SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1999
[ ] 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.
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(Name of Small Business Issuer in Its Charter)
Delaware 63-1146351
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
221 S. 6th Street, Gadsden, Alabama 35901
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(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
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(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
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, 1999: $597,901
The aggregate market value of the 816,064 shares of Common Stock of the
registrant issued and outstanding held by non-affiliates was approximately $6.8
million based on the closing sales price of $8.375 per share of the registrant's
Common Stock on September 24, 1999 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 24, 1999: 1,074,098
Transitional Small Business Disclosure Format Yes No X
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, 1999 (the "Annual Report"). (Parts I and II)
2. Portions of the Proxy Statement for the registrant's 1999 Annual Meeting of
Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 The Southern Bank Company, formerly First
Federal Savings and Loan Association of Gadsden (the "Bank"), for the purpose of
serving as a savings institution holding company of the Bank upon the Company's
acquisition of all of the capital stock issued by the Bank in connection with
the Bank's conversion from mutual to stock form.
The holding company structure permits the Company to expand the financial
services offered through the Bank. As a holding company, the Company has greater
flexibility than the Bank to diversify its business activities through existing
or newly formed subsidiaries or through acquisition or merger with other
financial institutions. The Company qualifies as a unitary savings institution
holding company and is subject to regulation by the Office of Thrift Supervision
("OTS"). The Company's principal business is the business of the Bank. At June
30, 1999, the Company had total consolidated assets of $96.9 million, deposits
of $79.7 million, net loans receivable of $42.1 million and stockholders' equity
of $16.6 million.
The Company's executive offices are located at 221 S. 6th Street, Gadsden,
Alabama 35901, and its telephone number is (256) 543-3860.
The Southern Bank Company. The Bank is a conservative and independent
community-oriented savings institution dedicated to providing quality customer
service. The Bank was organized in 1936 as a federally chartered mutual savings
and loan Bank, at which time it also became a member of the Federal Home Loan
Bank ("FHLB") System and obtained federal deposit insurance. The Bank currently
operates through four banking offices located in Gadsden, Albertville,
Guntersville and Centre, Alabama.
In August 1999, the Bank changed it corporate title from "First Federal
Savings and Loan Association of Gadsden" to "The Southern Bank Company." The
change of name was made to eliminate any confusion between the Company and the
Bank and to increase public awareness of the expanded banking services which the
Bank is authorized to offer.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the
authority to conduct special examinations. The Bank 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").
YEAR 2000
The Company has taken certain actions to address issues relating to the
Year 2000, and the proper functioning of computer and data processing equipment.
For more information, see "Item 6. Management's Discussion and Analysis or Plan
of Operation."
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SHAREHOLDER RIGHTS PLAN
In July 1999, the Board of Directors of the Company adopted a shareholder
rights plan and declared a dividend distribution of one common stock purchase
right on each outstanding share of the Company's Common Stock. See Item 6 -
Management's Discussion and Analysis or Plan of Operation.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain matters discussed in this document are "forward looking
statements," intended to qualify for the safe harbors from liability established
by the Private Securities Legislation Reform Act of 1995. These forward looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects," "estimates," or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also forward
looking statements. Such forward looking statements are subject to certain risks
and uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated as
of the date of this report. Stockholders, potential investors, and other readers
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are only made as of the date of
this report and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
BUSINESS STRATEGY
The Bank's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Bank 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
Bank's market area, U.S. government and agency securities, interest-earning
deposits, cash and equivalents and consumer loans. The Bank'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 Bank'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 Bank considers its primary market area to consist of Etowah, Cherokee
and Marshall Counties in which the Bank has its four offices. The City of
Gadsden in which the Bank'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 Bank's market area includes a mixture of manufacturing
and agriculture. For years the two major industrial employers were Goodyear Tire
and Rubber Company and Gulf States Steel Corporation. On February 4, 1999,
Goodyear Tire and Rubber Company announced that it would cut approximately 1,320
jobs by year-end as it ceases tire production at the Gadsden, Alabama plant.
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Approximately 200 workers will remain employed at the Gadsden facility to
operate a rubber-mixing center and tire storage site. On July 1, 1999, Gulf
States Steel Corporation, currently employing 1,800, filed for relief under
Chapter 11 Bankruptcy. While the company is allowed to continue operations under
Chapter 11, a significant negative impact would be felt in the Bank's market
area in the event Gulf States is unable to overcome its financial problems.
According to the Alabama Department of Industrial Relations, the unemployment
rates for June 1999 in Etowah, Cherokee and Marshall Counties were 6.7%, 4.8%
and 6.5%, respectively, as compared to 4.5% for the state of Alabama.
COMPETITION
The Bank 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 Bank's
other deposit products and services comes from money market mutual funds and
brokerage firms. The primary factors in competing for loans are interest rates
and loan origination fees and the range of services offered by various financial
institutions. Competition for origination or real estate loans normally comes
from other savings institutions, commercial banks, credit unions, mortgage
bankers, and mortgage brokers.
The Bank's primary competition comes from institutions headquartered in the
Bank's market area as well as numerous additional commercial banks which have
branch offices located in the Bank's market area. Many competing financial
institutions have financial resources substantially greater than the Bank and
offer a wider variety of deposit and loan products.
LENDING ACTIVITIES
General. The Bank's principal lending activity consists of the origination
of loans secured by mortgages on existing one- to four-family residences in the
Bank's market area. The Bank also makes a variety of consumer loans and limited
amounts of non-residential real estate loans. Historically, the Bank 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, 1999, the maximum amount that the Bank could have loaned to any
one borrower without prior OTS approval was approximately $4.2 million. At such
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was approximately $263,000.
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Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated. At June 30, 1999, the Bank had no concentrations of loans
exceeding 10% of total loans that are not disclosed below.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
Amount % Amount %
------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
One- to four-family residential(1)............. $ 36,702 87.17% $ 36,528 88.77%
Non-residential................................ 302 .72 216 0.52
Consumer loans................................... 4,451 10.57 3,748 9.11
Savings account loans............................ 647 1.54 657 1.60
----------- ------ ------------ ------
Total gross loans................................ 42,102 100.00% 41,149 100.00%
====== ======
Less:
Unearned income................................ 240 245
Discounts on loans purchased................... -- --
Deferred loan fees (costs), net................ (345) (325)
Allowance for loan losses...................... 98 76
----------- -----------
Total....................................... $ 42,109 $ 41,153
=========== ===========
</TABLE>
- ---------------
(1) One- to four-family residential includes second mortgage loans on which the
Bank 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, 1999 and 1998 were approximately $1.5 million and
$974,000 million, respectively.
The following table sets forth information at June 30, 1999 regarding the
dollar amount of loans maturing or repricing in the Bank's portfolio, based on
contractual terms to maturity or repricing period. Demand loans, loans having no
schedule of repayments and no stated maturity and overdrafts are reported as due
in one year or less.
<TABLE>
<CAPTION>
Due After
Due Within 1 through Due After
1 Year 5 Years 5 Years After
After 6/30/99 After 6/30/99 6/30/99 Total
------------- ------------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage(1)............... $ 25 $ 2,609 $ 34,370 $ 37,004
Consumer and savings accounts......... 160 2,936 2,002 5,098
------------- --------------- ------------ -----------
Total............................ $ 185 $ 5,545 $ 36,372 $ 42,102
============= =============== ============ ===========
</TABLE>
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(1) Real estate mortgage loans includes second mortgage loans on which the Bank
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, 1999 totaled $1.5 million.
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The following table sets forth at June 30, 1999, 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.
Predetermined Floating or
Rate Adjustable Rates
---- ----------------
(In thousands)
Real estate............................... $ 34,769 $ 2,235
Consumer and savings account.............. 5,098 --
------------ -----------
Total................................. $ 39,867 $ 2,235
============ ===========
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 Bank's loans are primarily
originated by salaried loan officers of the Bank. In addition, from time to
time, the Bank purchases loans. During fiscal 1998, the Bank purchased three
real estate loans totaling approximately $220,000 from a financial institution
in Tuscaloosa, Alabama. During the fiscal year ended June 30, 1999, the Bank
originated and sold a total of $1.0 million in loans to the secondary market.
One- to Four-Family Residential Lending. Historically, the Bank'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 Bank'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 Bank's loan amounts averaging
approximately $50,000. At June 30, 1999, $36.7 million, or 87.2%, of the Bank'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
Bank's market area. At June 30, 1999, $34.8 million, or 94.7%, of the Bank's
one- to four-family residential loans had fixed rates and $2.2 million, or 6.1%,
had adjustable rates.
The Bank'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 Bank'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 Bank to accelerate repayment of a loan upon transfer of ownership of
the mortgaged property. In January 1995, the Bank 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, 1999, the Bank had originated $7.3 million of these graduated rate loans.
The Bank intends to continue originating such loans subject to market demands.
The Bank'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 97% of the lesser of the appraised value or purchase price. The
Bank'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 Bank may lend up to 100% of the purchase price of a one- to
four-family residence provided
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that the borrower (or third party) provides additional collateral in the form of
a pledge of a savings deposit or certificate of deposit equal to 25% of the loan
amount for loans up to 15 years and 28% of the loan amount for loans with terms
greater than 15 years up to 21 years. Securities may also be pledged as
additional collateral but such securities must have a current market value equal
to 140% of the required collateral amount.
The Bank has not originated any adjustable rate, one- to four-family
residential mortgage loans in recent years. However, total loans at June 30,
1999 included adjustable rate loans with an aggregate principal balance of $1.2
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 Bank's adjustable rate loans do not permit negative
amortization.
The Bank also originates second mortgage loans on properties for which the
Bank 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 Bank's
portfolio helps reduce the Bank'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 Bank 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 Bank's
adjustable rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, adjustable rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although decreases in
the Bank's cost of funds tend to offset this effect.
Consumer Lending. The Bank's consumer loans consist primarily of home
equity lines of credit secured by first or second mortgages on single-family
residences in the Bank's market area, new and used automobile loans and demand
loans secured by savings accounts at the Bank. These loans totaled approximately
$992,000, $3.5 million and $647,000, respectively, at June 30, 1999. Management
plans to continue the Bank's expansion of these programs as part of the Bank's
plan to provide a wider range of financial services to the Bank's customers
while increasing the Bank's portfolio yields.
The Bank 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 Bank, generally are limited to 75% of the appraised value of the
residence as long as the first mortgage is held by the Bank 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 Bank'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
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for older used cars underwritten for shorter terms. The Bank requires that the
vehicles be insured and that the Bank be listed as loss payee on the insurance
policy. The Bank 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 Bank generally makes savings account loans for up to 80% of the balance
of the account. The interest rate on these loans is generally two percentage
points above the rate paid on the account, and interest is billed on a monthly
basis. These loans are payable on demand, and the account must be pledged as
collateral to secure the loan.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank, and a borrower may be able to assert against the
Bank claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank 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 Bank'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 Bank originates a
portion of its automobile loans on an indirect basis through various dealerships
located in the Bank's market area. The Bank's solicitation programs consist of
calls by the Bank'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 Bank's staff loan officers and executive officers,
none of whom receives commissions for loan originations. Loan applications are
accepted at each of the Bank's offices for processing and approval.
