.
(2) During any period that the Employee shall receive
disability benefits and to the extent that the Employee shall be physically and
mentally able to do so, he shall furnish such information, assistance and
documents so as to assist in the continued ongoing business of the Association
and, if able, shall make himself available to the Association to undertake
reasonable assignments consistent with his prior position and his physical and
mental health. The Association shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
(c) Just Cause. The Board may, by written notice to the Employee,
----------
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. No act, or failure to act, on the
Employee's part shall be considered "willful" unless he has acted, or failed to
act, with an absence of good faith and without a reasonable belief that his
action or failure to act was in the best interest of the Association.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for Just Cause unless there shall have been delivered to the Employee
a copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), finding that in the good faith opinion of the Board, the
Employee was guilty of conduct set forth above in the second sentence of this
subsection (c) and specifying the particulars thereof in detail.
(d) Without Just Cause; Constructive Discharge.
------------------------------------------
(1) The Board may, by written notice to the Employee,
immediately terminate his employment at any time for a reason other than Just
Cause, in which event the Employee shall be entitled to receive the following
compensation and benefits (unless such termination occurs within the time period
that begins on the date six months before a "Change in Control" (as defined in
Section 11 hereof) and ends on the later of the second annual
-3-
<PAGE>
anniversary of the Change in Control or the expiration date of this Agreement
(the "Protected Period"), in which event the benefits and compensation provided
for in Section 11 shall apply): (i) the salary provided pursuant to Section 2
hereof, up to the date of termination of the term as provided in Section 5
hereof (including any renewal term) of this Agreement (the "Expiration Date"),
plus said salary for an additional 12-month period, and (ii) at the Employee's
election either (A) cash in an amount equal to the cost to the Employee of
obtaining all health, life, disability and other benefits which the Employee
would have been eligible to participate in through the Expiration Date based
upon the benefit levels substantially equal to those that the Association
provided for the Employee at the date of termination of employment or (B)
continued participation under such Association benefit plans through the
Expiration Date, but only to the extent the Employee continues to qualify for
participation therein. All amounts payable to the Employee shall be paid, at the
option of the Employee, either (I) in periodic payments through the Expiration
Date, or (II) in one lump sum within ten (10) days of such termination.
(2) The Employee may voluntarily terminate his employment
under this Agreement, and the Employee shall thereupon be entitled to receive
the compensation and benefits payable under Section 9(d)(1) hereof, within
ninety (90) days following the occurrence of any of the following events, which
has not been consented to in advance by the Employee in writing (unless such
voluntary termination occurs during the Protected Period, in which event the
benefits and compensation provided for in Section 11 shall apply): (i) a
material reduction in the Employee's base compensation; (ii) the failure by the
Association to continue to provide the Employee with compensation and benefits
provided for under this Agreement, as the same may be increased from time to
time, or with benefits substantially similar to those provided to him under any
of the employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Association which would directly
or indirectly reduce any of such benefits or deprive the Employee of any
material fringe benefit enjoyed by him; (iii) the assignment to the Employee of
duties and responsibilities materially different from those normally associated
with his position as referenced at Section 1; or (iv) a material diminution or
reduction in the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Association. Said
sum shall be paid in lieu of the payment of any benefits under Section 9 hereof.
(3) Notwithstanding the foregoing, but only to the extent
required under federal banking law, the amount payable under clause (d)(1)(i)
hereof shall be reduced to the extent that on the date of the Employee's
termination of employment, the present value of the benefits payable under
clauses (d)(1)(i) and (ii) hereof exceeds the limitation on severance benefits
that is set forth in Regulatory Bulletin 27a of the Office of Thrift
Supervision, as in effect on the Effective Date. In the event that Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") becomes applicable
to payments made under this Section 9(d), and the payments exceed the "Maximum
Amount" as defined in Section 11(a)(1) hereof, the payments shall be reduced as
provided by Section 11(a)(2) of this Agreement.
(e) Termination or Suspension Under Federal Law.
-------------------------------------------
(1) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Association's affairs by an order
issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act
("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association
under this Agreement shall terminate, as of the effective date of the order, but
vested rights of the parties shall not be affected.
(2) If the Association is in default (as defined in Section
3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the
date of default; however, this Paragraph shall not affect the vested rights of
the parties.
(3) All obligations under this Agreement shall terminate,
except to the extent that continuation of this Agreement is necessary for the
continued operation of the Association: (i) by the Director of the Office of
Thrift Supervision ("Director of the OTS"), or his or her designee, at the time
that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance
-4-
<PAGE>
to or on behalf of the Association under the authority contained in Section
13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at
the time that the Director of the OTS, or his or her designee approves a
supervisory merger to resolve problems related to operation of the Association
or when the Association is determined by the Director of the OTS to be in an
unsafe or unsound condition. Such action shall not affect any vested rights of
the parties.
(4) If a notice served under Section 8(e)(3) or (g)(1) of the
FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Association's affairs, the
Association's obligations under this Agreement shall be suspended as of the date
of such service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Association may in its discretion (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.
(f) Voluntary Termination by Employee. Subject to Section 11
---------------------------------
hereof, the Employee may voluntarily terminate employment with the Association
during the term of this Agreement, upon at least ninety (90) days' prior written
notice to the Board of Directors, in which case the Employee shall receive only
his compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 9(d)(2) hereof
or within the Protected Period, in which event the benefits and compensation
provided for in Sections 9(d) or 11, as applicable, shall apply).
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control.
-----------------
(a) Change in Control; Involuntary Termination.
------------------------------------------
(1) Notwithstanding any provision herein to the contrary, if
the Employee's employment under this Agreement is terminated by the Association,
without the Employee's prior written consent and for a reason other than Just
Cause during the Protected Period, the Employee shall, subject to paragraph (2)
of this Section 11(a), be paid an amount equal to the difference between (i) the
product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the
Code and regulations promulgated thereunder (the "Maximum Amount"), and (ii) the
sum of any other parachute payments (as defined under Section 280G(b)(2) of the
Code) that the Employee receives on account of the Change in Control.
The amount payable under this Section 11(a)(2) shall be paid
either (i) in one lump sum within ten days of the later of the date of the
Change in Control and the Employee's last day of employment, or (ii) if prior to
the date which is 90 days before the date on which a Change in Control occurs,
the Employee filed a duly executed irrevocable written election in the form
attached hereto as Exhibit "A", payment of such amount shall be made according
to the elected schedule. Deferred amounts shall bear interest from the date on
which they would otherwise be payable until the date paid at a rate equal to
120% of the applicable federal rate, compounded semiannually, as determined
under Code Section 1274(d) and the regulations thereunder.
(2) In the event that the Employee and the Association jointly
determine and agree that the total parachute payments receivable under clauses
(i) and (ii) of Section 11(a)(1) hereof exceed the Maximum Amount,
notwithstanding the payment procedure set forth in Section 11(a)(1) hereof, the
Employee shall determine which and how much, if any, of the parachute payments
to which he is entitled shall be eliminated or reduced so that the total
parachute payments to be received by the Employee do not exceed the Maximum
Amount. If the Employee does not make his determination within ten business
days after receiving a written request from the Association, the Association may
make such determination, and shall notify the Employee promptly thereof. Within
five business days
-5-
<PAGE>
of the earlier of the Association's receipt of the Employee's determination
pursuant to this paragraph or the Association's determination in lieu of a
determination by the Employee, the Association shall pay to, or distribute for
the benefit of, the Employee such amounts as are then due the Employee under
this Agreement.
(3) As a result of uncertainty in application of Section 280G
of the Code at the time of payment hereunder, it is possible that such payments
will have been made by the Association which should not have been made
("Overpayment") or that additional payments will not have been made by the
Association which should have been made ("Underpayment"), in each case,
consistent with the calculations required to be made under Section 11(a)(1)
hereof. In the event that the Employee, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Employee believes
has a high probability of success, determines that an Overpayment has been made,
any such Overpayment paid or distributed by the Association to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
-- ------
the Employee shall repay to the Association together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by the Employee to the Association if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Employee and the
Association determine, based upon controlling precedent or other substantial
authority, that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Association to or for the benefit of the Employee together
with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code.
The term "Change in Control" shall mean any one of the following events:
(1) the acquisition of ownership, holding or power to vote more than 25% of the
Association's or the Company's voting stock, (2) the acquisition of the ability
to control the election of a majority of the Association's or the Company's
directors, (3) the acquisition of a controlling influence over the management or
policies of the Association or the Company by any person or by persons acting as
a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934) (provided that in the case of (1), (2) and (3) hereof, ownership or
control of the Association by the Company itself shall not constitute a "Change
in Control") or (4) during any period of two consecutive years, individuals who
at the beginning of such period constitute the board of directors of the Company
or the Association (the "Continuing Directors") cease for any reason to
constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the board of directors of the
Company or the Association was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a Continuing Director.
For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Committee as
to whether a Change in Control has occurred shall be conclusive and binding.
(b) Change in Control; Voluntary Termination. Notwithstanding any
----------------------------------------
other provision of this Agreement to the contrary, but subject to Section
11(a)(2) hereof, the Employee shall be entitled to collect the severance
benefits set forth in Section 11(a)(1) hereof in the event that either (i) the
Employee voluntarily terminates his employment under this Agreement for any
reason within the 30-day period beginning on the date of a Change in Control, or
(ii) the Employee voluntarily terminates his employment within ninety (90) days
following the occurrence of any of the following events, which has not been
consented to in advance by the Employee in writing and occur within the
---
Protected Period: (i) the requirement that the Employee move his personal
residence, or perform his principal executive functions, more than thirty (30)
miles from his primary office as of the date of the change in control; (ii) a
material reduction in the Employee's base compensation as in effect on the date
of the change in control or as the same may be increased from time to time;
(iii) the failure by the Association to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed
-6-
<PAGE>
by him at the time of the change in control; (iv) the assignment to the Employee
of duties and responsibilities materially different from those normally
associated with his position as referenced at Section 1; (v) a failure to elect
or reelect the Employee to the Board of Directors of the Association, if the
Employee is serving on the Board on the date of the change in control; (vi) a
material diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Association; or (vii) a material reduction in the secretarial or other
administrative support of the Employee. Said sum shall be paid in lieu of the
payment of any benefits under Section 9 hereof.
(c) Compliance with 12 U.S.C. Section 1828(k). Any payments made
-----------------------------------------
to the Employee pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
(d) Trust.
-----
(1) Within five business days before or after a change in
control as defined in Section 11(a) of this Agreement, the Association shall (i)
deposit, or cause to be deposited, in a grantor trust substantially in the form
of the trust (the "Trust) that the Association's Board of Directors approved on
May 18, 1995, an amount equal to 2.99 times the Employee's "base amount" as
defined in Section 280G(b)(3) of the Code, and (ii) provide the trustee of the
Trust with a written direction to hold said amount and any investment return
thereon in a segregated account for the benefit of the Employee, and to follow
the procedures set forth in the next paragraph as to the payment of such amounts
from the Trust.
(2) During the twenty-seven (27) consecutive month period
following the date on which the Association makes the deposit referred to in the
preceding paragraph, the Employee may provide the trustee of the Trust with a
written notice requesting that the trustee pay to the Employee an amount
designated in the notice as being payable pursuant to Section 11(a) or (b).
Within three business days after receiving said notice, the trustee of the Trust
shall send a copy of the notice to the Association via overnight and registered
mail return receipt requested. On the tenth (10th) business day after mailing
said notice to the Association, the trustee of the Trust shall pay the Employee
the amount designated therein in immediately available funds, unless prior
thereto the Association provides the trustee with a written notice directing the
trustee to withhold such payment. In the latter event, the trustee shall submit
the dispute to non-appealable binding arbitration for a determination of the
amount payable to the Employee pursuant to Section 11(a) or (b) hereof, and the
costs of such arbitration (including any legal fees and expenses incurred by the
Employee) shall be paid by the Association. The trustee shall choose the
arbitrator to settle the dispute, and such arbitrator shall be bound by the
rules of the American Arbitration Association in making his determination. The
parties and the trustee shall be bound by the results of the arbitration and,
within 3 days of the determination by the arbitrator, the trustee shall pay from
the Trust the amounts required to be paid to the Employee and/or the
Association, and in no event shall the trustee be liable to either party for
making the payments as determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the Trust to
the Employee, or (ii) the date twelve (12) months after the date on which the
Association makes the deposit referred to in the first paragraph of this
subsection (d)(1), the trustee of the Trust shall pay to the Association the
entire balance remaining in the segregated account maintained for the benefit of
the Employee. The Employee shall thereafter have no further interest in the
Trust pursuant to this Agreement.
(e) In the event that any dispute arises between the Employee and the
Association as to the terms or interpretation of this Agreement, including this
Section 11, whether instituted by formal legal proceedings or otherwise,
including any action that the Employee takes to enforce the terms of this
Section 11 or to defend against any action taken by the Association, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee shall obtain a final judgement by a court of competent
jurisdiction in favor of the Employee. Such reimbursement shall be paid within
-7-
<PAGE>
ten (10) days of Employee's furnishing to the Association written evidence,
which may be in the form, among other things, of a cancelled check or receipt,
of any costs or expenses incurred by the Employee.
12. Federal Income Tax Withholding. The Association may withhold all
------------------------------
Federal and State income or other taxes from any benefit payable under this
Agreement as shall be required pursuant to any law or government regulation or
ruling.
13. Successors and Assigns.
----------------------
(a) Association. This Agreement shall not be assignable by the
-----------
Association, provided that this Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.
(b) Employee. Since the Association is contracting for the unique
--------
and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Association; provided, however, that nothing in this
paragraph shall preclude (i) the Employee from designating a beneficiary to
receive any benefit payable hereunder upon his death, or (ii) the executors,
administrators, or other legal representatives of the Employee or his estate
from assigning any rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive
----------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
14. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
15. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Alabama shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
16. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
________________________ By: ______________________________________
Secretary ______________________________________
Authorized Member of the Board of Directors
WITNESS:
_______________________ __________________________________________
Gates B. Little
-9-
<PAGE>
EXHIBIT "A"
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYMENT AGREEMENT
_______________________________
DEFERRED PAYMENT ELECTION FORM
_______________________________
AGREEMENT, made this ____ day of ________, 19__, by and between _________
(the "Employee") and First Federal Savings and Loan Association (the
"Association") with respect to payment of severance compensation to the Employee
pursuant to Section 12(b) of his employment agreement ("Agreement") with the
Association, dated _______, 199__.
NOW THEREFORE, it is mutually agreed as follows:
1. Form of Payment. The Employee, by the execution hereof, in accordance
---------------
with Section 12(b) of the Agreement, elects to have his change in control
severance benefits (plus earnings thereon) distributed in cash as follows:
[_] in one lump sum payment.
[_] in substantially equal annual payments over a period of _____
years (no more than 10).
2. In the event of the Employee's death, his benefits shall be distributed
- --
[_] in one lump sum payment.
[_] in accordance with the payment schedule selected in paragraph 1
hereof (with payments made as though the Employee survived to
collect all benefits, and as though the Employee terminated
service on the date of his death, if payments had not already
begun).
3. Designation of Beneficiary. In the event of the Employee's death
--------------------------
before he has collected all of the benefits payable pursuant to the Agreement
and this election, any such benefits payable shall be distributed to the
beneficiary or beneficiaries designated under subparagraphs a and b of this
paragraph 3 in the manner elected pursuant to paragraph 2 above:
a. Primary Beneficiary. The Employee hereby designates the person(s)
-------------------
named below to be his primary beneficiary and to receive the balance of any
unpaid benefits under the Agreement:
===========================================================================
Name of Mailing Address Percentage of
Primary Beneficiary Death Benefit
---------------------------------------------------------------------------
%
---------------------------------------------------------------------------
%
===========================================================================
-1-
<PAGE>
b. Contingent Beneficiary. In the event that the primary beneficiary or
----------------------
beneficiaries named above are not living at the time of the Employee's death,
the Employee hereby designates the following person(s) to be his contingent
beneficiary for purposes of the Agreement:
===========================================================================
Name of Mailing Address Percentage of
Contingent Beneficiary Death Benefit
---------------------------------------------------------------------------
%
---------------------------------------------------------------------------
%
===========================================================================
4. Effect of Election. The elections made in paragraph 1 hereof shall
------------------
become irrevocable 90 days prior to the change in control. The Employee may, by
submitting an effective superseding Deferred Payment Election Form at any time
and from time to time, prospectively change the beneficiary designation and the
manner of payment to a beneficiary. Such elections shall, however, become
irrevocable upon the Employee's death.
5. Commitments. The Association agrees to make payment of all amounts
-----------
due the Employee in accordance with the terms of the Agreement and the elections
made by the Employee herein.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the
day and year first above-written.
WITNESS: EMPLOYEE
______________________ ____________________________________
Gates B. Little
ATTEST: ASSOCIATION
______________________ FIRST FEDERAL SAVING AND LOAN ASSOCIATION
Secretary
By _________________________________
Its Chairman of the Board
-2-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into this 15th day of October 1997 (the
"Effective Date"), by and between The Southern Banc Company, Inc. (the
"Company") and Gates B. Little (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association as
Vice President and is experienced in all phases of the business of the
Association; and
WHEREAS, the parties desire by this writing to establish and to set forth
the employment relationship between the Company and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as Vice President of the Company.
----------
The Employee shall render such administrative and management services for the
Company as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Company. The Employee's other duties shall be such as the Board of
Directors of the Company ("Board") may from time to time reasonably direct,
including normal duties as an officer of the Company.
2. Consideration from Company: Joint and Several Liability. In lieu of
-------------------------------------------------------
paying the Employee a base salary during the term of this Agreement, the Company
hereby agrees that to the extent permitted by law, it shall be jointly and
severally liable with the Association for the payment of all amounts due under
the employment agreement of even date herewith between the Association and the
Employee. Nevertheless, the Board may in its discretion at any time during the
term of this Agreement agree to pay the Employee a base salary for the remaining
term of this Agreement. If the Board agrees to pay such salary, the Board shall
thereafter review, not less often than annually, the rate of the Employee's
salary, and in its sole discretion may decide to increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an equitable
---------------------
manner with all other senior management employees of the Company in
discretionary bonuses that the Board may award from time to time to the
Company's senior management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The
----------------------------------------------------
Employee shall participate in any plan that the Company maintains for the
benefit of its employees if the plan relates to (i) pension, profit-sharing, or
other retirement benefits, (ii) medical insurance or the reimbursement of
medical or dependent care expenses, or (iii) other group benefits, including
disability and life insurance plans. The Employee shall also be entitled at no
expense to himself, to family medical insurance throughout the term of this
Agreement and for a 3-year period beginning upon the termination of this
Agreement, regardless of his employment status. This 3-year coverage period may
be reconsidered and extended by the Board, in its sole discretion.
(b) Employee Benefits; Expenses. The Employee shall participate in any
---------------------------
fringe benefits which are or may become available to the Company's senior
management employees, including for example: any stock option or incentive
compensation plans, club memberships, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Company.
5. Term. The Company hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending thirty-six months thereafter (or such earlier date as
is determined in accordance with Section 9). Additionally, this Agreement shall
be automatically extended to a date thirty-six months after any "Change in
Control" (as defined in Section 11 hereof), and on each
-1-
<PAGE>
annual anniversary date from the Effective Date, the Board shall duly consider
and determine whether to extend the Employee's term of employment under this
Agreement, and the Employee's term of employment under this Agreement may be
extended to a date up to thirty-six months thereafter provided the Board
determines in a duly adopted resolution that the performance of the Employee has
met the Board's requirements and standards and that this Agreement shall be
extended.
6. Loyalty; Noncompetition.
-----------------------
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, Employee may serve on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which will not
present any conflict of interest with the Company or any of its subsidiaries or
affiliates, or unfavorably affect the performance of Employee's duties pursuant
to this Agreement, or will not violate any applicable statute or regulation.
"Full business time" is hereby defined as that amount of time usually devoted to
like companies by similarly situated executive officers. During the term of his
or her employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the
Company.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Company, or, solely as a passive or
minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
---------
in accordance with such reasonable standards as the Board may establish from
time to time. The Company will provide Employee with the working facilities and
staff customary for similar executives and necessary for him to perform his
duties.
8. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in accordance
with the policies that the Board periodically establishes for senior management
employees of the Company.
(b) The Employee shall not receive any additional compensation from the
Company on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation from one fiscal year to the next,
except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Company for such additional periods of time and for
such valid and legitimate reasons as the Board may in its discretion determine.