Upon receipt of a loan application from a prospective borrower, the Bank'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 Bank's policy to obtain an
appraisal of the real estate intended to secure a proposed mortgage loan from a
Bank-approved appraiser. The Bank generally does not obtain a formal
environmental report on the real estate at the time a loan is made, except when
the Bank becomes aware of a particular risk of environment contamination.
It is the Bank'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 Bank's loan policies. The Board has established
written lending policies for the Bank. The Bank 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
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<PAGE>
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 Bank's consumer loan committee which is comprised
of all of the Bank's loan officers. Loan applicants are promptly notified of the
decision of the Bank. It has been management's experience that substantially all
approved loans are funded.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and the Bank'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.
The Bank 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 Bank 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
Bank 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 Bank'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 Bank 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 Bank 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, 1999, the Bank had no assets classified as loss or doubtful, $10,000 of
assets classified as substandard and $915,000 of assets designated as special
mention.
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In extending credit, the Bank 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 Bank's and the industry's historical
and projected loss experience and current and forecasted economic conditions.
The Bank increases its allowance for loan losses by charging provisions for
losses against the Bank's income. Federal examiners may disagree with an
institution's allowance for loan losses.
Management actively monitors the Bank'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 Bank'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 Bank's assets and evaluates the adequacy of its
allowance for loan losses based on an assessment of risk in the Bank's assets
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, the state of the
real estate market, regulatory reviews conducted in the regulatory examination
process and economic conditions generally. Allowances are provided for
individual assets, or portions of assets, when ultimate collection is considered
improbable by management based on the current payment status of the assets and
the fair value or net realizable value of the security.
At the date of foreclosure or other repossession, the Bank 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, 1999, the Bank had no properties
acquired in settlement of loans.
9
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
Year Ended June 30,
----------------------------
1999 1998
---- ----
(In thousands)
Balance at beginning of period.................$ 76 $ 76
Charge-offs.................................... (5) --
Recoveries..................................... -- --
Provision for loan losses...................... 27 --
------------ ------------
Balance at end of period.......................$ 98 $ 76
============ ============
Ratio of net charge-offs during the
period to average loans outstanding
during the period............................ 0.00% 0.00%
============ ============
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,
----------------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------------
Percent of Percent of
Loans in Loans in
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C>
One-to four-family residential....... $ 55 87.17% $ 48 88.77%
Non-residential...................... -- 0.72 -- 0.52
Consumer and savings account loans..... 43 12.11 28 10.71
Total allowance for loan losses... $ 98 100.00% $ 76 100.00%
</TABLE>
The Bank 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.
10
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At June 30,
-------------------------------
1999 1998
---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:(1)
Real estate loans:
One- to four-family residential.............. $ 6 $ 11
Non-residential............................. -- --
Consumer and savings account loans............... 4 --
Other loans...................................... -- --
--------- ---------
Total......................................... $ 10 $ 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........................ $ 10 $ 11
========= =========
Percentage of total loans........................ 0.02 0.03%
========= =========
Other non-performing assets(2)................... $ -- $ --
========= =========
Percentage of total assets....................... 0.01% 0.01%
========= =========
- ------------------
(1) The Bank 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 Bank through foreclosure or repossession. Real estate owned
is recorded at the lower of the recorded investment in the loan or fair
value of the property, less estimated costs of disposition.
Interest income foregone on non-accrual loans was considered insignificant
for the year ended June 30, 1999.
At June 30, 1999, 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.
11
<PAGE>
INVESTMENT ACTIVITIES
The Bank 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 Bank 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
Bank 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 Bank -- Liquidity Requirements."
The Bank 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 Bank 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 Bank 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 Bank's investment policy. The Bank's investment policy
does not permit the Bank 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.
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, 1999, investment securities with an aggregate amortized cost of $21.7
million and an aggregate fair value of $21.4 million were included in the
portfolio of securities designated as available for sale. The aggregate impact
on equity was an decrease of approximately $334,000 for the year ended June 30,
1999. Securities designated as "held to maturity" are those assets which the
Bank has the ability and management has the intent to hold to maturity. Upon
acquisition, securities are classified as to the Bank'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 Bank 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 Bank 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 Bank. In addition, the Bank's portfolio of mortgage-backed securities
qualify as "Qualified Thrift Investments" for purposes of determining the Bank'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 -- Regulation of the Bank -- 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-
12
<PAGE>
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated life of the securities using a
level yield method. Prepayments of the underlying mortgages depend on many
factors, including the type of mortgage, the coupon rate, the age of the
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates. The
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. During periods of falling mortgage interest rates, prepayments
generally increase, and, conversely, during periods of rising mortgage interest
rates, prepayments generally decrease. If the coupon rate of the underlying
mortgage significantly exceeds the prevailing market interest rates offered for
mortgage 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 Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate and adjustable rate mortgage-backed securities. At June 30,
1999, the Bank had $29.1 million in mortgage-backed securities (representing
30.0% of total assets) which are considered to be held to maturity and which are
insured or guaranteed by FNMA, FHLMC or GNMA.
Agency Notes. The Bank has also invested in notes issued by the FHLB, FHLMC
and FNMA. Such notes had an aggregate balance of $9.5 million at June 30, 1999
and are neither insured nor guaranteed by the United States. The issuing agency
has the right to prepay such notes at face value at certain pre-established
dates. The weighted average maturity and coupon rate of the Bank's agency notes
were 74 months and 6.2516%, respectively, at June 30, 1999.
13
<PAGE>
The following table sets forth the carrying value of the Bank's investment
portfolio at the dates indicated.
At June 30,
------------------------------
1999 1998
---- ----
(In thousands)
Securities available for sale:(1)
U.S. Treasury securities:.....................$ 5,306 $ 7,938
U.S. Government agency securities............. 15,321 13,506
Federal Home Loan Bank stock.................. 724 795
----------- -----------
Total securities available for sale.........$ 21,351 $ 22,239
=========== ===========
Securities held to maturity:(2)
U.S. Treasury securities:.....................$ -- $ --
U.S. Government agency securities............. 23,706 34,077
----------- -----------
Total securities held to maturity...........$ 23,706 $ 34,077
=========== ===========
Total securities................................$ 45,057 $ 56,316
=========== ===========
- ---------------
(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.
14
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized costs, fair values and weighted average yields for the
Bank's investment securities at June 30, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
--------------------- --------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities available for sale:(1)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities...... $ 1,000 6.4% $ 4,317 5.7% $ -- --%
U.S. Government agency
Securities................... -- -- 6,243 6.0 5,595 6.8
Federal Home Loan Bank stock.. 724 7.3 -- -- -- --
------- --- -------- --- -------- ---
Total securities available for sale $ 1,724 6.7% $ 10,560 5.9% $ 5,595 6.8%
======= === ======== === ======== ===
Securities held to maturity:(2)
U.S. Government agency
Securities................... $ -- --% $ 2,840 8.0% $ 13,553 6.9%
------- --- -------- --- -------- ---
Total securities available for sale $ 1,724 6.7% $ 13,400 6.3% $ 19,148 6.8%
======= === ======== === ======== ===
</TABLE>
<TABLE>
<CAPTION>
(continued from above)
More than Ten Years Total Investment Portfolio
--------------------- -----------------------------------
Carrying Average Amortized Fair Average
Value Yield Cost Value Yield
----- ----- ---- ----- -----
(Dollars in Thousands)
Securities available for sale:(1)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities...... $ -- --% $ 5,317 $ 5,306 5.8%
U.S. Government agency
Securities................... 3,806 6.6 15,644 15,321 6.3
Federal Home Loan Bank stock.. -- -- 724 724 7.3
-------- --- --------- -------- ---
Total securities available for sale $ 3,806 6.6% $ 21,685 $ 21,351 6.3%
======== === ========= ======== ===
Securities held to maturity:(2)
U.S. Government agency
Securities................... $ 7,313 7.5% $ 23,706 $ 23,647 7.2%
-------- --- --------- -------- ---
Total securities available for sale $ 11,119 7.2% $ 45,391 $ 44,998 6.8%
======== === ========= ======== ===
</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.
15
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank 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 Bank attracts deposits principally from within its market
area by offering a variety of deposit instruments, including regular checking,
passbook, statement savings 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 Bank also offers Individual Retirement
Accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from local
residents through the Bank's branch network rather than from outside the Bank's
market area. The Bank'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 Bank's
funds acquisition and liquidity requirements, the rates paid by the Bank's
competitors, the Bank's growth goals and applicable regulatory restrictions and
requirements. The Bank does not solicit deposits from brokers and currently does
not bid for public unit funds.
The Bank 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.
16
<PAGE>
Deposits in the Bank as of June 30, 1999 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>
1.97307% None NOW Accounts $ 100 $ 407 0.51%
2.74327 None Passbook Statement Accounts 100 4,533 5.69
3.93221 None Gold Star Savings Account 100 1,180 1.48
4.62542 None Money Market Deposit Account 1,500 393 0.49
2.47121 None High Yield Account 100 3,009 3.77
2.24968 None Best Checking Account 50 224 0.28
1.94381 None Merit Checking 50 707 0.89
2.25006 None Classic 55 Checking 50 1,930 2.42
0.00000 None Free Checking -- 105 0.13
0.00000 None Business Checking 50 56 0.07
2.04188 None First Checking 50 984 1.23
Certificates of Deposit
-----------------------
2.00000 91 Days 3-Month Money Market 1,000 7 0.01
2.79810 5 Month Fixed Term, Fixed Rate 1,000 298 0.37
4.36455 182 Days 6-Month Money Market 1,000 4,567 5.73
3.08774 7 Month Fixed Term, Fixed Rate 1,000 212 0.27
4.62021 8 Month Fixed Term, Fixed Rate 1,000 4,679 5.87
3.15311 9 Month Fixed Term, Fixed Rate 1,000 659 0.83
4.44752 10 Month Fixed Term, Fixed Rate 1,000 1,868 2.34
4.38021 12 Month Fixed Term, Fixed Rate 1,000 1,869 2.34
4.73898 14 Month Fixed Term, Fixed Rate 1,000 15,071 18.90
5.13970 18 Month Fixed Term, Fixed Rate 1,000 3,425 4.30
5.09234 18 Month-IRA Fixed Term, Fixed Rate - IRA 250 4,479 5.62
4.66243 20 Month Fixed Term, Fixed Rate 1,000 3,455 4.33
5.39428 24 Month Fixed Term, Fixed Rate 1,000 4,217 5.29
5.21805 30 Month Fixed Term, Fixed Rate 1,000 1,840 2.31
5.59240 36 Month Fixed Term, Fixed Rate 1,000 3,965 4.97
5.85175 48 Month Fixed Term, Fixed Rate 1,000 2.319 2.91
5.77942 60 Month Fixed Term, Fixed Rate 1,000 5,359 6.72
5.71195 72 Month Fixed Term, Fixed Rate 1,000 926 1.16
5.14543 96 Month Fixed Term, Fixed Rate 1,000 37 0.05
5.77269 120 Month Fixed Term, Fixed Rate 1,000 796 1.00
4.33800 3-Month-State Fixed Term, Fixed Rate 1,000 1,325 1.66
5.32271 Negotiated Negotiated Jumbo 100,000 155 0.19
5.18202 11 Month Fixed Term, Fixed Rate 1,000 4,365 5.47
5.29362 17 Month Fixed Term, Fixed Rate 1,000 315 0.40
--------- ------
Total................$ 79,734 100.00%
========= ======
</TABLE>
17
<PAGE>
The following tables set forth the average balances and average interest
rates paid based on month-end balances for deposits in the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
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.......... $ 5,119 $ 8,759 $ 67,757 $ 7,210 $ 7,829 $ 73,157
Average interest rate.... 3.39% 2.82% 5.35% 2.85% 3.07% 5.65%
</TABLE>
The following table sets forth the certificates of deposit in the Bank
classified by rates at the dates indicated.