Further, the Board may grant to the Employee a leave or leaves of absence, with
or without pay, at such time or times and upon such terms and conditions as such
Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section 11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
-2-
<PAGE>
(b) Disability. The Company may terminate the Employee's employment
----------
after having established the Employee's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Employee's ability to substantially perform his duties under this Agreement and
which results in the Employee becoming eligible for long-term disability
benefits under the Company's long-term disability plan (or, if the Company has
no such plan in effect, which impairs the Employee's ability to substantially
perform his duties under this Agreement for a period of one hundred eighty (180)
consecutive days). The Employee shall be entitled to the compensation and
benefits provided for under this Agreement for (i) any period during the term of
this Agreement and prior to the establishment of the Employee's Disability
during which the Employee is unable to work due to the physical or mental
infirmity, or (ii) any period of Disability which is prior to the Executive's
termination of employment pursuant to this Section 9(b).
(c) Just Cause. The Board may, by written notice to the Employee,
----------
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. No act, or failure to act, on the
Employee's part shall be considered "willful" unless he has acted, or failed to
act, with an absence of good faith and without a reasonable belief that his
action or failure to act was in the best interest of the Association.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for Just Cause unless there shall have been delivered to the Employee
a copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board called
and held for the purpose (after reasonable notice to the Employee and an
opportunity for the Employee to be heard before the Board), finding that in the
good faith opinion of the Board, the Employee was guilty of conduct set forth
above in the second sentence of this subsection (c) and specifying the
particulars thereof in detail.
(d) Without Just Cause. The Board may, by written notice to the
------------------
Employee, immediately terminate his employment at any time for a reason other
than Just Cause, in which event the Employee shall be entitled to receive the
following compensation and benefits (unless such termination occurs within the
time period that begins on the date six months before a "Change in Control" (as
defined in Section 11 hereof) and ends on the later of the second annual
anniversary of the Change in Control or the expiration date of this Agreement
(the "Protected Period"), in which event the benefits and compensation provided
for in Section 11 shall apply): (i) any salary provided pursuant to Section 2
hereof, up to the date of termination of the term as provided in Section 5
hereof (including any renewal term) of this Agreement (the "Expiration Date"),
plus said salary for an additional 12-month period, and (ii) at the Employee's
election either (A) cash in an amount equal to the cost to the Employee of
obtaining all health, life, disability and other benefits which the Employee
would have been eligible to participate in through the Expiration Date based
upon the benefit levels substantially equal to those that the Company provided
for the Employee at the date of termination of employment or (B) continued
participation under such Company benefits plans through the Expiration Date, but
only to the extent the Employee continues to qualify for participation therein.
All amounts payable to the Employee shall be paid, at the option of the
Employee, either (I) in periodic payments through the Expiration Date, or (II)
in one lump sum within ten (10) days of such termination.
(e) Voluntary Termination by Employee. Subject to Section 11 hereof,
---------------------------------
the Employee may voluntarily terminate employment with the Company during the
term of this Agreement, upon at least 90 days' prior written notice to the Board
of Directors, in which case the Employee shall receive only his compensation,
vested rights and employee benefits up to the date of his termination.
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control.
-----------------
-3-
<PAGE>
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Company, without
the Employee's prior written consent and for a reason other than Just Cause
during the Protected Period, the Employee shall be paid an amount equal to the
difference between (i) the product of 2.99 times his "base amount" as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder, and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the Change in Control. Said sum shall be paid in the
manner set forth in the Employee's Employment Agreement with the Association.
The term "Change in Control" shall mean any one of the following events:
(1) the acquisition of ownership, holding or power to vote more than 25% of the
Association's or the Company's voting stock, (2) the acquisition of the ability
to control the election of a majority of the Association's or the Company's
directors, (3) the acquisition of a controlling influence over the management or
policies of the Association or the Company by any person or by persons acting as
a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934) (provided that in the case of (1), (2) and (3) hereof, ownership or
control of the Association by the Company itself shall not constitute a "Change
in Control") or (4) during any period of two consecutive years, individuals who
at the beginning of such period constitute the board of directors of the Company
or the Association (the "Continuing Directors") cease for any reason to
constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the board of directors of the
Company or the Association was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a Continuing Director.
For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Committee as
to whether a Change in Control has occurred shall be conclusive and binding.
(b) Notwithstanding any other provision of this Agreement to the
contrary, the Employee shall be entitled to collect the severance benefits set
forth in Section 11(a) hereof in the event that either (i) the Employee
voluntarily terminates his employment under this Agreement for any reason within
the 30-day period beginning on the date of a Change in Control, or (ii) the
Employee voluntarily terminates his employment within ninety (90) days following
the occurrence of any of the following events, which have not been consented to
in advance by the Employee in writing and occur during the Protected Period: (i)
---
the requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty-five (35) miles from his primary
office as of the date of the change in control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the change in control
or as the same may be increased from time to time; (iii) the failure by the
Company to continue to provide the Employee with compensation and benefits
provided for under this Agreement, as the same may be increased from time to
time, or with benefits substantially similar to those provided to him under any
of the employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Company which would directly or
indirectly reduce any of such benefits or deprive the Employee of any material
fringe benefit enjoyed by him at the time of the change in control; (iv) the
assignment to the Employee of duties and responsibilities materially different
from those normally associated with his position as referenced at Section 1; (v)
a failure to elect or reelect the Employee to the Board, if the Employee is
serving on the Board on the date of the change in control; or (vi) a material
diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Company. Said sum shall be paid in lieu of the payment of any benefits under
Section 9 hereof.
(c) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
(d) In the event that any dispute arises between the Employee and the
Company as to the terms or interpretation of this Agreement, including this
Section 11, whether instituted by formal legal proceedings or otherwise,
including any action that the Employee takes to enforce the terms of this
Section 11 or to defend against any action taken by the Company, the Employee
shall be reimbursed for all costs and expenses, including reasonable attorneys'
fees, arising from such dispute, proceedings or actions, provided that the
Employee shall obtain a final
-4-
<PAGE>
judgement by a court of competent jurisdiction in favor of the Employee. Such
reimbursement shall be paid within ten (10) days of Employee's furnishing to the
Company written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Company which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Company.
(b) Since the Company is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Company.
13. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
14. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Alabama shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: THE SOUTHERN BANC COMPANY, INC.
____________________ By: ___________________________
___________________________
Secretary Authorized Member of the
Board of Directors
WITNESS:
____________________
---------------------------
Gates B. Little
-5-
<PAGE>
================================================================================
1998
A N N U A L R E P O R T
================================================================================
THE SOUTHERN BANC COMPANY, INC.
<PAGE>
[LETTERHEAD OF THE SOUTHERN BANC COMPANY, INC.]
To Our Stockholders:
We are happy to present the third annual report of The Southern Banc
Company, Inc. We invite you to review the report and the Company's
performance during fiscal 1998.
The year was a good one. We significantly increased our loan
production and increased net income in a period of declining interest
rates. This was done while maintaining the Association's traditionally high
asset quality, preserving the integrity of your investment and the safety
of the depositors funds. We continue to carefully monitor our investments
in an environment where the combination of optimism and competition might
draw some into more treacherous areas.
We appreciate your investment in The Southern Banc Company, Inc., and
invite your continued support of First Federal, our core holding. We are
confident of our sound financial condition and look to the future with
great anticipation.
Sincerely,
/s/ James B. Little, Jr.
James B. Little, Jr.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
The Southern Banc Company, Inc. (the "Company") was incorporated 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 its conversion from mutual to stock form (the
"Conversion") effective October 5, 1995. The Company is classified as a unitary
savings institution holding company and is subject to regulation by the Office
of Thrift Supervision ("OTS"). At June 30, 1998, the Company had total assets
of $105.1 million, deposits of $85.9 million and stockholders' equity of $18.6
million, or 17.67% of total assets.
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.
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 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.
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").
1
<PAGE>
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the American Stock Exchange on
October 5, 1995, under the symbol "SRN." At June 30, 1998, there were 1,230,313
shares of the Common Stock outstanding and approximately 336 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 declared 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 1997
First Quarter $13.500 $12.000 $.0875 $.1750
Second Quarter $13.750 $12.250 $.0875 $ --
Third Quarter $14.625 $13.250 $.0875 $ --
Fourth Quarter $15.500 $14.250 $.0875 $ --
FISCAL 1998
First Quarter $16.375 $15.313 $.0875 $ --
Second Quarter $18.000 $16.125 $.0875 $ --
Third Quarter $19.125 $16.500 $.0875 $ --
Fourth Quarter $17.125 $15.500 $.0875 $ --
</TABLE>
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income........................... $ 7,418 $ 7,513 $ 7,702 $ 7,016 $ 5,814
Interest expense.......................... 4,519 4,534 4,679 4,261 3,330
-------- -------- -------- -------- -------
Net interest income....................... 2,899 2,979 3,023 2,755 2,484
Provision for loan losses................. -- -- -- 40 --
-------- -------- -------- -------- -------
Net interest income after provision
for loan losses.......................... 2,899 2,979 3,023 2,715 2,484
Noninterest income........................ 92 92 77 (638) 69
Noninterest expense....................... 2,171 2,849 2,231 1,843 1,499
-------- -------- -------- -------- -------
Income before provision for income taxes.. 820 222 869 234 1,054
Provision for income taxes................ 277 79 294 75 358
-------- -------- -------- -------- -------
Net income................................ $ 543 $ 143 $ 575 $ 159 $ 696
======== ======== ======== ======== =======
Earnings per share (1)
Basic.................................. $ 0.51 $ 0.13 $ 0.34 $ -- $ --
======== ======== ======== ======== =======
Diluted................................ $ 0.49 $ 0.12 $ 0.34 $ -- $ --
======== ======== ======== ======== =======
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.............................. $105,087 $105,434 $107,029 $101,773 $98,072
Loans receivable, net..................... 41,153 36,180 33,145 26,465 25,745
Securities:
Available for sale...................... 22,239 17,621 13,504 11,449 15,588
Held to maturity........................ 34,077 44,158 52,822 53,126 39,911
Deposits.................................. 85,926 86,759 85,847 91,407 88,672
Stockholders' equity...................... 18,570 17,931 20,135 9,757 9,109
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
KEY OPERATING DATA
Return on average assets.................. 0.52% 0.14% 0.53% 0.16% 0.83%
Return on average equity.................. 2.96 0.82 3.29 1.72 7.54
Average equity to average assets.......... 17.43 16.58 16.17 9.27 11.03
Dividend payout ratio..................... 68.63 424.07 127.53 -- --
Number of offices......................... 4 4 4 4 4
</TABLE>
____________
(1) Earnings per share and dividend payout ratio are presented from the
conversion date, October 5, 1995.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
consists 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, primarily an
interest-bearing account with the 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.
POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900. All of the significant data processing of the Association that could
be affected by this problem is provided by a third party service bureau. The
service bureau of the Association has advised the Association that it expects to
resolve this potential problem before the year 2000. However, if the service
bureau is unable to resolve this potential problem in time, the Association
would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a material adverse
impact on the financial condition and results of operations of the Association.
Risks to the Company if its computer systems are not year 2000
compliant include the inability to process customer deposits or checks drawn on
the Association, inaccurate interest accruals and maturity dates of loans and
time deposits, and the inability to update accounts for daily transactions.
Other risks to the Company exist if certain of its vendors', suppliers' and
customers' computer systems are not Year 2000 compliant. These risks include
the inability of the Association to communicate with its third party service
bureau if phone systems are not working, the interruption of business in the
event of power outages, the inability of loan customers to comply with repayment
terms if their businesses are interrupted, the inability to make payment for
checks drawn on the Association, receive payment for checks deposited by the
Association's customers, or invest excess funds if the Federal Home Loan Bank or
correspondent banks are not Year 2000 compliant. The Company's most important
mission critical system is the
4
<PAGE>
software and hardware responsible for maintaining and processing general ledger,
deposits, and loan accounts. The Company's Year 2000 Compliance and Contingency
Plans are structured in accordance with the OTS and the FFIEC guidelines.
Remediation and testing efforts relating to the Year 2000 are on schedule and
are expected to be completed by December 1998. The Company is in the process of
contacting its key vendors, suppliers and customers to determine their Year 2000
compliance. The Company estimates that the cost of testing and updating its
systems for Year 2000 compliance will not be material.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997
Total assets decreased approximately $346,000, or 0.33%, from $105.4
million at June 30, 1997 to $105.1 million at June 30, 1998. During the period
ended June 30, 1998, net loans increased approximately $5.0 million, or 13.74%,
securities available for sale increased approximately $4.6 million, or 26.20%,
and securities held to maturity decreased approximately $10.1 million or 22.83%.
The decrease in securities held to maturity was primarily attributable to
principal payments received during the period ended June 30, 1998.
Cash and cash equivalents increased approximately $614,000, or 10.58%,
from $5.8 million to $6.4 million at June 30, 1998. The increase in cash and
cash equivalents was primarily attributable to the proceeds from maturities and
principal payments on securities available for sale and held to maturity.
Accrued interest and dividends receivable decreased approximately
$24,000, or 3.20%, from $747,000 at June 30, 1997 to $723,000 at June 30, 1998.
Prepaid expenses and other assets decreased approximately $431,000 or 66.01%
from $654,000 at June 30, 1997 to $222,000 at June 30, 1998.
Total deposits decreased approximately $833,000, or 0.96%, from $86.8
million at June 30, 1997 to $85.9 million at June 30, 1998. Other liabilities
during the period ended June 30, 1998 decreased approximately $152,000, 20.45%,
from $744,000 at June 30, 1997 to $592,000 at June 30, 1998. This decrease was
primarily attributable to a decrease in accrued federal and state income taxes.
Total equity increased approximately $639,000, or 3.56%, from $17.9
million at June 30, 1997 to $18.6 million at June 30, 1998. This change was
primarily attributable to an increase in retained earnings, additional paid-in
capital, and amortization of unearned compensation, offset in part by the
payment of dividends on the Common Stock. Treasury stock at June 30, 1998 was
$3.0 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
1997
The Company reported net income for the fiscal years ended June 30,
1998 and 1997 of $543,000 and $143,000, respectively. The increase in net
income for the fiscal year ended June 30, 1998 was primarily attributable to a
reduction in deposit insurance expense, offset in part by an increase in income
tax expense. Net income during the fiscal year ended June 30, 1997 included the
recognition of the special assessment imposed upon all institutions with
deposits insured by the SAIF. This amounted to approximately $591,000, offset
in part by a $214,000 reduction in income tax expense.
Net Interest Income. Net interest income for the fiscal years ended
June 30, 1998 and 1997 was $2.9 million and $3.0 million, respectively. Total
interest income decreased approximately $96,000, or 1.27%, for the fiscal year
ended June 30, 1998. Total interest expense decreased approximately $15,000 or
0.34% for the fiscal year ended June 30, 1998 compared with the fiscal year
ended June 30, 1997.
Provision for Loan Losses. No provision for loan losses was deemed
necessary in either of the fiscal years ended June 30, 1998 or 1997. The
allowance for loan losses is based on management's evaluation of possible loan
losses inherent in the Association's loan portfolio. Management considers,
among other factors, past loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
5
<PAGE>
Non-interest Income. Non-interest income was approximately $92,000
for the fiscal years ended June 30, 1998 and June 30, 1997.
Non-Interest Expense. Non-interest expense decreased approximately
$678,000, or 23.81%, for the fiscal year ended June 30, 1998 from $2.8 million
to $2.2 million. This decrease was primarily attributable to the reduction in
deposit insurance expense related to the recognition of the special assessment
imposed by the SAIF in the amount of $591,000 during the fiscal year ended June
30, 1997. Salaries and employee benefits remained level at approximately $1.4
million for the fiscal years ended June 30, 1998 and 1997. Other operating
expenses decreased by approximately $25,000 or 4.12% for the fiscal year ended
June 30, 1998.
Provision for Income Taxes. During the fiscal year ended June 30,
1998, the provision for income tax expense increased approximately $198,000 or
248.96%. This increase was primarily attributable to a reduction in deposit
insurance expense related to the absence of any SAIF special assessment in the
amount of $591,000 during the fiscal year June 30, 1998.
Liquidity and Capital Resources. As a holding company, the Company
conducts its business through its subsidiary, the Association. The Association
is required to maintain minimum levels of liquid assets as defined by
regulations of the OTS. The requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4.0%.
The Association's average liquidity ratio well exceeded the required minimums at
and during the fiscal year ended June 30, 1998. The Association adjusts its
liquidity levels in order to meet funding needs of deposit outflows, repayment
of borrowings and loan commitments. The Association also adjusts liquidity as
appropriate to meet its asset and liability management objectives.
The Association's primary sources of funds are deposits, payment of
loans and mortgage-backed securities, maturities of investment securities and
other investments. While scheduled principal repayments on loans and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Association invests in short-term interest-
earning assets which provide liquidity to meet lending requirements.
The Association is required to maintain certain levels of regulatory
capital. At June 30, 1998, the Association exceeded all minimum regulatory
capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
1996
The Association reported net income for the fiscal years ended June
30, 1997 and 1996 of $143,000 and $575,000, respectively. The decrease in the
net income during the year was primarily attributable to the recognition of the
one-time special assessment of approximately $591,000 by the FDIC, offset in
part by a $214,000 reduction in income tax expense.
Net Interest Income. Net interest income decreased $43,000 or 1.42%
for the fiscal year ended June 30, 1997. This decrease was primarily
attributable to a decrease in total interest income of $188,000 which resulted
primarily from volume decreases in securities held to maturity. This decrease
was partially offset by a decrease in interest paid on deposits of $145,000.
Provision for Loan Losses. No provision for loan losses was deemed
necessary in either of the fiscal years ended June 30, 1997 or 1996. The
allowance for loan losses is based on management's evaluation of possible loan
losses inherent in the Association's loan portfolio. Management considers,
among other factors, past loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
6
<PAGE>
Non-interest Income. Non-interest income increased $14,000 or 18.59%.
This increase was primarily attributable to an increase in customer service
fees.
Non-interest Expense. Non-interest expense increased $618,000 or
27.70% for the fiscal year ended June 30, 1998 from $2.2 million to $2.8 million
at June 30, 1996 and 1997, respectively. This increase was primarily
attributable to the recognition of the one-time special assessment by the FDIC
in the amount of $591,000. Salaries and employee benefits increased $102,000 or
7.68% for the fiscal year ended June 30, 1997 compared with the fiscal year
ended June 30, 1996. This increase is primarily attributable to the expenses
related to the establishment of certain employee benefit plans, subsequent to
the conversion. Other operating expenses increased $29,000 or 5.06% for the
fiscal year ended June 30, 1997. This increase was primarily attributable to
operating expenses relating to the operation of the holding company and
professional fees associated with back-office operational improvements.
Provision for Income Taxes. During the fiscal year ended June 30,
1997, the provision for income taxes decreased $214,000 or 72.96%. This
decrease was primarily attributable to reduced income related to the recognition
of the one-time special assessment by the FDIC in the amount of $591,000. As a
result, income before income taxes decreased $647,000 or 74.44%.
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, 1998, based on the most recent information
provided by the OTS, it was estimated that the Association's NPV would decrease
9%, 19%, 30% and 41% and increase 6%, 11%, 16% and 21% in the event of 1%, 2%,
3% and 4% increases and decreases in market interest rates, respectively. These
calculations indicate that the Association's net portfolio value
7
<PAGE>
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
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 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.
8
<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, 1998 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,
---------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------- ----------------------------- --------------------------
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............. $ 38,751 $3,081 7.95% $ 34,149 $ 2,734 8.01% $ 30,183 $2,467 8.17%
Securities................... 58,426 4,046 6.92 62,113 4,491 8.04 68,460 4,814 7.03
Other interest-earning assets 6,252 291 4.65 7,518 288 3.82 6,436 420 6.53
-------- ------ -------- ------- -------- ------
Total interest-earning
assets.................... 103,429 7,418 7.17 103,780 7,513 7.24 105,079 7,701 7.33
Non-interest-earning assets.... 1,844 1,751 3,083
-------- -------- --------
Total assets............... $105,273 $105,531 $108,162
======== ======== ========
Interest-bearing liabilities:
Deposits..................... $ 85,262 4,519 5.30 $ 86,743 4,534 5.23 $ 88,785 4,679 5.27
-------- ------ -------- ------- -------- ------
Total interest-bearing
liabilities.............. 85,262 4,519 5.30 86,743 4,534 5.23 88,785 4,679 5.27
------ ------- ------
Non-interest-bearing
liabilities................... 1,667 1,286 1,886
-------- -------- -------
Total liabilities.......... 88,029 90,671
Equity......................... 18,344 17,502 17,491
-------- -------- -------
Total liabilities and
equity.................... $105,273 $105,531 $108,162
======== ======== ========
Net interest income............ $ 2,899 $ 2,979 $3,022
======= ======= ======
Interest rate spread........... 1.87% 2.01% 2.06%
====== ====== ======
Net interest margin............ 2.80% 2.87% 2.88%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.................. 121.31% 119.64% 118.35%
====== ====== ======
</TABLE>
9
<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,
---------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------- ------------------------------------
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................................. $ (19) $ 366 $ 347 $ (49) $ 316 $ 267
Securities............................ (185) (260) (445) 141 (464) (323)
Other interest-earning assets......... 14 (11) 3 (223) 91 (132)
----- ----- ----- ----- ----- -----
Total interest-earning assets....... (190) 95 (95) (131) (57) (188)
----- ----- ----- ----- ----- -----
Interest expense:
Deposits.............................. 68 (83) (15) (38) (107) (145)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities.. 68 (83) (15) (38) (107) (145)
----- ----- ----- ----- ----- -----
Change in net interest income........... $(258) $ 178 $ (80) $ (93) $ 50 $ (43)
===== ===== ===== ===== ===== =====
</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, 1998 the Association had
approximately $6.4 million in cash on hand and interest-bearing deposits in
other banks which represented 6.11% of total assets. At June 30, 1998, the
Association's level of liquid assets, as measured for regulatory compliance
purposes was 26.02%, or $19.1 million, in excess of the minimum liquidity
requirement of 4%.