At June 30,
------------------------------
1999 1998
---- ----
(In thousands)
2.00 - 4.00%.................... $ 7,490 $ 310
4.01 - 6.00%.................... 57,546 68,465
6.01 - 8.00%.................... 1,048 3,553
8.01 - 10.00%................... 122 122
---------- ----------
$ 66,206 $ 72,450
========== ==========
The following table indicates the amount of the certificates of deposit of
$100,000 or more in the Bank by time remaining until maturity at June 30, 1999.
Certificates
Maturity Period of Deposits
--------------- --------------
(In thousands)
Three months or less.................... $ 3,010
Over three through six months........... 1,291
Over six through 12 months.............. 1,679
Over 12 months.......................... 3,649
------------
Total.............................. $ 9,629
============
18
<PAGE>
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending, investment and general operating activities. The
Bank 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 Bank 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 Bank does not have any borrowings from the FHLB, and management
currently does not expect to borrow from the FHLB in the future.
SUBSIDIARY ACTIVITIES
Federally chartered savings institutions are permitted to invest up to 2%
of their assets in subsidiary service corporations, plus an additional 1% in
subsidiaries engaged in specific community purposes. Under such limitation, as
of June 30, 1999, the Bank was authorized to invest approximately $1.9 million
in the stock of or loans to subsidiaries. The Bank currently does not have a
subsidiary.
REGULATION
GENERAL
As a federal savings institution, the Bank is subject to regulation,
supervision and regular examination by the OTS. Federal banking laws and
regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
Savings Association Insurance Fund ("SAIF") administered by the FDIC to the
maximum extent provided by law ($100,000 for each depositor). In addition, the
FDIC has certain regulatory and examination authority over OTS-regulated savings
institutions and may recommend enforcement actions against savings institutions
to the OTS. The supervision and regulation of the Bank is intended primarily for
the protection of the deposit insurance fund and depositors.
As a savings institution holding company, the Company is subject to OTS
regulation, examination, supervision and reporting requirements. The Company
also is required to file certain reports with, and otherwise comply with the
rules and regulations of, the Securities and Exchange Commission under the
federal securities laws.
The following discussion summarizes certain of the statutes, rules and
regulations affecting the Bank and the Company. A number of other statutes and
regulations have an impact on their operations. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
REGULATION OF THE BANK
Regulatory Capital. The OTS's capital adequacy regulations require savings
institutions such as the Bank to meet three minimum capital standards: a "core"
capital requirement of between 3% and 5% of adjusted total assets, a "tangible"
capital requirement of 1.5% of adjusted total assets, and a "risk-based" capital
requirement of 8% of total risk-based capital to total risk-weighted assets. In
addition, the OTS has adopted regulations imposing certain restrictions on
savings institutions that have a total risk-based capital ratio of less than 8%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a
19
<PAGE>
ratio of Tier 1 capital to total assets of less than 4% (or 3% if the
institution is rated composite 1 under the CAMELS examination rating system).
See "--Prompt Corrective Regulatory Action."
At June 30, 1999, the Bank exceeded its tangible, core and risk-based
regulatory capital requirements. For more information, see "Item 6. Management's
Discussion and Analysis or Plan of Operation" and Note 4 of Notes to
Consolidated Financial Statements.
PROMPT CORRECTIVE REGULATORY ACTION. The Federal Deposit Insurance Act
("FDI Act") requires the federal banking regulators to take prompt corrective
action in respect of depository institutions that do not meet certain minimum
capital requirements, including a leverage limit and a risk-based capital
requirement. The joint regulations of the federal banking agencies, including
the OTS, classify insured depository institutions by capital levels and provide
that the applicable agency will take various prompt corrective actions to
resolve the problems of any institution that fails to satisfy the capital
standards. Under the joint prompt corrective action regulations, a
"well-capitalized" institution is one that is not subject to any regulatory
order or directive to meet any specific capital level and that has or exceeds
the following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets
("leverage ratio") of 5%. An "adequately capitalized" institution is one that
does not qualify as "well capitalized" but meets or exceeds the following
capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based
capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the
institution has the highest composite examination rating. An institution not
meeting these criteria is treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which its capital levels are below these standards. An institution that falls
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory sanctions required by the FDI Act and the implementing
regulations. As of June 30, 1999, the Bank was "well-capitalized" as defined by
the regulations.
QUALIFIED THRIFT LENDER TEST. The Home Owners' Loan Act ("HOLA") and OTS
regulations require all savings institutions to satisfy one of two Qualified
Thrift Lender ("QTL") tests or to suffer a number of sanctions, including
restrictions on activities. A savings institution must maintain its status as a
QTL on a monthly basis in at least nine out of every 12 months. An initial
failure to qualify as a QTL results in a number of sanctions, including the
imposition of certain operating restrictions and a restriction on obtaining
additional advances from its Federal Home Loan Bank. If a savings institution
does not requalify under the QTL test within the three-year period after it
fails the QTL test, it would be required to terminate any activity not
permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution would similarly be required to register as a bank
holding company with the Federal Reserve Board. At June 30, 1999, the Bank
qualified as a QTL.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. Under the OTS capital distribution regulations, a savings
institution that qualifies for expedited treatment of applications by
maintaining specified supervisory examination ratings and that is not otherwise
restricted in making capital distributions may, without prior approval by the
OTS, make capital distributions during a calendar year equal to its net income
for such year plus its retained net income for the preceding two years. Capital
distributions in excess of such amount are subject to prior OTS approval. In
addition, even if a proposed capital distribution is less than the above limit,
a savings institution must give notice to the OTS at least 30 days before
declaration of a capital distribution to its holding company.
20
<PAGE>
Under the OTS's prompt corrective action regulations, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "--Prompt Corrective Regulatory
Action." Further, earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of
dividends or other distributions to the Bank without payment of taxes at the
then current tax rate by Home Federal on the amount of earnings removed from the
reserves for such distributions.
TRANSACTIONS WITH AFFILIATES AND INSIDERS. Generally, transactions between
a savings institution or its subsidiaries and its affiliates are required to be
on terms as favorable to the institution as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company that is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must generally be made on terms that are substantially the same as for
loans to unaffiliated individuals.
RESERVE REQUIREMENTS. The Federal Reserve Board requires all depository
institutions to maintain noninterest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1999, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS.
LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulations to maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, qualifying
mortgage-related securities and mortgage loans, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage of its net withdrawable short-term savings deposits plus short-term
borrowings. The current minimum liquid asset ratio required by the OTS is 4.0%.
For the month ended June 30, 1999, the Bank was in compliance with the
requirement, with an average daily liquidity ratio of 24.4%.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System consists of 12 district
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. As a member of the FHLB of
Atlanta, the Bank is required to acquire and hold shares of capital stock in the
FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its
home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. The Bank was in compliance with this requirement, with an
investment in FHLB stock at June 30, 1999 of $724,000. Long-term FHLB advances
may only be made for the purpose of providing funds for residential housing
finance. In July 1999, the Bank obtained a short-term advance from the FHLB of
Atlanta in the amount of $5.0 million.
21
<PAGE>
REGULATION OF THE COMPANY
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings institution subsidiaries, which permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company were to acquire control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the Company and any of
its subsidiaries (other than the Bank or any other SAIF-insured savings
association) would become subject to restrictions on its activities under the
HOLA unless such other association qualifies as a QTL and is acquired in a
supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company would be required to register as, and would
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured institution. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings institutions in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings institution.
TAXATION
General. The Company and the Bank 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. Savings institutions, such as the Bank, 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 Bank historically used whichever method resulted in the
highest bad debt reserve deduction in any given year.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that
22
<PAGE>
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 Bank have been treated the same as commercial
banks. Institutions with $500 million or more in assets are able to take a tax
deduction only when a loan is actually charged off. Institutions with less than
$500 million in assets are 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, 1999, the Bank's post-1987 tax bad debt reserve
subject to recapture was approximately $144,000. The Bank recaptured
approximately $41,000 of this reserve into taxable income in the year ended June
30, 1999. The recapture did not have any effect on the Bank'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 Bank'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 Bank includes the amounts distributed in taxable
income, along with the amounts deemed necessary to pay the resulting federal
income tax. At June 30, 1999, the Bank 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
23
<PAGE>
pursuant to the percentage of taxable income method over the amount allowable
under the experience method. The other items of tax preference that constitute
AMTI include (a) tax-exempt interest on newly-issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified bonds
and (b) for taxable years including 1987 through 1989, 50% of the excess of (i)
the taxpayer's pre-tax adjusted net book income over (ii) AMTI (determined
without regard to this latter preference and prior to reduction by net operating
losses). For taxable years beginning after 1989, this latter preference has been
replaced by 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Internal Revenue Code, over (ii) AMTI (determined without regard
to this preference and prior to reduction by net operating losses). For any
taxable year beginning after 1986, net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum taxes may be used as
credits against regular tax liabilities in future years. In addition, for
taxable years after 1986 and before 1992, corporations, including savings
institutions, are also subject to an environmental tax equal to 0.12% of the
excess of AMTI for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2.0 million. The Bank
is not currently paying any amount of alternative minimum tax but may, depending
on future results of operations, be subject to this tax.
The Bank'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 Bank and the Company. The Company
also is subject to the Delaware franchise tax.
EMPLOYEES
As of June 30, 1999, the Company and the Bank had 27 full-time and two
part-time employees, none of whom was represented by a collective bargaining
agreement.
24
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth information regarding the Bank's offices at
June 30, 1999.
<TABLE>
<CAPTION>
Net Book Owned
Year Value at Approximate or
Opened June 30, 1999 Square Footage Leased
------ ------------- -------------- ------
Main Office:
<S> <C> <C> <C> <C>
221 South 6th Street 1968 $ 197,794 6,500 Owned
Gadsden, Alabama 35901
Branch Offices:
202 Sand Mountain Drive 1965 2,441 1,405 Leased
Albertville, Alabama 35950
395 Gunter Avenue 1971 69 1,000 Leased
Guntersville, Alabama 35976
390 W. Main Street 1994 6,022 2,263 Leased
Centre, Alabama 35960
</TABLE>
The net book value of the Bank's investment in furnishings and equipment
totaled $52,231 at June 30, 1999.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank is a party to various legal proceedings
incident to its business. At June 30, 1999, there were no legal proceedings to
which the Company or the Bank 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 1999.