At June 30, 1998 the Association had $18.6 million of total equity or
17.67% of total assets. The Association continues to exceed its regulatory
capital requirement ratios at June 30, 1998. Tangible capital and core capital
were $15.8 million, which represented 14.9% of adjusted total assets and risk-
based capital was $15.8 million which represented 56.9% of total risk-weighted
assets at June 30, 1998. Such amounts exceeded the minimum required ratios of
1.5%, 3.0% and 8.0%, respectively by 13.4%, 11.9% and 48.9%, respectively. At
June 30, 1998, the Association continued to meet the definition of a "well-
capitalized" institution the highest of the five categories under the prompt
corrective action standards adopted by the OTS.
10
<PAGE>
[Letterhead of 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) AND SUBSIDIARY as of
June 30, 1998 and 1997 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. 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, 1998 and 1997 and the results of
their operations and cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Birmingham, Alabama
July 31, 1998
11
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
ASSETS 1998 1997
- -------------------------------------------------- -------------- --------------
<S> <C> <C>
CASH AND EQUIVALENTS:
Cash on hand and in other banks $ 1,171,354 $ 1,074,824
Interest-bearing deposits in other banks 5,250,164 4,732,376
------------- -------------
6,421,518 5,807,200
------------- -------------
SECURITIES AVAILABLE FOR SALE 22,238,866 17,621,290
SECURITIES HELD TO MATURITY (fair values
of $34,811,021 and $44,249,863, respectively) 34,077,096 44,157,426
LOANS RECEIVABLE, net 41,153,338 36,180,396
PREMISES AND EQUIPMENT, net 251,373 266,737
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE 723,024 746,900
PREPAID EXPENSES AND OTHER ASSETS 222,142 653,577
------------- -------------
Total assets $ 105,087,357 $ 105,433,526
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------- -------------
<S> <C> <C>
DEPOSITS $ 85,925,834 $ 86,758,713
OTHER LIABILITIES:
Accrued interest payable 59,106 45,029
Advance payments by borrowers for taxes
and insurance 60,797 74,029
Taxes payable 213,504 506,814
Other 258,182 117,755
------------- ------------
Total liabilities 86,517,423 87,502,340
------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 15)
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 14,548
Additional paid-in capital 13,676,507 13,642,623
Retained earnings 9,433,341 9,253,350
Unearned compensation (1,601,861) (1,917,094)
Treasury stock at cost, 224,437 shares in 1998 and 1997 (3,000,128) (3,000,128)
Unrealized gain (loss) on securities available for sale, net 47,527 (62,113)
------------- ------------
Total stockholders' equity 18,569,934 17,931,186
------------- ------------
Total liabilities and stockholders' equity $105,087,357 $105,433,526
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
12
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,080,942 $2,734,183 $2,466,817
Interest and dividends on securities available for sale 1,253,456 1,005,783 790,809
Interest and dividends on securities held to maturity 2,792,400 3,485,439 4,023,246
Other interest income 290,785 287,880 420,827
---------- ---------- ----------
Total interest income 7,417,583 7,513,285 7,701,699
INTEREST EXPENSE ON DEPOSITS 4,518,576 4,533,837 4,679,246
---------- ---------- ----------
Net interest income 2,899,007 2,979,448 3,022,453
PROVISION FOR LOAN LOSSES 0 0 0
---------- ---------- ----------
Net interest income after provision for
loan losses 2,899,007 2,979,448 3,022,453
---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees 88,523 90,643 77,420
Miscellaneous income, net 3,277 1,171 0
---------- ---------- ----------
Total noninterest income (expense) 91,800 91,814 77,420
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,400,837 1,429,250 1,327,274
Office building and equipment expense 91,264 101,256 120,975
Deposit insurance expense 55,657 712,962 213,229
Loss on sale of REO 0 7,288 0
Other expense 623,121 598,484 569,664
---------- ---------- ----------
Total noninterest expense 2,170,879 2,849,240 2,231,142
---------- ---------- ----------
Income before provision for income taxes 819,928 222,022 868,731
PROVISION FOR INCOME TAXES 277,043 79,391 293,658
---------- ---------- ----------
Net income $ 542,885 $ 142,631 $ 575,073
========== ========== ==========
EARNINGS PER SHARE
Basic $.51 $.13 $.34
========== ========== ==========
Diluted $.49 $.12 $.34
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED UNEARNED
STOCK CAPITAL EARNINGS COMPENSATION
------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
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 plan trusts 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 ($.4375 per share) 0 0 (579,203) 0
------ ----------- ---------- -----------
BALANCE, JUNE 30, 1996 14,548 13,572,806 9,701,971 (2,117,393)
Net income 0 0 142,631 0
Purchase of treasury stock, at cost 0 0 0 0
Amortization of unearned compensation 0 34,045 0 275,135
Dividends declared ($.525 per share) 0 0 (591,252) 0
Valuation adjustment on unallocated stock plan shares 0 35,772 0 (35,772)
Contributions to stock plan trusts 0 0 0 (45,434)
Exercise of stock options (545 shares) 0 0 0 6,370
Change in unrealized gain (loss) on securities available for sale, net 0 0 0 0
------- ----------- ---------- -----------
BALANCE, JUNE 30, 1997 14,548 13,642,623 9,253,350 (1,917,094)
Net income 0 0 542,885 0
Amortization of unearned compensation 0 32,470 0 237,758
Dividends declared ($.35 per share) 0 0 (362,894) 0
Valuation adjustment on unallocated stock plan shares 0 1,414 0 (1,414)
Exercise of stock options (8,599 shares) 0 0 0 100,489
Contributions to stock plan trusts 0 0 0 (21,600)
Change in unrealized gain (loss) on securities available for sale, net 0 0 0 0
------- ----------- ---------- -----------
BALANCE, JUNE 30, 1998 $14,548 $13,676,507 $9,433,341 $(1,601,861)
======= =========== ========== ===========
<CAPTION>
TREASURY UNREALIZED
STOCK GAIN (LOSS) TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
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 plan trusts 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 ($.4375 per share) 0 0 (579,203)
----------- ---------- -----------
BALANCE, JUNE 30, 1996 (957,590) (79,587) 20,134,755
Net income 0 0 142,631
Purchase of treasury stock, at cost (2,042,538) 0 (2,042,538)
Amortization of unearned compensation 0 0 309,180
Dividends declared ($.525 per share) 0 0 (591,252)
Valuation adjustment on unallocated stock plan shares 0 0 0
Contributions to stock plan trusts 0 0 (45,434)
Exercise of stock options (545 shares) 0 0 6,370
Change in unrealized gain (loss) on securities available for sale, net 0 17,474 17,474
----------- ---------- -----------
BALANCE, JUNE 30, 1997 (3,000,128) (62,113) 17,931,186
Net Income 0 0 542,885
Amortization of unearned compensation 0 0 270,228
Dividends declared ($.35 per share) 0 0 (362,894)
Valuation adjustment on unallocated stock plan shares 0 0 0
Exercise of stock options (8,599 shares) 0 0 100,489
Contributions to stock plan trusts 0 0 (21,600)
Change in unrealized gain (loss) on securities available for sale, net 0 109,640 109,640
----------- ---------- -----------
BALANCE, JUNE 30, 1998 $(3,000,128) $ 47,527 $18,569,934
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 542,885 $ 142,631 $ 575,073
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 46,176 48,391 62,568
Amortization (accretion), net (15,581) 56,293 7,884
Amortization of intangible asset 38,847 46,356 49,706
Amortization of unearned compensation 270,228 309,180 195,181
Loss on sale of real estate owned, net 0 7,288 0
Provision for loan losses 0 0 0
Deferred income tax provision (benefit) 31,167 (105,788) 44,747
Change in assets and liabilities:
(Increase) decrease in accrued interest and
dividends receivable 23,876 109,481 (108,950)
(Increase) decrease in prepaid expenses and other assets 392,588 1,188,958 221,929
Increase (decrease) in accrued interest payable 14,077 (14,136) (6,751)
Increase (decrease) in income taxes payable (346,299) 461,363 (123,645)
Increase (decrease) in other liabilities 140,427 (633,797) 645,507
------------ ----------- ------------
Net cash provided by operating activities 1,138,391 1,616,220 1,563,249
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (12,304,906) (6,728,677) (7,714,153)
Proceeds from sale of real estate owned 0 13,808 0
Proceeds from maturities and principal payments on securities
available for sale 7,808,031 2,641,104 3,962,049
Purchases of securities held to maturity (5,004,063) (728,320) (13,600,221)
Proceeds from maturities and principal payments on securities
held to maturity 15,110,735 9,368,961 13,891,264
Purchase of loans (685,400) (291,151) (4,178,768)
Net increase in loans (4,287,542) (2,796,725) (2,501,051)
Capital expenditures (30,812) (36,040) (8,292)
------------ ----------- ------------
Net cash provided by (used in) investing activities 606,043 1,442,960 (10,149,172)
------------ ----------- ------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock $ 0 $ 0 $12,504,570
Contributions to stock plan trusts (21,600) (45,434) (6,335)
Repurchase of common stock for stock plans 0 0 (1,223,455)
Purchase of treasury stock 0 (2,042,538) (957,590)
Dividends paid (362,894) (591,252) (579,203)
Increase (decrease) in deposits, net (832,879) 912,113 (5,560,200)
Increase (decrease) in advance payments by borrowers
for taxes and insurance (13,232) (25,787) (48,462)
Proceeds from exercise of stock options 100,489 6,370 0
----------- ----------- -----------
Net cash provided by (used in) financing activities (1,130,116) (1,786,528) 4,129,325
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 614,318 1,272,652 (4,456,598)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,807,200 4,534,548 8,991,146
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,421,518 $ 5,807,200 $ 4,534,548
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes, net of refund received $ 224,222 $ 104,679 $ 427,767
=========== =========== ===========
Interest $ 4,504,499 $ 4,547,973 $ 4,685,997
=========== =========== ===========
Noncash transactions:
Transfer of matured securities to prepaid expenses
and other assets $ 0 $ 0 $ 1,500,000
Real estate owned, obtained through foreclosure 0 21,096 0
Change in unrealized net gain (loss) on securities
available for sale, net of deferred taxes (benefit) 109,640 17,474 (130,903)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
16
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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 deposit
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.
17
<PAGE>
Securities designated as held to maturity are carried at amortized cost, as
the Company has both the ability and management has the positive intent to
hold these securities to maturity. The Company had no securities classified
as trading at June 30, 1998 and 1997.
Amortization of premiums and accretion of discounts on mortgage-backed
securities and other investments are computed using the level yield method
and the straight-line method, respectively. The adjusted cost of the
specific security sold is used to compute gain or loss on the sale of
securities.
LOANS AND ALLOWANCE FOR LOAN LOSSES
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. To serve as a basis for making this provision each quarter,
the Association maintains an extensive credit risk monitoring process that
considers several factors including: current economic conditions affecting
the Association's customers, the payment performance of individual large
loans and pools of homogeneous small loans, distribution of loans by risk
class, portfolio seasoning, changes in collateral values, and detailed
reviews of specific large loan relationships. 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 provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans on the statement of financial
condition. As the amount of a loan loss is confirmed by gathering additional
information, taking collateral in full or partial settlement of the loan,
bankruptcy of the borrower, etc., the loan is written down, reducing the
allowance for loan losses. If, subsequent to a writedown, the Association is
able to collect additional amounts from the customer or obtain control of
collateral worth more than earlier estimated, a recovery is recorded,
increasing the allowance for loan losses.
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 loans, which are exempt from SFAS No. 114 when evaluated
collectively for
18
<PAGE>
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, 1998.
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>
<CAPTION>
<S> <C> <C>
Building and improvements 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. The amounts expensed in 1998 and 1997 were
$0 and $808, respectively. There were no amounts capitalized in either year.
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, 1998 and 1997.
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, sale or 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 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.
19
<PAGE>
CORE DEPOSIT PREMIUM
The premium paid to acquire the deposits of another financial institution 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 ($137,235 and $176,082 at June 30,
1998 and 1997, 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 $38,847, $46,356, and $49,706
in fiscal years 1998, 1997, and 1996, respectively).
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.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting of
Comprehensive Income. This Statement established standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of financial statements. This Statement
also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income, be reported in
financial statements and be displayed with the same prominence as other
financial statements. This Statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is permitted. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required.
In June 1997, FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. This Statement also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. This Statement requires the reporting of financial and
descriptive information about an enterprise's reportable operating segments.
This Statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application comparative
information for earlier years is to be restated.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About
Pensions and Other Postretirement Benefits. This Statement revises
employers' disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful and suggests combined formats for
presentation of pension and other postretirement benefit disclosures. This
Statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information
is not readily available, in which case the notes to the financial statements
should include all available information and a description of the information
not available.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as
20
<PAGE>
derivatives), and for hedging activities. This Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew
and documented pursuant to the provisions of this Statement. Earlier
application of all of the provisions of this Statement is encouraged, but it
is permitted only as of the beginning of any fiscal quarter that begins after
issuance of this Statement. This Statement should not be applied
retroactively to financial statements of prior periods.
Management believes there will be no material effect on the consolidated
financial statements from the adoption of these pronouncements.
PRIOR YEAR CLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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.
21
<PAGE>
The Company's ability to pay dividends will be largely dependent upon
dividends to the Company from the Association. Pursuant to the Office of
Thrift Supervision ("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. (See Note 4).
3. INTEREST-RATE SENSITIVITY
Fixed-rate mortgage loans and mortgage-backed securities comprise a
substantial portion of the Association's interest-earning assets
(approximately 70% at June 30, 1998), while its principal source of funds
consists of savings deposits with maturities of three years or less (79%).
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.
At June 30, 1998, based on information provided by the 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 9%, 19%, 30%, and 41%, and increase 6%, 11%, 16%, and
21% 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.
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. As a result of the Association's exposure to interest rate
risk, the OTS will continue to monitor the Association's interest rate risk
management strategy and activities.
22
<PAGE>
4. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines that involve
quantitative measures of the Association's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Association's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table which follows) of Total and Tier 1 capital (as defined in the
regulations) to Risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to Average assets (as defined). Management believes, as of June 30,
1998 and 1997, that the Association meets all capital adequacy requirements
to which it is subject.
As of June 30, 1998 and 1997, the most recent notification from the
regulatory authorities categorized the Association as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Association must maintain minimum Total risk-based,
Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table which
follows.
Actual capital amounts and ratios are presented in the table below for the
Association:
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
----------------- -------------------------
AMOUNT RATIO AMOUNT RATIO
------- ------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
JUNE 30, 1998:
Total capital (to risk weighted assets) $15,845 56.9% $2,228 8.0%
Tier 1 (core) capital (to risk weighted assets) 15,769 56.6 N/A N/A
Tier 1 (core) capital (to adjusted total assets) 15,769 14.9 3,165 3.0
Tangible capital (to adjusted total assets) 15,769 14.9 1,583 1.5
JUNE 30, 1997:
Total capital (to risk weighted assets) $14,857 60.7% $1,956 8.0%
Tier 1 (core) capital (to risk weighted assets) 14,781 60.4 N/A N/A
Tier 1 (core) capital (to adjusted total assets) 14,781 14.0 3,165 3.0
Tangible capital (to adjusted total assets) 14,781 14.0 1,580 1.5
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO
-------- -------
(Dollars in thousands)
<S> <C> <C>
JUNE 30, 1998:
Total capital (to risk weighted assets) $2,785 10.0
Tier 1 (core) capital (to risk weighted assets) 1,671 6.0
Tier 1 (core) capital (to adjusted total assets) 5,276 5.0
Tangible capital (to adjusted total assets) N/A N/A
JUNE 30, 1997:
Total capital (to risk weighted assets) $2,446 10.0
Tier 1 (core) capital (to risk weighted assets) 1,467 6.0
Tier 1 (core) capital (to adjusted total assets) 5,275 5.0
Tangible capital (to adjusted total assets) N/A N/A
</TABLE>
23
<PAGE>
The following table is a reconcilitation of the Association's stockholder's
equity to Tangible, Tier 1, and Risk-based capital as required by the OTS:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(In thousands)
<S> <C> <C>
Stockholder's equity $ 15,953 $ 14,895
Intangible assets (137) (176)
Unrealized (gain) loss on securities available
for sale (47) 62
---------- ---------
Tangible and Tier 1 capital 15,769 14,781
Allowance for loan losses 76 76
---------- ---------
Total risk based capital $ 15,845 $ 14,857
========== =========
Total assets $105,105 $105,451
Adjusted total assets 105,511 105,337
Total risk weighted assets 27,845 24,456
</TABLE>
Pursuant to OTS regulations, an institution that exceeds all fully phased-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's principal source of funds for dividend payments is dividends
from the Association. Certain restrictions exist regarding the ability of
the Association to pay dividends to the Company. At July 1, 1998, dividend
payments by the Association were subject to regulatory approval.
5. EARNINGS PER SHARE
In 1998, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. Basic earnings per share were computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the years ended June 30, 1998, 1997, and 1996. Diluted earnings per
share for the years ended June 30, 1998, 1997, and 1996, were computed by
dividing net income by the weighted average number of shares of common stock
outstanding and the dilutive effects of the shares awarded under the
Management Recognition Plan ("MRP") and the Stock Option Plan, based on the
treasury stock method using an average fair market value of the stock during
the respective periods. As a result, the Company's reported earnings per
share for 1997 and 1996 were restated. Earnings per share for the period
from October 5, 1995, the date of Conversion, to June 30, 1996, have 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. The weighted average number of shares used for the
period from October 5, 1995 through June 30, 1996, was 1,340,743.
The following table represents the earnings per share calculations for the
years ended June 30, 1998, 1997, and 1996 accompanied by the effect of this
accounting change on previously reported earnings per share:
24
<PAGE>
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- ---------- ------------
<S> <C> <C> <C>
1998:
Net income $542,885
Basic earnings per share:
Income available to common shareholders 542,885 1,061,133 $.51
============
Diluted securities:
Management recognition plan shares 0 24,449
Incentive stock option plan shares 0 33,031
--------- ----------
Dilued earnings per share:
Income available to common shareholders plus assumed conversions
$542,885 1,118,613 $.49
========= ========== ============
<CAPTION>
Per Share
Income Shares Amount
--------- ---------- ------------
<S> <C> <C> <C>
1997:
Net income $142,631
Basic earnings per share:
Income available to common shareholders 142,631 1,095,959 $.13
============
Diluted securities:
Management recognition plan shares 0 32,590
Incentive stock option plan shares 0 23,974
--------- ----------
Diluted earnings per share:
Income available to common shareholders plus assumed conversions
$142,631 1,152,523 $.12
========= ========== ============
<CAPTION>
Per Share
Income Shares Amount
--------- ---------- ------------
<S> <C> <C> <C>
1996:
Net income from October 5, 1995 (date of conversion) $455,853
Basic earnings per share:
Income available to common shareholders 455,853 1,326,039 $.34
============
Diluted securities:
Management recognition plan shares 0 14,236
Incentive stock option plan shares 0 469
--------- ----------
Diluted earnings per share:
Income available to common shareholders plus assumed conversions
$455,853 1,340,744 $.34
========= ========== ============
</TABLE>
25
<PAGE>
Changes in previously reported earnings per share were as follows for the
years ended June 30, 1997 and 1996:
1997 1996
----- -----
Earnings per share, as reported $ .12 $ .34
Earnings per share, as amended:
Basic .13 .34
Diluted .12 .34
6. EMPLOYEE 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 was approximately $166,000 and $170,000 for 1998
and 1997, respectively, a significant portion of which was to provide for
individuals' service prior to Conversion. Unearned compensation related to
the ESOP was approximately $757,000 and $891,000 at June 30, 1998 and 1997,
respectively, 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 was approximately $104,000 and
$142,000 for 1998 and 1997, respectively. Unearned compensation related to
the MRP was approximately $492,000 and $587,000 for 1998 and 1997,
respectively, and is shown as a reduction to stockholders' equity in the
accompanying consolidated statements of financial condition.