25
<PAGE>
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. Description of Business - Regulation - Regulation of the Bank - Limitations
on Capital Distributions" herein and "Market for Common Stock and Related
Stockholder Matters" 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.
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.
26
<PAGE>
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.
4.1 * Specimen Common Stock Certificate of The Southern Banc Company, Inc.
4.2 ** Rights Agreement
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. Except for these portions of the
Annual Report to Stockholders which are expressly incorporated
herein by reference, such Annual Report is furnished for the
information of the Commission and is not to be deemed "filed" as
part of this report.
27
<PAGE>
21 Subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (SEC use only)
- ----------------
* Incorporated by reference to Registration Statement on Form 8-A
(No. 1-13964).
** Incorporated by reference to Current Report on Form 8-K dated
July 15, 1999.
*** Incorporated by reference to Registration Statement on Form S-1
(No. 33-93218).
**** Incorporated by reference to Registration Statement on Form S-8
(No. 333-3546).
***** Incorporated by reference to Annual Report on Form 10-KSB for fiscal
year ended June 30, 1998
(b) Reports on Form 8-K. There were no Current Reports on Form 8-K filed
during the last quarter of fiscal year 1999.
28
<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 24, 1999 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 Director
Executive 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: /s/ Fred Taylor
--------------------------------- ----------------------------
Rex G. Keeling, Jr. Fred Taylor
Director Director
1999
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 Annual Report of The Southern Banc
Company, Inc. for the fiscal year ended June 30, 1999. We invite you to
review the Report and the Company's performance during fiscal 1999.
The year was a challenging one. We significantly increased our
loan production and increased net income in a period of declining
interest rates. This was done while maintaining the Bank's
traditionally high asset quality, preserving the integrity of your
investment and 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.
At the same time we must react to the narrowing interest rate spreads
by expanding our products and services to counter this effect on our
bottom-line.
In August 1999, we changed the corporate title of First
Federal Savings and Loan Association of Gadsden to "The Southern Bank
Company." We believe that this change will eliminate any confusion
between the Company and the Bank, our core holding, and will increase
public awareness of the expanded banking services which the Bank is
authorized to offer.
We appreciate your investment. 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 The Southern Bank Company, formerly First Federal
Savings and Loan Association of Gadsden, Alabama (the "Bank"), for the purpose
of serving as a savings institution holding company of the Bank upon the
acquisition of all of the capital stock issued by the Bank upon its conversion
from mutual to stock form 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, 1999, the Company had
total consolidated assets of $96.9 million, deposits of $79.7 million and
stockholders' equity of $16.6 million, or 17.2% of total assets.
The Bank 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 Bank currently
operates through four banking offices located in Gadsden, Albertville,
Guntersville and Centre, Alabama. In August 1999, the Bank adopted its current
corporate title to eliminate any confusion between the Company and the Bank and
to increase public awareness of the expanded banking services which the Bank is
authorized to offer.
The Bank's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Bank 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
Bank's market area, U.S. government and agency securities, interest-earning
deposits, cash and equivalents and consumer loans. The Bank'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 Bank'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 Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the
authority to conduct special examinations. The Bank 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.
<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, 1999, there were 1,074,098
shares of the Common Stock outstanding and approximately 311 stockholders of
record. This total does not reflect the number of persons or entities who hold
Common Stock in nominee or "street name" through various brokerage firms.
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 Bank, 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.
Price Per Share Dividends
-----------------------------
High Low Per Share
---- --- ---------
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
Fiscal 1999
First Quarter $15.750 $13.688 $.0875
Second Quarter $13.688 $12.063 $.0875
Third Quarter $12.625 $11.000 $.0875
Fourth Quarter $12.625 $11.500 $.0875
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 6,990 $ 7,418 $ 7,513 $ 7,702 $ 7,016
Interest expense............................ 4,100 4,519 4,534 4,679 4,261
Net interest income......................... 2,890 2,899 2,979 3,023 2,755
Provision for loan losses................... 27 -- -- -- --
Net interest income after provision
for loan losses........................... 2,863 2,899 2,979 3,023 2,715
Noninterest income.......................... 196 92 92 77 (638)
Noninterest expense......................... 2,148 2,171 2,849 2,231 1,843
Income before provision for income taxes.... 911 820 222 869 234
Provision for income taxes.................. 313 277 79 294 75
Net income.................................. $ 598 $ 543 143 575 159
Earnings per share(1)
Basic.................................. $ 0.59 $ 0.51 $ 0.13 $ 0.34 $ --
Diluted................................ $ 0.57 $ 0.49 $ 0.12 $ 0.34 $ --
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Total assets................................ $ 96,875 $ 105,087 $ 105,434 $ 107,029 $ 101,773
Loans receivable, net....................... 42,109 41,153 36,180 33,145 26,465
Securities:
Available for sale..................... 21,351 22,239 17,621 13,504 11,449
Held to maturity....................... 23,706 34,077 44,158 52,822 53,126
Deposits.................................... 79,734 85,926 86,759 85,847 91,407
Stockholders' equity........................ 16,645 18,570 17,931 20,135 9,757
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
KEY OPERATING DATA
<S> <C> <C> <C> <C> <C>
Return on average assets.................... 0.61% 0.52% 0.14% 0.53% 0.16%
Return on average equity.................... 3.38 2.96 0.82 3.29 1.72
Average equity to average assets............ 18.12 17.43 16.58 16.17 9.27
Dividend payout ratio(1).................... 59.32 68.63 424.07 127.53 --
Number of offices........................... 4 4 4 4 4
- -----------------
(1) Earnings per share and dividend payout ratio are presented from the conversion date, October 5, 1995.
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal business of the Bank 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
Bank's primary market area. Due to the limited demand for one- to four-family
mortgage loans in the Bank's market area, the Bank maintains a substantial
portfolio of investment and mortgage-backed securities and originates a limited
amount of consumer loans. The Bank's mortgage-backed securities are all
guaranteed as to principal and interest by GNMA, FHLMC or FNMA. The Bank's
securities portfolio consists primarily of U.S. Treasury notes and government
agency securities, including agency notes. See Notes 8 and 9 of Notes to
Consolidated Financial Statements. The Bank maintains a substantial amount in
interest-bearing deposits in other banks, primarily an interest-bearing account
with the FHLB of Atlanta. Although the Bank has originated a limited amount of
commercial real estate loans in the past, the Bank is not currently seeking such
loans.
The Bank'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 Bank'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, Savings Association Insurance Fund
("SAIF") deposit insurance premiums and other expenses.
The operations of the Bank 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 Bank's market area. The Bank'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 Bank'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 Bank that could be
affected by this problem is provided by a third party service bureau. The
service bureau of the Bank has advised the Bank that it has resolved this
potential problem. However, if the service bureau has not resolved this
potential problem, the Bank 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 Bank.
4
<PAGE>
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 Bank,
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
Bank 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 Bank,
receive payment for checks deposited by the Bank's customers, or invest excess
funds if the FHLB or correspondent banks are not year 2000 compliant. The
Company's most important mission critical system is the 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 regulatory guidelines. Remediation and testing
efforts relating to the year 2000 were completed in December 1998. The Company
has also contacted its key vendors, suppliers and customers to determine their
year 2000 compliance.
Although the Company currently believes that it will be year 2000
compliant, the risk of system failures cannot be eliminated. Also, the Company
cannot guarantee the performance of third parties as to which it has material
relationships. The Company estimates that the cost of testing and updating its
systems for year 2000 compliance will be approximately $5,000.
SHAREHOLDER RIGHTS PLAN
In July 1999, the Board of Directors of the Company adopted a shareholder
rights plan (the "Plan") and declared a dividend distribution of one common
stock purchase right (a "Right") on each outstanding share of the Company's
Common Stock.
The Plan is designed to protect the Company's stockholders against certain
unsolicited attempts to acquire the Company, including a partial or two-tier
tender offer that does not treat all stockholders equally, a squeeze-out merger
and other abusive or unfair takeover tactics that the Board believes are not in
the best interests of the Company. The Plan is not intended to prevent an
acquisition of the Company in which all stockholders are offered a fair price
for all of their shares.
The Rights were issued to stockholders of record at the close of business
on August 2, 1999, and they expire on July 15, 2009. The Rights automatically
trade with the Common Stock.
The Rights would only become exercisable if one of the following were to
occur:
(i) a public announcement that a person has acquired 15% or more of the
outstanding Common Stock;
(ii) the commencement of, or announcement of an intention to make, a tender
offer that would result in the acquisition by a person or group of 15% or
more of the outstanding Common Stock; or
5
<PAGE>
(iii)the Company's Board of Directors declares a 10% or greater stockholder to
be an "Adverse Person," as defined in the Plan.
When the Rights first become exercisable, a holder would be entitled to buy
from the Company one-hundredth (1/100th) of a share of Common Stock at an
exercise price of $30.00. Upon the occurrence of certain triggering events, each
Right would entitle the holder to purchase additional shares of Common Stock, or
securities of a company that acquires the Company, at a 50% discount to their
respective market values at such time. In other words:
o If the Company is involved in a merger or other business combination
at any time after a person or group has acquired 15% or more of the
Common Stock, the Rights would entitle a holder to buy a number of
shares of common stock of the acquiring company having a market value
of twice the exercise price of the Right. For example, if at the time
of the business combination the acquiring company's common stock has a
per share value of $30.00, the holder of each Right would be entitled
to receive 2 shares of the acquiring company's common stock for
$30.00.
o Upon the acquisition by any person or group of 15% or more of the
Common Stock, the "flip-in" provision of the Rights would be triggered
and the Rights would entitle the holder to buy a number of additional
shares of Common Stock having a market value of twice the exercise
price of the Right. Thus, if at the time of the "flip-in," the Common
Stock's market value were $15 per share, the holder of each Right
would be entitled to receive 4 shares of Common Stock for $30.00.
The Rights do not interfere with the Company's business plans or affect its
financial position. The issuance of the Rights had no dilutive effect, will not
affect earnings per share, were not taxable to stockholders or the Company, and
did not change the way in which the Common Stock is traded on the American Stock
Exchange. Depending on individual circumstances, stockholders may recognize
taxable income, but only when (and if) the Rights become exercisable or upon the
occurrence of certain events thereafter.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND JUNE 30, 1998
Total assets decreased approximately $8.2 million, or 7.8%, from $105.1
million at June 30, 1998 to $96.9 million at June 30, 1999. During the period
ended June 30, 1999, net loans increased approximately $956,000, or 2.3%,
securities available for sale decreased approximately $888,000, or 4.0%, and
securities held to maturity decreased approximately $10.4 million, or 30.4%. The
decrease in securities held to maturity was primarily attributable to principal
payments received during the period ended June 30, 1999.
Cash and cash equivalents increased approximately $2.1 million, or 32.1%,
from $6.4 million at June 30, 1998 to $8.5 million at June 30, 1999. 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.
6
<PAGE>
Accrued interest and dividends receivable decreased approximately $135,000,
or 18.7%, from $723,000 at June 30, 1998 to $588,000 at June 30, 1999. Prepaid
expenses and other assets increased approximately $40,000, or 17.9% from
$222,000 at June 30, 1998 to $183,000 at June 30, 1999.