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 Company makes a discretionary
contribution to the SEP each year. The cost to the Company under the SEP was
$94,996, $111,190, and $88,095 for fiscal years 1998, 1997, and 1996,
respectively.
26
<PAGE>
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.
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 approximately $60,000 in compensation expense for the
years ended June 30, 1998 and 1997 related to the SERA. The projected benefit
obligation, accumulated benefit obligation, and vested benefit obligation
were all $189,040 and $157,810 at June 30, 1998 and 1997, respectively. The
components of the net periodic cost as of 1998 and 1997, respectively, are
service costs of $4,444 and $5,103, interest cost of $11,047 and $12,351, and
net amortization and deferred cost of $28,482 and $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 12 months after any change in
control of the Company, he shall be paid approximately 3 times his salary.
27
<PAGE>
7. STOCK-BASED COMPENSATION 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
nonincentive stock options ("non-ISO's") to nonemployee directors. The
Company utilizes the intrinsic value method of accounting for stock option
grants. As the option price is considered to be equal to the fair value of
the stock at the date of grant, no compensation cost is recognized.
The Company has adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation. This Statement establishes financial
accounting and reporting standards for stock-based employee compensation
plans. Those plans include all arrangements by which employees receive shares
of stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock. Examples are stock purchase plans, stock options, restricted stock and
stock appreciation rights.
Under the Option Plan, the Company may grant options up to 145,475 shares and
has granted options outstanding of 123,577 shares through June 30, 1998.
Under the Option Plan, the options vest 20% per year and become exercisable
upon the participant's completion of each of five years of service.
Had compensation costs for these plans been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income:
As reported $542,885 $142,631
Pro forma 494,676 66,438
Earnings per share:
As reported:
Basic $ .51 $ .13
Diluted .49 .12
Pro forma:
Basic .47 .06
Diluted .44 .06
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 5, 1995, the resulting pro forma compensation costs
may not be representative of that to be expected in future years.
28
<PAGE>
Unearned compensation related to the Option Plan was approximately $352,000
and $446,000 at June 30, 1998 and 1997, respectively, and is shown as a
reduction of stockholders' equity in the accompanying statements of financial
condition. A summary of the status of the Company's stock option plan at June
30, 1998 and 1997 and the changes during the years then ended is as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------
WEIGHTED
AVERAGE OPTION
EXERCISE PRICE
SHARES PRICE PER SHARE
------- -------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year 120,376 $11.69 $11.69
Forfeitures 0 0.00 0.00
Exercised (8,599) 11.69 11.69
------- -------- ---------
Outstanding at end of year 111,777 $11.69 $11.69
======= ======== =========
Exercisable at end of year 43,402 $11.69
======= ========
Weighted average fair value of the
options granted $ 1.70
=======
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------
Weighted
Average Option
Exercise Price
Shares Price Per Share
------- ---------- -----------
<S> <C> <C> <C>
Outstanding at beginning of year 126,376 $11.69 $11.69
Granted 0 0.00 0.00
Forfeitures (5,455) 11.69 11.69
Exercised (545) 11.69 11.69
-------- ---------- -----------
Outstanding at end of year 120,376 $11.69 $11.69
======== ========== ===========
Exercisable at end of year 23,639 $11.69
======== ==========
Weighted average fair value of the
options granted $ 1.70
========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: risk-free interest rate of 6.22%;
expected life of the options is 20% per year over the next five years and
expected volatility and dividend yields of 17% and 2.99%, respectively.
<PAGE>
8. 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, 1998
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
--------------- ---------- ----------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 7,879,031 $ 63,751 $ (5,094) $ 7,937,688
U.S. Government agency securities
13,487,978 46,077 (28,077) 13,505,978
Federal Home Loan Bank stock 795,200 0 0 795,200
--------------- ---------- ----------- ---------------
$22,162,209 $109,828 $ (33,171) $ 22,238,866
=============== ========== =========== ===============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
--------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 6,620,331 $ 75,480 $ (34,749) $ 6,661,062
U.S. Government agency securities
10,260,565 11,231 (106,768) 10,165,028
Federal Home Loan Bank stock 795,200 0 0 795,200
------------------ -------------- -------------- -------------------
$ 17,676,096 $ 86,711 $ (141,517) $17,621,290
================== ============== ============== ===================
</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, 1998
-----------------------------------
AMORTIZED
COST FAIR VALUE
--------------- ----------------
<S> <C> <C>
Due in one year or less $ 6,071,900 $ 6,065,382
Due after one year through five years 7,071,544 7,128,571
Due after five years through ten years 5,847,255 5,862,491
Due after ten years 2,376,310 2,387,222
---------------- -----------------
21,367,009 21,443,666
Federal Home Loan Bank stock 795,200 795,200
---------------- -----------------
$ 22,162,209 $ 22,238,866
================ =================
</TABLE>
There were no sales of securities during fiscal years 1998 and 1997.
30
<PAGE>
A security designated as available for sale with a carrying value (fair
value) of $1,595,500 has been pledged as collateral for certain large
deposits (public funds) with an aggregate balance of $1,425,000 at June 30,
1998.
9. 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, 1998
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
U.S. Government agency securities
$34,077,096 780,511 $(46,586) $34,811,021
------------- ------------ -------------- ----------------
$34,077,096 $780,511 $(46,586) $34,811,021
============= ============ ============== ================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,000,069 $ 6,181 $ 0 $ 1,006,250
U.S. Government agency securities
43,157,357 576,248 (489,992) 43,243,613
------------- ------------- -------------- --------------
$44,157,426 $582,429 $(489,992) $44,249,863
============== ============= ============== ==============
</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, 1998
-------------------------------
AMORTIZED
COST FAIR VALUE
------------- --------------
<S> <C> <C>
Due in one year or less $ 27,952 $ 29,435
Due after one year through five years 4,764,079 4,861,434
Due after five years through ten years 10,412,184 10,596,308
Due after ten years 18,872,881 19,323,844
------------- --------------
$34,077,096 $34,811,021
============= ==============
</TABLE>
31
<PAGE>
10. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
Mortgage loans:
Secured by one to four family residential properties $36,528,215 $32,678,216
Secured by nonresidential properties 216,000 278,000
Consumer loans 3,748,379 2,617,095
Savings account loans 656,743 608,663
----------- -----------
41,149,337 36,181,974
Less:
Unearned interest income 244,711 132,940
Discount (rebate) on loans 530 (57)
Deferred loan fees (costs), net (324,915) (206,978)
Allowance for loan losses 75,673 75,673
----------- -----------
Loans receivable, net $41,153,338 $36,180,396
=========== ===========
</TABLE>
Loans secured by one to four family residential properties include second
mortgage loans on properties for which the Association 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, 1998 and 1997 were approximately $974,000 and $1,065,000, respectively.
As a savings and loan institution, the Association 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 Association 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 and the Association. 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,
1998 and 1997, $395,768 and $442,792, respectively, of these loans were
outstanding. During fiscal 1998, $441,859 of new loans were made and
repayments totaled $488,883.
32
<PAGE>
An analysis of the Company's allowance for loan losses is as follows:
<TABLE>
<CAPTION>
For the Years Ended
June 30,
-----------------------------------------
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Balance, beginning of year $75,673 $78,070 $80,000
Provision for loan losses 0 0 0
Charge-offs, net of recovery 0 (2,397) (1,930)
--------- -------- ---------
Balance, end of year $75,673 $75,673 $78,070
========= ======== =========
</TABLE>
At June 30, 1998, nonaccrual loans totaled approximately $11,000. The
Association did not have any loans on nonaccrual status at June 30, 1997.
Interest income foregone on nonaccrual loans was not significant for fiscal
years 1998 and 1997.
11. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Land $ 170,085 $ 170,085
Building and improvements 250,623 244,773
Leasehold improvements 57,050 50,652
Furniture, fixtures, and equipment 538,482 519,918
---------- ---------
1,016,240 985,428
Less accumulated depreciation (764,867) (718,691)
---------- ---------
$ 251,373 $ 266,737
========== =========
</TABLE>
Depreciation expense charged to office building and equipment expense in
1998, 1997, and 1996, totaled approximately $46,000, $48,000, and $63,000,
respectively.
33
<PAGE>
12. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 June 30, 1997
--------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Demand, NOW, and Money Market accounts,
including noninterest bearing deposits of $171,064
and $217,814 at June 30, 1998 and June 30, 1997,
respectively $ 8,277,383 9.63% $ 7,425,269 8.56%
Passbook savings 5,198,093 6.05 5,213,413 6.01
----------- ------ ----------- ------
13,475,476 15.68 12,638,682 14.57
Certificates of deposit:
2.00- 4.00% 310,238 .36 326,059 .37
4.01- 6.00% 68,464,845 79.68 62,271,432 71.78
6.01- 8.00% 3,553,214 4.14 11,403,980 13.14
8.01- 10.00% 122,061 .14 118,560 .14
----------- ------ ----------- ------
72,450,358 84.32 74,120,031 85.43
----------- ------ ----------- ------
$85,925,834 100.00% $86,758,713 100.00%
----------- ------ ----------- ------
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $10,659,343 and $8,026,770, at June 30, 1998
and 1997, respectively.
Scheduled maturities of certificates of deposit at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
-----------------------------------------------------------------------------------
1999 2000 2001 2002 TOTAL
----------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
2.00- 4.00% $ 200,291 $ 93,947 $ 16,000 $ 0 $ 310,238
4.01- 6.00 47,328,010 12,711,482 5,577,832 2,847,521 68,464,845
6.01- 8.00 2,544,358 517,224 44,316 447,316 3,553,214
8.01- 10.00 4,000 7,118 110,943 0 122,061
------------- ------------- ------------ ------------ -------------
Total $50,076,659 $13,329,771 $5,749,091 $3,294,837 $72,450,358
============= ============= ============ ============ =============
</TABLE>
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Passbook savings $ 149,106 $ 228,747 $ 292,124
NOW accounts 240,356 158,914 255,133
Certificates of deposit 4,129,114 4,146,176 4,131,989
---------- ---------- ----------
$4,518,576 $4,533,837 $4,679,246
========== ========== ==========
</TABLE>
34
<PAGE>
13. INCOME TAXES
The provision (benefit) for income taxes for the periods indicated is
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Current Provision:
Federal $216,746 $ 164,392 $222,637
State 29,130 20,787 26,274
---------- ----------- -----------
245,876 185,179 248,911
Deferred provision (benefit) 31,167 (105,788) 44,747
---------- ----------- -----------
$277,043 $ 79,391 $293,658
========== =========== ===========
</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 the Years Ended June 30,
------------------------------------------
1998 1997 1996
------------ ---------- -------------
<S> <C> <C> <C>
Pretax income at statutory rates $273,142 $75,487 $295,369
Add (deduct):
State income tax, net of federal tax benefit 21,494 6,022 20,599
Other, net (17,593) (2,118) (22,310)
---------- --------- ------------
$277,043 $79,391 $293,658
========== ========= ============
Effective income tax rate 35% 36% 34%
========== ========= ============
</TABLE>
The net deferred tax liability was included in Taxes payable in the
accompanying consolidated statements of financial condition at June 30,
1998 and 1997. The components of the net deferred tax asset or liability at
June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Unrealized net loss on securities available for sale $ 0 $ 35,980
Amortization of intangible 53,291 36,854
Employee benefit plans 119,612 80,511
Depreciation 1,715 3,044
Other 11,200 13,252
---------- ----------
Deferred tax asset 185,818 169,641
---------- ----------
Unrealized net gain on securities available for sale (29,129) 0
FHLB stock dividend (57,869) (57,869)
Bad debt reserve, net (41,648) (80,637)
Accretion of discount on securities (139,800) (92,657)
Deferred loan fees and costs, net (123,468) (45,561)
Other (6,921) (9,658)
---------- ----------
Deferred tax liability (398,835) (286,382)
---------- ----------
Net deferred tax liability $(213,017) $(116,741)
========== ==========
</TABLE>
35
<PAGE>
Thrift institutions, in determining taxable income, were historically
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 was gradually reduced to 8%, when in August
1996, Congress passed the Small Business Job Protection Act that, among
other things, repealed the tax bad debt reserve method for thrifts
effective for taxable years beginning after December 31, 1995. As a result,
thrifts began recapturing into taxable income the amount of their post-1987
tax bad debt reserves over a six-year period beginning after 1995. At June
30, 1998, the Association's post-1987 tax bad debt reserve, subject to
recapture, was approximately $185,000. The Association recaptured
approximately $103,000 of this reserve into taxable income in the current
year. The recapture did 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
the provisions above 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.
14. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Securities available for sale $299,919 $273,696
Securities held to maturity 241,546 303,524
Loans receivable 176,980 166,425
Interest-bearing deposits in other banks 4,579 3,255
---------- ----------
$723,024 $746,900
========== ==========
</TABLE>
36
<PAGE>
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has lease agreements for its branch offices. Rental expense
under these leases aggregated $16,694, $16,889, and $16,064, for fiscal
years 1998, 1997, and 1996, respectively. The aggregate annual minimum
rental commitments under the terms of all noncancelable leases at June 30,
1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
--------------------- ---------
<S> <C>
1999 $17,764
2000 8,664
2001 6,164
2002 514
2003 0
---------
$33,106
=========
</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, 1998,
the Company had $729,164 in outstanding commitments to originate
residential real estate loans at fixed rates between 6.75% and 10%.
Additionally, at June 30, 1998, the Association had provided approximately
$361,000 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.
FDIC ASSESSMENT
The deposits of the Association are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance
Fund ("BIF"), the federal deposit insurance fund that covers the deposits
of state and national banks and certain state savings banks, are required
by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The BIF has achieved the required reserve rate, and, as
discussed below, during the prior year the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below
the average premium paid by savings institutions.
37
<PAGE>
Banking legislation was enacted September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured
institutions. The FDIC Board of Directors established a special assessment
necessary to recapitalize the SAIF at 65.7 basis points of SAIF assessable
deposits held by affected institutions as of March 31, 1995. Based upon its
level of SAIF deposits as of March 31, 1995, the Association paid a special
assessment of approximately $591,000 during the year ended June 30, 1997.
Upon recapitalization of the SAIF, premiums paid by SAIF-insured
institutions were reduced. The legislation also provides for the merger of
the BIF and the SAIF, with such merger being conditioned upon the prior
elimination of the thrift charter.
16. 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 1997 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.
38
<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, 1998 At June 30, 1997
----------------------------- ----------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
------------ -------------- ----------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash on hand and in banks $ 6,422 $ 6,422 $ 5,807 $ 5,807
Securities--AFS 22,239 22,239 17,621 17,621
Securities--HTM 34,077 34,811 44,157 44,250
Loans receivable, net 41,153 42,033 36,180 36,006
LIABILITIES:
Deposits 85,926 86,338 86,759 87,069
Other liabilities and borrowed
funds 120 120 119 119
</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.
39
<PAGE>
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
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, are for short periods, and there is no
known credit exposure.
40
<PAGE>
17. PARENT COMPANY FINANCIAL STATEMENTS
Separate condensed financial statements of The Southern Banc Company, Inc.
(the "Parent Company") as of and for the years ended June 30, 1998 and 1997
are presented below:
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,860 $ 2,128
Investment in subsidiary 15,953 14,895
ESOP loan receivable 826 932
Other assets 44 50
--------- ---------
Total assets $18,683 $18,005
========= =========
LIABILITIES:
Other liabilities $ 113 $ 74
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock 0 0
Common stock 15 15
Paid-in capital 13,676 13,642
Retained earnings 9,433 9,253
Unearned compensation (1,602) (1,917)
Treasury stock (3,000) (3,000)
Unrealized gain (loss) on securities available for sale, net 48 (62)
--------- ---------
Total stockholders' equity 18,570 17,931
--------- ---------
Total liabilities and stockholders' equity $18,683 $18,005
========= =========
</TABLE>
41
<PAGE>
STATEMENT OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
INCOME FROM SUBSIDIARY:
Dividends $ 0 $1,000
Interest 142 165
-------- --------
Total income 142 1,165
OPERATING EXPENSE 128 110
-------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS 14 1,055
INCOME TAXES 3 14
-------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS 11 1,041
DISTRIBUTIONS (OVER) UNDER CURRENT YEAR SUBSIDIARY EARNINGS 532 (899)
-------- --------
Net income $ 543 $ 142
======== ========
</TABLE>
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 543 $ 142
Distributions over (under) current year subsidiary earnings (532) 899
-------- --------
11 1,041
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease in other assets 6 1
Increase (decrease) in other liabilities 39 (631)
-------- --------
Net cash provided (used in) operating activities 56 411
-------- --------
INVESTING ACTIVITIES:
Net cash provided by investing activities 0 0
-------- --------
FINANCING ACTIVITIES:
Capital contributions to subsidiary (145) (68)
Capital contributions to plan trust (22) (46)
Payments received on ESOP loan 106 95
Proceeds from exercise of stock options 100 6
Purchase of treasury stock 0 (2,042)
Dividends paid (363) (591)
-------- --------
Net cash used in financing activities (324) (2,646)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (268) (2,235)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,128 4,363
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,860 $ 2,128
======== ========
</TABLE>
42
<PAGE>
CORPORATE INFORMATION
Directors:
James B. Little, Jr.
Chairman of the Board, President and Chief
Executive Officer of the Company and the
Association
Craig G. Cantrell
Retired
Thomas F. Dowling
Dentist
Gadsden, Alabama
Grady Gillam
Retired
W. Roscoe Johnson, III
Partner in law firm of Inzer, Haney, Johnson
& McWhorter, P.A.
Gadsden, Alabama
Rex G. Keeling, Jr.
Property/Casualty Salesman with Insurance Facilities
Gates Little
Executive Vice President of the Company and
the Association
Fred Taylor
Owner of Taylor Realty
Albertville, Alabama
Officers:
James B. Little, Jr.
President and Chief Executive Officer of the
Company and the Association
Gates Little
Executive Vice President of the Company and
the Association
Rodney Rich
Vice President of the Association
Martha Stewart
Secretary of the Association
Janice Stephens
Comptroller of the Association
Teresa Elkins
Vice President of the Association
Officers (continued):
Peggy Smith
Secretary of the Company and Treasurer of the
Association
Martha Garrett
Vice President of the Association
Main Office:
221 S. 6th Street
Gadsden, Alabama
Branch Offices:
202 Sand Mountain Drive
Albertville, Alabama
395 Gunter Avenue
Guntersville, Alabama
390 W. Main Street
Centre, Alabama
Independent Auditor:
Arthur Andersen LLP
Birmingham, Alabama
General Counsel:
Inzer, Haney, Johnson & McWhorter, P.A.
Gadsden, Alabama
Securities and Regulatory Counsel:
Housley Kantarian & Bronstein, P.C.
1220 19th Street, NW, Suite 700
Washington, D.C.
Annual Stockholders Meeting:
November 12, 1998 - 5:00 p.m.
First Federal Savings and Loan Association of Gadsden
221 S. 6th Street
Gadsden, Alabama
Record Date - September 25, 1998
<PAGE>
================================================================================
================================================================================
THE SOUTHERN BANC COMPANY, INC.
221 SOUTH 6TH STREET . GADSDEN, ALABAMA 35901 . (205) 543-3860
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
The Southern Banc Company, Inc.
State or Other Percentage
Subsidiaries (1) Jurisdiction of Incorporation Ownership
- ---------------- ----------------------------- ---------
First Federal Savings and Loan United States 100%
Association of Gadsden
First Service Corporation (2) Alabama 100%
- -------------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the financial statements
attached hereto as an exhibit.
(2) Prior to July 1998, First Service Corporation had been a wholly owned
subsidiary of the Association
<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-KSB, into Southern Banc Company's previously
filed Registration Statement File No. 333-3546.
/s/ Arthur Andersen LLP
Birmingham, Alabama
September 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,171
<INT-BEARING-DEPOSITS> 5,250
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,239
<INVESTMENTS-CARRYING> 34,077
<INVESTMENTS-MARKET> 34,811
<LOANS> 41,229
<ALLOWANCE> 76
<TOTAL-ASSETS> 105,087
<DEPOSITS> 85,926
<SHORT-TERM> 0
<LIABILITIES-OTHER> 592
<LONG-TERM> 0
0
0
<COMMON> 15
<OTHER-SE> 18,555
<TOTAL-LIABILITIES-AND-EQUITY> 105,087
<INTEREST-LOAN> 3,081
<INTEREST-INVEST> 4,046
<INTEREST-OTHER> 291
<INTEREST-TOTAL> 7,418
<INTEREST-DEPOSIT> 4,519
<INTEREST-EXPENSE> 4,519
<INTEREST-INCOME-NET> 2,899
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,171
<INCOME-PRETAX> 820
<INCOME-PRE-EXTRAORDINARY> 820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 543
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 2.80
<LOANS-NON> 11
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 76
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 76
<ALLOWANCE-DOMESTIC> 76
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