Total deposits decreased approximately $6.2 million, or 7.2%, from $85.9
million at June 30, 1998 to $79.7 million at June 30, 1999. Other liabilities
during the fiscal year ended June 30, 1999 increased approximately $95,000, or
16.1%, from $592,000 at June 30, 1998 to $497,000 at June 30, 1999. This
increase was primarily attributable to a decrease in taxes payable.
Total equity decreased approximately $2.0 million, or 10.6%, from $18.6
million at June 30, 1998 to $16.6 million at June 30, 1999. This change was
primarily attributable to the repurchase of approximately 156,000 shares of the
Company's outstanding Common Stock.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND
1998
The Company reported net income for the fiscal years ended June 30, 1999
and 1998 of $598,000 and $543,000, respectively. The increase in net income for
the fiscal year ended June 30, 1999 was primarily attributable to a reduction in
operating expenses.
Net Interest Income. Net interest income for each of the fiscal years ended
June 30, 1999 and 1998 was $2.9 million. Total interest income decreased
approximately $428,000, or 5.8%, for the fiscal year ended June 30, 1999. Total
interest expense decreased approximately $419,000, or 10.2% for the fiscal year
ended June 30, 1999 compared with the fiscal year ended June 30, 1998.
Provision for Loan Losses. During the fiscal year ended June 30, 1999, the
provision for loan losses was approximately $27,000. No provision for loan
losses was deemed necessary in the fiscal year ended June 30, 1998. The
allowance for loan losses is based on management's evaluation of possible loan
losses inherent in the Bank'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.
Non-Interest Income. Non-interest income increased approximately $104,000,
from $92,000 for the fiscal year ended June 30, 1998 to $196,000 for the fiscal
year ended June 30, 1999. This increase was primarily attributable to an
increase in prepayment penalties associated with mortgage loan refinances.
Non-Interest Expense. Non-interest expense decreased approximately $23,000,
or 1.1%. Non-interest expenses were approximately $2.2 million for each of the
fiscal years ended June 30, 1999 and 1998. Salaries and employee benefits were
approximately $1.44 million and $1.40 million for the fiscal years ended June
30, 1999 and 1998, respectively. Other operating expenses decreased by
approximately $46,000, or 7.3%, for the fiscal year ended June 30, 1999.
7
<PAGE>
Provision for Income Taxes. During the fiscal year ended June 30, 1999, the
provision for income tax expense increased approximately $36,000, or 12.8%. This
increase was primarily attributable to an increase in pre-tax earnings resulting
from a reduction in operating expenses.
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 1.3%, for the fiscal year
ended June 30, 1998. Total interest expense decreased approximately $15,000 or
0.3% 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 Bank'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.
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 23.8%, 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 4.1% 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 249.0%.
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.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Bank's net income, is
determined by the difference or "spread" between the yield earned on the Bank's
interest-earning assets and the
8
<PAGE>
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
Bank'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 Bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank'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 Bank's assets mature or reprice more slowly or
to a lesser extent than its liabilities, the Bank'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 Bank'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 Bank 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 Bank purchases
adjustable- and fixed-rate securities with maturities of primarily one to five
years and originates limited amounts of shorter term consumer loans.
The OTS requires the Bank 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 Bank's NPV of sudden and sustained 1% to 4% increases and decreases in
market interest rates. The Bank's Board of Directors has adopted an interest
rate risk policy which establishes maximum increases and decreases in the Bank's
estimated NPV of 25%, 50% and 77% and 25%, 35% and 50% in the event of 1%, 2%
and 3% increases and decreases in market interest rates, respectively. At June
30, 1999, based on the most recent information provided by the OTS, it was
estimated that the Bank's NPV would decrease 8%, 18% and 28% and increase 5%, 7%
and 9% in the event of 1%, 2% and 3% increases and decreases in market interest
rates, respectively. These calculations indicate that the Bank's net portfolio
value could be adversely affected by increases in interest rates. Changes in
interest rates also may affect the Bank's net interest income, with increases in
rates expected to decrease income and decreases in rates expected to increase
income, as the Bank's interest-bearing liabilities would be expected to mature
or reprice more quickly than the Bank's interest-earning assets. See Note 3 of
Notes to Consolidated Financial Statements.
While management cannot predict future interest rates or their effects on
the Bank's NPV or net interest income, management does not expect current
interest rates to have a material adverse effect on the Bank'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
9
<PAGE>
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 Bank's portfolio contain conditions which
restrict the periodic change in interest rate.
The Bank's Board of Directors is responsible for reviewing the Bank'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 Bank's management is responsible for administering the
policies and determinations of the Board of Directors with respect to the Bank's
asset and liability goals and strategies. Management expects that the Bank'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.
10
<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, 1999 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,
------------------------------------------------------------------------------
1999 1998
----------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable................. $ 41,508 $ 3,185 7.67% $ 38,751 $ 3,081 7.95%
Securities....................... 52,145 3,502 6.72 58,426 4,046 6.92
Other interest-earning assets.... 6,828 303 4.44 6,252 291 4.65
--------- --------- --------- ----------
Total interest-earning assets.. 100,481 6,990 6.96 103,429 7,418 7.17
Non-interest-earning assets........ 2,009 1,844
--------- ---------
Total assets................... $ 102,490 $ 105,273
========= =========
Interest-bearing liabilities:
Deposits......................... $ 83,137 4,100 4.93 $ 85,262 4,519 5.30
--------- --------- --------- ----------
Total interest-bearing liabilities 83,137 4,100 4.93 85,262 4,519 5.30
--------- ----------
Non-interest-bearing liabilities... 1,106 1,667
--------- ---------
Total liabilities.............. 84,243
Equity............................. 18,247 18,344
--------- ---------
Total liabilities and equity... $ 102,490 $ 105,273
========= =========
Net interest income.............. $ 2,890 $ 2,899
========= ==========
Interest rate spread............. 2.03% 1.87%
====== ======
Net interest margin.............. 2.88% 2.80%
====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities.................... 120.86% 121.31%
====== ======
</TABLE>
(continued from above)
Year Ended June 30,
-------------------------------------
1997
-------------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable................. $ 34,149 $2,734 8.01%
Securities....................... 62,113 4,491 8.04
Other interest-earning assets.... 7,518 288 3.82
---------- ------
Total interest-earning assets.. 103,780 7,513 7.24
Non-interest-earning assets........ 1,751
---------
Total assets................... $ 105,531
=========
Interest-bearing liabilities:
Deposits......................... $ 86,743 4,534 5.23
---------- ------
Total interest-bearing liabilities 86,743 4,534 5.23
Non-interest-bearing liabilities... 1,286
----------
Total liabilities.............. 88,029
Equity............................. 17,502
---------
Total liabilities and equity... $ 105,531
=========
Net interest income.............. $2,979
======
Interest rate spread............. 2.01%
======
Net interest margin.............. 2.87%
======
Ratio of average interest-earning
assets to average interest-bearing
liabilities.................... 119.64%
======
11
<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,
------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------ --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ --------------------------------------
Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ -----
(In thousands)
Interest income
<S> <C> <C> <C> <C> <C> <C>
Loans................................. $ (114) $ 219 $ 105 $ (19) $ 366 $ 347
Securities............................ (78) (431) (509) (185) (260) (445)
Other interest-earning assets......... 47 (71) (24) 14 (11) 3
Total interest-earning assets....... (145) (283) (428) (190) 95 (95)
Interest expense
Deposits............................. (306) (113) (419) 68 (83) (15)
Total interest-bearing liabilities... (306) (113) (419) 68 (83) (15)
Change in net interest income........... $ 161 $ (170) $ (9) $ (258) $ (178) $ (80)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company conducts its business through its
subsidiary, the Bank, which 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 Bank adjusts its liquidity levels in order to meet funding needs of
deposit outflows, repayment of borrowings and loan commitments. The Bank also
adjusts liquidity as appropriate to meet its asset and liability management
objectives.
The Bank'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 Bank invests in short-term interest-earning
assets which provide liquidity to meet lending requirements.
The Bank continues to maintain a high level of liquid assets in order to
meet its funding requirements. At June 30, 1999 the Bank had approximately $8.5
million in cash on hand and interest-bearing deposits in other banks, which
represented 8.8% of total assets. The Bank's
12
<PAGE>
average liquidity ratio well exceeded the required minimum at and during the
fiscal year ended June 30, 1999. At June 30, 1999, the Bank's level of liquid
assets, as measured for regulatory compliance purposes, was $19.4 million, or
24.4%.
At June 30, 1999, the Bank had $16.6 million of total equity, or 17.2% of
total assets. The Bank continued to exceed its regulatory capital requirement
ratios at June 30, 1999. Tangible capital and core capital were each $15.6
million, which represented 16.2% of adjusted total assets, and risk-based
capital was $15.8 million, which represented 56.0% of total risk-weighted assets
at June 30, 1999. Such amounts exceeded the respective minimum required ratios
of 1.5%, 4.0% and 8.0% by 14.7%, 12.2% and 7.8%, respectively. At June 30, 1999,
the Bank 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. See Note 4 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis includes certain forward-looking
statements addressing, among other things, the Bank's prospects for earnings,
asset growth and net interest margin. Forward-looking statements are accompanied
by, and identified with, such terms as "anticipates," "believes," "expects,"
"intends," and similar phrases. Management's expectations for the Bank's future
involve a number of assumptions and estimates. Factors that could cause actual
results to differ from the expectations expressed herein include: substantial
changes in interest rates, and changes in the general economy; changes in the
Bank's strategies for credit-risk management, interest-rate risk management and
investment activities. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or circumstances and
may not be realized.
13
<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, 1999 and 1998 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. 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, 1999 and 1998 and the results of
their operations and cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Birmingham, Alabama
August 20, 1999
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
ASSETS 1999 1998
------ ---- ----
CASH AND EQUIVALENTS:
Cash on hand and in other banks $ 1,379,871 $ 1,171,354
Interest-bearing deposits in other banks 7,300,785 5,250,164
------------ --------------
8,680,656 6,421,518
Securities available for sale, at fair value 21,350,466 22,238,866
Securities held to maturity (fair values
of $23,646,445 and $34,811,021, respectively) 23,706,524 34,077,096
------------ --------------
LOANS RECEIVABLE, net 42,108,709 41,153,338
------------ --------------
PREMISES AND EQUIPMENT, net 258,557 251,373
accrued interest and dividends receivable 587,656 723,024
PREPAID EXPENSES AND OTHER ASSETS 182,487 222,142
------------ --------------
Total assets $96,875,055 $105,087,357
============ ============
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ---- ----
<S> <C> <C>
DEPOSITS $79,733,677 $ 85,925,834
OTHER LIABILITIES:
Accrued interest payable 40,700 59,106
Advance payments by borrowers for taxes
and insurance 46,681 60,797
Taxes payable 101,470 213,504
Other 307,787 258,182
----------- ------------
Total liabilities 80,230,315 86,517,423
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 500,000 shares
authorized; shares issued and outstanding--none 0 0
Common stock, par value $.01 per share; 3,500,000 shares
authorized; 1,454,750 shares issued 14,548 14,548
Additional paid-in capital 13,684,237 13,676,507
Retained earnings 9,684,032 9,433,341
Unearned compensation (1,531,981) (1,601,861)
Treasury stock at cost, 380,652 and 224,427 shares in 1999
and 1998, respectively (4,991,316) (3,000,128)
Unrealized gain (loss) on securities available
for sale, net (214,780) 47,527
----------- ------------
Total stockholders' equity 16,644,740 18,569,934
----------- ------------
Total liabilities and stockholders' equity $96,875,055 $105,087,357
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on loans $3,221,414 $3,080,942 $2,734,183
Interest and dividends on securities available for sale 1,286,155 1,253,456 1,005,783
Interest and dividends on securities held to maturity 2,068,895 2,792,400 3,485,439
Other interest income 414,190 290,785 287,880
---------- ---------- ----------
Total interest income 6,990,654 7,417,583 7,513,285
INTEREST EXPENSE ON DEPOSITS 4,100,296 4,518,576 4,533,837
---------- ---------- ----------
Net interest income 2,890,358 2,899,007 2,979,448
PROVISION FOR LOAN LOSSES 27,000 0 0
---------- ---------- ----------
Net interest income after provision for loan losses 2,863,358 2,899,007 2,979,448
---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees 153,362 88,523 90,643
Miscellaneous income, net 41,015 3,277 1,171
---------- ---------- ----------
Total noninterest income 194,377 91,800 91,814
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,439,904 1,400,837 1,429,250
Office building and equipment expense 77,503 91,264 101,256
Deposit insurance expense 52,213 55,657 712,962
Other expense 577,656 623,121 605,772
---------- ---------- ----------
Total noninterest expense 2,147,276 2,170,879 2,849,240
---------- ---------- ----------
Income before provision for income taxes 910,459 819,928 222,022
PROVISION FOR INCOME TAXES 312,558 277,043 79,391
---------- ---------- ----------
Net income $ 597,901 $ 542,885 $ 142,631
=========== =========== ===========
EARNINGS PER SHARE
Basic $.59 $.51 $.13
Diluted $.57 $.49 $.12
AVERAGE SHARES OUTSTANDING--BASIC 1,014,959 1,061,133 1,095,959
AVERAGE SHARES OUTSTANDING--DILUTED 1,048,023 1,118,613 1,152,523
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Unearned
Stock Capital Earnings Compensation
----- ------- -------- ------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1996 14,548 $13,572,806 $9,701,971 $(2,117,393)
Net income 0 0 142,631 0
Change in unrealized gain (loss) on securities
available for sale, net 0 0 0 0
Comprehensive income
Purchase of treasury stock, at cost 0 0 0 0
Amortization of unearned compensation 0 34,045 0 275,135
Dividends declared ($.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
------ ---------- --------- ----------
BALANCE, June 30, 1997 14,548 13,642,623 9,253,350 (1,917,094)
Net income 0 0 542,885 0
Change in unrealized gain (loss) on securities
available for sale, net 0 0 0 0
Comprehensive income
Amortization of unearned compensation 0 32,470 0 237,758
dividends declared ($.35 per share) 0 0 (362,894) 0
Valuation adjustment on unallocated stock plan shares 0 1,414 0 (1,414)
Exercise of stock options (8,599 shares) 0 0 0 100,489
contributions to stock plan trusts 0 0 0 (21,600)
------ ---------- --------- ----------
BALANCE, June 30, 1998 14,548 13,676,507 9,433,341 (1,601,861)
Net income 0 0 597,901 0
Change in unrealized gain (loss) on securities
available for sale, net 0 0 0 0
Comprehensive income
Purchase of treasury stock, at cost 0 0 0 0
Amortization of unearned compensation 0 48,056 0 333,362
dividends declared ($.35 per share) 0 0 (347,210) 0
Valuation adjustment on unallocated stock plan shares 0 (40,326) 0 40,326
contributions to stock plan trusts 0 0 0 (303,808)
------ ---------- --------- ----------
BALANCE, June 30, 1999 14,548 $13,684,237 $9,684,032 $(1,531,981)
====== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(continued from above)
<TABLE>
<CAPTION>
Non-Owner
Treasury Unrealized Changes in
Stock Gain (Loss) Total Equity
----- ----------- ----- ------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1996 $ (957,590) $ (79,587) $20,134,755
Net income 0 0 142,631 $142,631
Change in unrealized gain (loss) on securities available for sale, net 0 17,474 17,474 17,474
-------
Comprehensive income 160,105
Purchase of treasury stock, at cost (2,042,538) 0 (2,042,538)
Amortization of unearned compensation 0 0 309,180
Dividends declared ($.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
---------- ------- ---------- -------
BALANCE, June 30, 1997 (3,000,128) (62,113) 17,931,186
Net income 0 0 542,885 542,885
Change in unrealized gain (loss) on securities available for sale, net 0 109,640 109,640 109,640
-------
Comprehensive income 652,525
Amortization of unearned compensation 0 0 270,228
dividends declared ($.35 per share) 0 0 (362,894)
Valuation adjustment on unallocated stock plan shares 0 0 0
Exercise of stock options (8,599 shares) 0 0 100,489
contributions to stock plan trusts 0 0 (21,600)
---------- ------- ---------- -------
BALANCE, June 30, 1998 (3,000,128) 47,527 18,569,934
Net income 0 0 597,901 597,901
Change in unrealized gain (loss) on securities available for sale, net 0 (262,307) (262,307) (262,307)
-------
Comprehensive income 335,594
Purchase of treasury stock, at cost (1,991,189) 0 (1,991,189)
Amortization of unearned compensation 0 0 381,418
dividends declared ($.35 per share) 0 0 (347,210)
Valuation adjustment on unallocated stock plan shares 0 0 0
contributions to stock plan trusts 0 0 (303,808)
---------- ------- ---------- -------
BALANCE, June 30, 1999 $(4,991,316) $(214,780) $16,644,740
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 597,901 $ 542,885 $ 142,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 38,186 46,176 48,391
Amortization (accretion), net (187,428) (15,581) 56,293
Amortization of intangible asset 32,973 38,847 46,356
Amortization of unearned compensation 381,418 270,228 309,180
Loss on sale of real estate owned, net 0 0 7,288
Provision for loan losses 27,000 0 0
Deferred income tax provision (benefit) (77,771) 31,167 (105,788)
Change in assets and liabilities:
Decrease in accrued interest and dividends receivable 135,368 23,876 109,481
Decrease in prepaid expenses and other assets 6,682 392,588 1,188,958
Increase (decrease) in accrued interest payable (18,406) 14,077 (14,136)
Increase (decrease) in income taxes payable 96,872 (346,299) 461,363
Increase (decrease) in other liabilities 49,605 140,427 (633,797)
---------- ---------- ---------
Net cash provided by operating activities 1,082,400 1,138,391 1,616,220
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (16,350,702) (12,304,906) (6,728,677)
Proceeds from sale of real estate owned 0 0 13,808
Proceeds from maturities and principal payments on securities
available for sale 16,946,256 7,808,031 2,641,104
Purchases of securities held to maturity (5,780,036) (5,004,063) (728,320)
Proceeds from maturities and principal payments on securities
held to maturity 16,237,440 15,110,735 9,368,961
Purchase of loans 0 (685,400) (291,151)
Net increase in loans (982,371) (4,287,542) (2,796,725)
Capital expenditures (45,370) (30,812) (36,040)
---------- ---------- ---------
Net cash provided by investing activities 10,025,217 606,043 1,442,960
---------- ---------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Contributions to stock plan trusts $ (303,808) $ (21,600) $ (45,434)
Purchase of treasury stock (1,991,189) 0 (2,042,538)
Cash dividends paid (347,209) (362,894) (591,252)
Increase (decrease) in deposits, net (6,192,157) (832,879) 912,113
Increase (decrease) in advance payments by borrowers
for taxes and insurance (14,116) (13,232) (25,787)
Proceeds from exercise of stock options 0 100,489 6,370
---------- ---------- ---------
Net cash used in financing activities (8,848,479) (1,130,116) (1,786,528)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
2,259,138 614,318 1,272,652
CASH AND CASH EQUIVALENTS, beginning of period 6,421,518 5,807,200 4,534,548
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $8,680,656 $6,421,518 $5,807,200
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes, net of refund received $ 284,079 $ 224,222 $ 104,679
========== ========== ==========
Interest $ 4,059,596 $ 4,504,499 $4,547,973
========== ========== ==========
Noncash transactions:
Real estate owned, obtained through foreclosure $ 0 $ 0 $ 21,096
Change in unrealized net gain (loss) on securities available
for sale, net of deferred taxes (benefit) (262,307) 109,640 17,474
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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 accounting principles and reporting policies of the Company, and the
methods of applying these principles, conform with generally accepted
accounting principles ("GAAP") and with general practices within the
thrift industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in the
near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowances for loan losses and real estate owned, management obtains
independent appraisals for significant properties, evaluates the overall
portfolio characteristics and delinquencies and monitors economic
conditions.
<PAGE>
A substantial portion of the Company's loans are secured by real estate in
its primary market area. Accordingly, the ultimate collectibililty of a
substantial portion of the Company's loan portfolio and the recovery of a
portion of the carrying amount of foreclosed real estate are susceptible
to changes in economic conditions in the Company's primary market areas.
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.
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, 1999 and 1998.
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 is
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.
2
<PAGE>
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.
Impaired loans are 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.
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:
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
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 1999 and
1998 were $0 and $0, 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, 1999 and 1998.
3
<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 ($104,262 and $137,235 at June
30, 1999 and 1998, 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 $32,973, $38,847,
and $46,356 in fiscal years 1999, 1998, and 1997, 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 1999, the Financial Accounting Standards board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, Accounting
for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133. This statement encourages
earlier application, but delays the effective date of Statement 133 from
fiscal quarters of all fiscal years beginning after June 15, 1999 to
fiscal quarters of all fiscal years beginning after June 15, 2000. In
accordance with the new standard, management will continue to evaluate the
impact and defer implementations as the standard allows.
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.
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
4
<PAGE>
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 58% at June 30, 1999), while its principal source of funds
consists of savings deposits with maturities of three years or less (86%).
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, 1999, 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 8%, 18%, and 28%, and increase
5%, 7%, and 9% in the event of 1%, 2%, and 3% 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.
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, 1999 and 1998, that the Association meets all capital adequacy
requirements to which it is subject.
5
<PAGE>
As of June 30, 1999 and 1998, 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>
To Be Well
Capitalized Under
Actual For Capital Adequacy Prompt Corrective
Purposes Action Provisions
----------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
JUNE 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $15,848 56.0% $2,266 8.0% $2,832 10.0%
Tier 1 (core) capital (to risk weighted 15,750 55.6 1,133 4.0 1,699 6.0
assets)
Tier 1 (core) capital (to adjusted total 15,750 16.2 3,893 4.0 4,867 5.0
assets)
Tangible capital (to adjusted total assets) 15,750 16.2 1,460 1.5% N/A N/A
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 15,769 56.6 N/A N/A 1,671 6.0
assets)
Tier 1 (core) capital (to adjusted total 15,769 14.9 3,165 3.0 5,276 5.0
assets)
Tangible capital (to adjusted total assets) 15,769 14.9 1,583 1.5 N/A N/A
</TABLE>
The following table is a reconciliation of the Association's stockholder's
equity to Tangible, Tier 1, and Risk-based capital as required by the OTS:
1999 1998
---- ----
(In thousands)
Stockholder's equity $15,639 $ 15,953
Intangible assets (104) (137)
Unrealized (gain) loss on securities
available for sale 215 (47)
------- ---------
Tangible and Tier 1 capital 15,750 15,769
Allowance for loan losses 98 76
------- ---------
Total risk based capital $15,848 $ 15,845
======= =========
Total assets $97,225 $105,105
Adjusted total assets 97,336 105,511
Total risk weighted assets 28,324 27,845
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
6
<PAGE>
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
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, 1999, 1998, and 1997. Common stock outstanding
consists of issued shares less unallocated ESOP shares and shares owned by
the stock plan trust. Diluted earnings per share for the years ended June
30, 1999, 1998, and 1997, 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.
The following table represents the earnings per share calculations for the
years ended June 30, 1999, 1998, and 1997 accompanied by the effect of
this accounting change on previously reported earnings per share:
Per Share
Income Shares Amount
------ ------ ------
1999:
Basic earnings per share $597,901 1,014,959 $.59
====
Diluted securities:
Management recognition plan shares 0 22,401
Incentive stock option plan shares 0 10,663
-------- ---------
Diluted earnings per share $597,901 1,048,023 $.57
======== ========= ====
Per Share
Income Shares Amount
------ ------ ------
1998:
Basic earnings per share $542,885 1,061,133 $.51
====
Diluted securities:
Management recognition plan shares 0 24,449
Incentive stock option plan shares 0 33,031
-------- ---------
Diluted earnings per share $542,885 1,118,613 $.49
======== ========= ====
7
<PAGE>
Per Share
Income Shares Amount
------ ------ ------
1997:
Basic earnings per share $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 $142,631 1,152,523 $.12
======== ========= ====
6. EMPLOYEE RETIREMENT AND SAVINGS PLANS
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
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 $285,000, $166,000, and
$170,000 for 1999, 1998, and 1997. Unearned compensation related to the
ESOP was approximately $515,000 and $757,000 at June 30, 1999 and 1998,
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 based on the fair value of shares. The difference between the
fair value of shares committed to be released and the cost of those shares
to the ESOP is credited to additional paid-in capital in accordance with
Statement of Position 93-6 Employers' Accounting for Employee Stock
Ownership Plans. The 1999 increase is due to increased debt service
payments on the ESOP loan which increased the shares to be released.
MANAGEMENT RECOGNITION PLAN ("MRP")
During fiscal 1996, the Association established a MRP which purchased
58,190 shares of the Company's common stock on the open market. 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 $112,000, $104,000, and
$142,000 for 1999, 1998, and 1997, respectively. Unearned compensation
related to the MRP was approximately $355,000 and $492,000 for 1999 and
1998, respectively, and is shown as a reduction to stockholders' equity in
the accompanying consolidated statements of financial condition.
Contributions to the MRP, usually in the form of dividend equivalents,
which will result in future compensation to the employees are debited to
unearned compensation.
8
<PAGE>
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 $38,132, $94,996, and $111,190 for fiscal years 1999,
1998, and 1997, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
During fiscal 1996, the Company entered into a Supplemental Executive
Retirement Agreement ("SERA") with an executive of the Company. Under the
provisions of the SERA, the Company will establish an account for the
executive and will credit to the executive's account an amount equal to
the difference between 25% of his compensation for the plan year and the
annual additions credited to him under any tax-qualified plans sponsored
by the Company (including the ESOP and the SEP). For each plan year, the
amount credited to the executive's account shall appreciate at a rate
equal to the highest rate paid by the Association on certificates of
deposit (regardless of their term). Said account shall be paid to the
executive in five substantially equal annual installments, with the first
installment due on the first day of the second month after he leaves
employment.
In the event that the Executive retires before the Company and the
Association fully repay the loan by which the ESOP purchased common stock
in the initial public offering, the Company will pay the executive an
amount having a fair market value equal to (i) the benefits he would have
accrued under the ESOP if the loan had been discharged on the date of his
retirement through a contribution, on said date, by the Company to the
ESOP, and if all assets of the ESOP were thereupon allocated to the
accounts of participants, plus (ii) a tax bonus equal to 40% of the amount
he recognizes as ordinary income pursuant to clause (i) hereof. The
executive will forfeit the right to receive any benefits under this SERA
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, 1999 and 1998 related to the SERA. The projected
benefit obligation, accumulated benefit obligation, and vested benefit
obligation were all $197,546 and $189,040 at June 30, 1999 and 1998,
respectively. The components of the net periodic cost as of 1999 and 1998,
respectively, are service costs of $5,186 and $4,444, interest cost of
$13,233 and $11,047, and net amortization and deferred cost of $33,900 and
$28,482. In determining the actuarial present value of the projected
benefit obligation, the discount rate was 7% and the increase in share
value was 10%.
9
<PAGE>
EMPLOYMENT AGREEMENT
The Company has a 36-month employment agreement with its President and a
Vice-President. This agreement provides that if employment under the
agreement is terminated by the Company in connection with or within 12
months after any change in control of the Company, each shall be paid
approximately 3 times his salary.
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 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,
1999. 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. Contributions to the stock option plan during 1999 were for the
purchase of 24,085 shares which will be used for the exercise of options.
The amount of the contributions, which equalled the share purchase price,
was debited to unearned compensation.
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:
1999 1998 1997
---- ---- ----
Net income:
As reported $597,901 $542,885 $142,631
Pro forma 555,592 494,676 66,438
Earnings per share:
As reported:
Basic $.59 $.51 $.13
Diluted .55 .49 .12
Pro forma:
Basic .57 .47 .06
Diluted .53 .44 .06
10
<PAGE>
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.
Unearned compensation related to the Option Plan was approximately
$362,707 and $352,000 at June 30, 1999 and 1998, 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, 1999 and 1998 and the changes
during the years then ended is as follows:
1999
------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year 111,777 $11.69
Granted 11,800 14.56
------- ------
Outstanding at end of year 123,577 $11.96
======= ======
Exercisable at end of year 68,114 $11.69
======= ======
Weighted average fair value of the
options granted $1.74
=======
1998
------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year 120,376 $11.69
Forfeitures 0 0.00
Exercised (8,599) 11.69
------- ------
Outstanding at end of year 111,777 $11.69
======= ======
Exercisable at end of year 43,402 $11.69
======= ======
Weighted average fair value of the
options granted $1.70
=======
11
<PAGE>
1997
------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year 126,376 $11.69
Forfeitures 0 0.00
Exercised (545) 11.69
------- ------
Outstanding at end of year 120,376 $11.69
======= ======
Exercisable at end of year 23,639 $11.69
======= ======
Weighted average fair value of the
options granted $1.70
=======
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 1999: 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 3%,
respectively.
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, 1999
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
---- ---- ------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,316,831 $37,489 $ (48,977) $ 5,305,343
U.S. Government agency securities 15,644,198 6,197 (329,672) 15,320,723
Federal Home Loan Bank stock 724,400 0 0 724,400
----------- ------- --------- -----------
$ 21,685,429 $43,686 $(378,649) $ 21,350,466
============ ======= ========= ============
</TABLE>
12
<PAGE>
<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>
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.
June 30, 1999
---------------------------------
Amortized
Cost Fair Value
---- ----------
Due in one year or less $ 1,000,000 $ 1,000,938
Due after one year through five years 10,559,518 10,406,773
Due after five years through ten years 5,594,718 5,478,036
Due after ten years 3,806,793 3,740,319
----------- ------------
20,961,029 20,626,066
Federal Home Loan Bank stock 724,400 724,400
----------- ------------
$21,685,429 $21,350,466
=========== ===========
A security designated as available for sale with a carrying value (fair
value) of $1,278,469 has been pledged as collateral for certain large
deposits (public funds) with an aggregate balance of $1,325,000 at June
30, 1999.
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:
June 30, 1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
---- ---- ------ ----------
U.S. Government
agency securities $23,706,524 $231,055 $(291,134) $23,646,445
----------- -------- --------- -----------
$23,706,524 $231,055 $(291,134) $23,646,445
=========== ======== ========= ===========
13
<PAGE>
June 30, 1998
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value
---- ---- ------ ----------
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
=========== ======== ======== ===========
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.
June 30, 1999
--------------------------------
Amortized
Cost Fair Value
---- ----------
Due in one year or less $ 0 $ 0
Due after one year through five years 3,311,836 3,336,664
Due after five years through ten years 16,101,132 16,051,127
Due after ten years 4,293,556 4,258,654
----------- -----------
$23,706,524 $23,646,445
=========== ===========
10. LOANS RECEIVABLE
Loans receivable are summarized as follows:
June 30,
---------------------------
1999 1998
---- ----
Mortgage loans:
Secured by one to four family
residential properties $36,702,144 $36,528,215
Secured by nonresidential properties 301,936 216,000
Consumer loans 4,450,682 3,748,379
Savings account loans 647,406 656,743
----------- -----------
42,102,168 41,149,337
Less:
Unearned interest income 240,453 244,711
Discount on loans 34 530
Deferred loan fees (costs), net (344,864) (324,915)
Allowance for loan losses 97,836 75,673
----------- -----------
Loans receivable, net $42,108,709 $41,153,338
=========== ===========
14
<PAGE>
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, 1999 and 1998 were approximately $1,464,000 and $974,000,
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,
1999 and 1998, $442,075 and $395,768, respectively, of these loans were
outstanding. During fiscal 1999, $294,154 of new loans were made and
repayments totaled $247,847.
An analysis of the Company's allowance for loan losses is as follows:
For the Years Ended
June 30,
----------------------------------------
1999 1998 1997
---- ---- ----
Balance, beginning of year $75,673 $75,673 $78,070
Provision for loan losses 27,000 0 0
Charge-offs, net of recovery (4,837) 0 (2,397)
------- ------- -------
Balance, end of year $97,836 $75,673 $75,673
======= ======= =======
At June 30, 1999, nonaccrual loans totaled approximately $10,333. At June
30, 1998, nonaccrual loans totaled approximately $11,000. Interest income
foregone on nonaccrual loans was not significant for fiscal years 1999 and
1998.
15
<PAGE>
11. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
June 30,
-----------------------------
1999 1998
---- ----
Land $ 170,085 $ 170,085
Building and improvements 254,677 250,623
Leasehold improvements 58,793 57,050
Furniture, fixtures, and equipment 561,421 538,482
1,044,977 1,016,240
Less accumulated depreciation (786,420) (764,867)
$ 258,557 $ 251,373
Depreciation expense charged to office building and equipment expense in
1999, 1998, and 1997, totaled approximately $38,000, $46,000, and $48,000,
respectively.
12. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
----------------------- ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Demand, NOW, and Money Market accounts, including
noninterest bearing deposits of $162,173 and
$171,064 at June 30, 1999 and June 30, 1998,
respectively $ 7,814,777 9.81% $ 8,277,383 9.63%
Passbook savings 5,713,307 7.17 5,198,093 6.05
----------- ------ ----------- ------
13,528,079 16.98 13,475,476 15.68
Certificates of deposit:
2.00- 4.00% 7,490,137 9.39 310,238 .36
4.01- 6.00% 57,545,898 72.17 68,464,845 79.68
6.01- 8.00% 1,047,695 1.31 3,553,214 4.14
8.01-10.00% 121,868 .15 122,061 .14
----------- ------ ----------- ------
66,205,598 83.02 72,450,358 84.32
----------- ------ ----------- ------
$79,733,677 100.00% $85,925,834 100.00%
=========== ====== =========== ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $6,092,582 and $10,659,343 at June 30, 1999
and 1998, respectively.
16
<PAGE>
Scheduled maturities of certificates of deposit at June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Year Ending June 30,
----------------------------------------------------------------------------
2000 2001 2002 2003 Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
2.00- 4.00% $ 5,990,754 $ 1,499,383 $ 0 $ 0 $ 7,490,137
4.01- 6.00 40,921,358 12,493,424 714,478 3,416,637 57,545,897
6.01- 8.00 540,822 46,348 217,436 243,088 1,047,694
8.01-10.00 7,728 114,140 0 2 121,870
----------- ----------- -------- ---------- -----------
Total $47,460,662 $14,153,295 $931,914 $3,659,727 $66,205,598
=========== =========== ======== ========== ===========
</TABLE>
Interest expense on deposits consisted of the following:
For the Years Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
Passbook savings $ 173,306 $ 149,106 $ 228,747
NOW accounts 247,099 240,356 158,914
Certificates of deposit 3,679,891 4,129,114 4,146,176
---------- ---------- ----------
$4,100,296 $4,518,576 $4,533,837
========== ========== ==========
13. INCOME TAXES
The provision (benefit) for income taxes for the periods indicated is
summarized as follows:
For the Years Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
Current Provision:
Federal $342,262 $216,746 $164,392
State 48,067 29,130 20,787
-------- -------- ---------
390,329 245,876 185,179
Deferred provision (benefit) (77,771) 31,167 (105,788)
-------- -------- ---------
$312,558 $277,043 $ 79,391
======== ======== =========
17
<PAGE>
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:
For the Years Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
Pretax income at statutory rates $313,813 $273,142 $75,487
Add (deduct):
State income tax, net of
federal tax benefit 26,183 21,494 6,022
Other, net (27,438) (17,593) (2,118)
$312,558 $277,043 $79,391
-------- -------- -------
Effective income tax rate 34% 35% 36%
======== ======== =======
The net deferred tax liability was included in taxes payable in the
accompanying consolidated statements of financial condition at June 30,
1999 and 1998. The components of the net deferred tax asset or liability
at June 30, 1999 and 1998 were as follows:
June 30,
-------------------------
1999 1998
---- ----
Amortization of intangibles $ 68,552 $ 53,291
Reserves for employee benefit plans 160,547 119,612
Depreciation 5,362 1,715
Unrealized net loss on securities
available for sale 81,616 0
Other 14,703 11,200
---------- ----------
Deferred tax asset 330,780 185,818
---------- ----------
Unrealized net gain on securities
available for sale 0 (29,129)
FHLB stock dividend (58,919) (57,869)
Bad debt reserve, net (17,462) (41,648)
Accretion of discount on securities (133,887) (139,800)
Deferred loan fees and costs, net (144,900) (123,468)
Other (112) (6,921)
---------- ----------
Deferred tax liability (355,280) (398,835)
---------- ----------
Net deferred tax liability $ (24,500) $ (213,017)
========== ==========
The portion of a thrift's tax bad debt reserve that was not recaptured
under the provisions of the Small Business Job Protection Act of 1996 are
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.
18
<PAGE>
14. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
June 30,
-----------------------
1999 1998
---- ----
Securities available for sale $254,431 $299,919
Securities held to maturity 145,540 241,546
Loans receivable 180,399 176,980
Interest-bearing deposits in other banks 7,286 4,579
-------- --------
$587,656 $723,024
======== ========
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has lease agreements for its branch offices. Rental expense
under these leases aggregated $18,546 $16,694, and $16,889, for fiscal
years 1999, 1998, and 1997, respectively. The aggregate annual minimum
rental commitments under the terms of all noncancelable leases at June 30,
1999 are as follows:
Fiscal Year Amount
----------- ------
2000 $19,848
2001 14,148
2002 14,148
2003 14,148
2004 14,148
-------
$76,440
=======
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,
1999, the Company had $844,751 in outstanding commitments to originate
residential real estate loans at fixed rates between 7.00% and 9.25%.
Additionally, at June 30, 1999, the Association had provided approximately
$437,367 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.
19
<PAGE>
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.
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.
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.
20
<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, 1999 At June 30, 1998
---------------- ----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(Dollars in thousands)
ASSETS:
<S> <C> <C> <C> <C>
Cash on hand and in banks $ 8,681 $ 8,681 $ 6,422 $ 6,422
Securities--AFS 21,350 21,350 22,239 22,239
Securities--HTM 23,706 23,646 34,077 34,811
Loans receivable, net 42,109 42,530 41,153 42,033
LIABILITIES:
Deposits 79,734 79,730 85,926 86,338
Other liabilities and borrowed funds 87 86 120 120
</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.
21
<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.
22
<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, 1999 and
1998 are presented below:
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
1999 1998
---- ----
ASSETS:
Cash and cash equivalents $ 403 $ 1,860
Investment in subsidiary 15,640 15,953
ESOP loan receivable 654 826
Other assets 35 44
--------- -------
Total assets $ 16,732 $18,683
========= =======
LIABILITIES:
Other liabilities $ 87 $ 113
--------- -------
STOCKHOLDERS' EQUITY:
Preferred stock 0 0
Common stock 15 15
Paid-in capital 13,684 13,676
Retained earnings 9,684 9,433
Unearned compensation (1,532) (1,602)
Treasury stock (4,991) (3,000)
Unrealized gain (loss) on securities
available for sale, net (215) 48
--------- -------
Total stockholders' equity 16,645 18,570
--------- -------
Total liabilities and stockholders' equity $ 16,732 $18,683
========= =======
23
<PAGE>
STATEMENT OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
1999 1998
---- ----
INCOME FROM SUBSIDIARY:
Dividends $1,000 $ 0
Interest 102 142
------ ------
Total income 1,102 142
OPERATING EXPENSE 66 128
------ ------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
CURRENT YEAR SUBSIDIARY EARNINGS 1,036 14
INCOME TAXES 16 3
------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS 1,020 11
DISTRIBUTIONS (OVER) UNDER CURRENT YEAR SUBSIDIARY EARNINGS (422) 532
------ ------
Net income $ 598 $ 543
======= ======
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 598 $ 543
Distributions over (under) current year subsidiary earnings 422 (532)
------- -------
1,020 11
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in other assets 9 6
Increase (decrease) in other liabilities (26) 39
------- -------
Net cash provided (used in) operating activities 1,003 56
------- -------
INVESTING ACTIVITIES:
Net cash provided by investing activities 0 0
------- -------
FINANCING ACTIVITIES:
Capital contributions to subsidiary (145)
Capital contributions to plan trust (304) (22)
Payments received on ESOP loan 182 106
Proceeds from exercise of stock options 0 100
Purchase of treasury stock (1,991) 0
Dividends paid (347) (363)
------- -------
Net cash used in financing activities (2,460) (324)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,457) (268)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,860 2,128
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 403 $ 1,860
======= =======
</TABLE>
24
<PAGE>
CORPORATE INFORMATION
Directors and Executive Officers: Main Office:
James B. Little, Jr. 221 S. 6th Street
Chairman of the Board, President Gadsden, Alabama
and Chief Executive Officer of the
Company and the Bank Branch Offices:
Craig G. Cantrell 202 Sand Mountain Drive
Retired Albertville, Alabama
Thomas F. Dowling 395 Gunter Avenue
Dentist Guntersville, Alabama
Gadsden, Alabama
390 W. Main Street
Grady Gillam Centre, Alabama
Retired
Independent Auditor:
W. Roscoe Johnson, III
Partner in law firm of Inzer, Haney, Arthur Andersen LLP
Johnson & McWhorter, P.A. Birmingham, Alabama
Gadsden, Alabama
General Counsel:
Rex G. Keeling, Jr.
Property/Casualty Salesman with Insurance Inzer, Haney, Johnson &
Facilities McWhorter, P.A.
Gadsden, Alabama
Gates Little
Executive Vice President of the Company Securities and Regulatory
and the Bank Counsel:
Fred Taylor Kutak Rock
Owner of Taylor Realty Washington, D.C.
Albertville, Alabama
Annual Stockholders Meeting:
Officers:
November 17, 1999 - 5:00 p.m.
Rodney Rich The Southern Bank Company
Vice President of the Bank 221 S. 6th Street
Gadsden, Alabama
Margaret Stewart Record Date-September 24, 1999
Secretary of the Bank
A COPY OF THE ANNUAL REPORT ON FORM 10-KSB
Janice Stephens FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AS
Comptroller of the Bank FILED WITH THE SEC WILL BE FURNISHED TO
STOCKHOLDERS AS OF THE RECORD DATE UPON
Teresa Elkins WRITTEN REQUEST TO THE SECRETARY OF THE
Vice President of the Bank COMPANY, 221 SOUTH 6TH STREET, GADSDEN,
AL 35901.
Peggy Smith
Secretary of the Company and
Treasurer of the Bank
Martha Garrett
Vice President of the Bank
Annette Espy
Vice President of the Bank
15
<PAGE>
================================================================================
THE SOUTHERN BANC COMPANY, INC.
221 SOUTH 6TH STREET o GADSDEN, ALABAMA 35901 o (256) 543-3860
================================================================================
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
- ------
The Southern Banc Company, Inc.
State or Other Percentage
Subsidiaries (1) Jurisdiction of Incorporation Ownership
- ---------------- ----------------------------- ---------
The Southern Bank Company United States 100%
First Service Corporation Alabama 100%
- --------------------------------
(1) The assets, liabilities and operations of the subsidiaries are included
in the consolidated financial statements attached hereto as an exhibit.
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 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000946453
<NAME> The Southern Banc Company, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,380
<INT-BEARING-DEPOSITS> 7,301
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,350
<INVESTMENTS-CARRYING> 23,707
<INVESTMENTS-MARKET> 23,646
<LOANS> 42,207
<ALLOWANCE> 98
<TOTAL-ASSETS> 96,875
<DEPOSITS> 79,734
<SHORT-TERM> 0
<LIABILITIES-OTHER> 496
<LONG-TERM> 0
0
0
<COMMON> 15
<OTHER-SE> 16,630
<TOTAL-LIABILITIES-AND-EQUITY> 96,875
<INTEREST-LOAN> 3,221
<INTEREST-INVEST> 3,355
<INTEREST-OTHER> 414
<INTEREST-TOTAL> 6,990
<INTEREST-DEPOSIT> 4,100
<INTEREST-EXPENSE> 4,100
<INTEREST-INCOME-NET> 2,890
<LOAN-LOSSES> 27
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 2,147
<INCOME-PRETAX> 910
<INCOME-PRE-EXTRAORDINARY> 910
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 598
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 2.88
<LOANS-NON> 10
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 76
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 98
<ALLOWANCE-DOMESTIC> 98
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
