EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
================================================================================
2000
A N N U A L R E P O R T
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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, 2000. We invite you to
review the Report and the Company's performance during fiscal 2000.
During fiscal 1999, we significantly increased our loan
production, while preserving the Bank's traditionally high asset
quality. During fiscal 2000, we continued our increased level of loan
production, while reducing our operating expenses. We also repurchased
approximately 65,600 shares of outstanding common stock. These efforts
resulted in another increase in net income and a significant increase
in earnings per share.
We will continue to focus on our stockholders and communities
in order to enhance your investment and the banking needs of our
customers.
Your continued support and interest in our Company is greatly
appreciated.
Sincerely,
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 the 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 in 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, 2000, the Company had total
consolidated assets of $98.1 million, deposits of $81.4 million and
stockholders' equity of $16.3 million, or 16.6% 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 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 now
offers.
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 properties 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 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, consumer 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
in 1995 under the symbol "SRN." At June 30, 2000, there were 1,008,498 shares of
the Common Stock outstanding and approximately 302 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. There can be no assurance that dividends will
be paid.
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 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
FISCAL 2000
First Quarter $12.313 $ 8.250 $.0875
Second Quarter $ 9.875 $ 8.000 $.0875
Third Quarter $ 9.000 $ 7.250 $.0875
Fourth Quarter $ 9.375 $ 7.313 $.0875
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 6,944 $ 6,990 $ 7,418 $ 7,513 $ 7,702
Interest expense............................ 4,081 4,100 4,519 4,534 4,679
---------- ---------- ---------- --------- ----------
Net interest income......................... 2,863 2,890 2,899 2,979 3,023
Provision for loan losses................... 17 27 -- -- --
---------- ---------- ---------- --------- ----------
Net interest income after provision
Noninterest income.......................... 118 196 92 92 77
Noninterest expense......................... 1,962 2,148 2,171 2,849 2,231
---------- ---------- ---------- --------- ----------
Income before provision for income taxes.... 1,002 911 820 222 869
Provision for income taxes.................. 356 313 277 79 294
---------- ---------- ---------- --------- ----------
Net income.................................. $ 646 $ 598 543 143 575
========== ========== ========== ========= ==========
Earnings per share
Basic.................................. $ 0.71 $ 0.59 $ 0.51 $ 0.13 $ 0.34
========== ========== ========== ========= ==========
Diluted................................ $ 0.71 $ 0.57 $ 0.49 $ 0.12 $ 0.34
========== ========== ========== ========= ==========
Year Ended June 30,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA
Total assets................................ $ 98,087 $ 96,875 $ 105,087 $ 105,434 $ 107,029
Loans receivable, net....................... 39,840 42,109 41,153 36,180 33,145
Securities:
Available for sale..................... 27,109 21,351 22,239 17,621 13,504
Held to maturity....................... 23,886 23,706 34,077 44,158 52,822
Deposits.................................... 81,437 79,734 85,926 86,759 85,847
Stockholders' equity........................ 16,319 16,645 18,570 17,931 20,135
Year Ended June 30,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
KEY OPERATING DATA
Return on average assets.................... 0.66% 0.61% 0.52% 0.14% 0.53%
Return on average equity.................... 4.03 3.38 2.96 0.82 3.29
Average equity to average assets............ 16.33 18.12 17.43 16.58 16.17
Dividend payout ratio....................... 49.30 59.32 68.63 424.07 127.53
Number of offices........................... 4 4 4 4 4
</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 and consumer
loans located in the Bank's primary market area. Due to the competition for
one-to-four-family mortgage loans and consumer loans in the Bank's market area,
the Bank maintains a substantial portfolio of investment and mortgage-backed
securities. 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 6 and 7 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.
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 financial institution 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.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND JUNE 30, 1999
Total assets increased approximately $1.2 million, or 1.3%, from $96.9
million at June 30, 1999 to $98.1 million at June 30, 2000. During the year
ended June 30, 2000, net loans decreased approximately $2.3 million, or 5.4%,
securities available for sale increased approximately $5.8 million, or 27.0%,
and securities held to maturity increased approximately $180,000, or 0.76%.
Cash and cash equivalents decreased approximately $2.9 million, or
33.8%, from $8.7 million at June 30, 1999 to $5.7 million at June 30, 2000. The
decrease in cash and cash equivalents was primarily attributable to the
reduction in interest-bearing deposits in other banks.
4
<PAGE>
Accrued interest and dividends receivable increased approximately
$75,000, or 12.5%, from $601,000 at June 30, 1999 to $677,000 at June 30, 2000.
Prepaid expenses and other assets increased approximately $187,000, or 110.6%,
from $169,000 at June 30, 1999 to $355,000 at June 30, 2000. This increase was
primarily attributable to an increase in prepaid federal income taxes.
Total deposits increased approximately $1.7 million, or 2.1%, from
$79.7 million at June 30, 1999 to $81.4 million at June 30, 2000. Other
liabilities during the fiscal year ended June 30, 2000 decreased approximately
$166,000, or 33.4%, from $497,000 at June 30, 1999 to $331,000 at June 30, 2000.
This decrease was primarily attributable to a decrease in deferred federal
income taxes.
Total equity decreased approximately $325,000, or 2.0%, from $16.6
million at June 30, 1999 to $16.3 million at June 30, 2000. This change was
primarily attributable to the repurchase of approximately 65,600 shares of the
Company's outstanding Common Stock.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 2000 AND
1999
The Company reported net income for the fiscal years ended June 30,
2000 and 1999 of $646,000 and $598,000, respectively. The increase in net income
for the fiscal year ended June 30, 2000 was primarily attributable to a
reduction in salaries and employee benefits.
Net Interest Income. Net interest income for each of the fiscal years
ended June 30, 2000 and 1999 was $2.9 million. Total interest income decreased
approximately $47,000, or 0.67%, for the fiscal year ended June 30, 2000. Total
interest expense decreased approximately $19,000, or 0.47%, for the fiscal year
ended June 30, 2000 compared with the fiscal year ended June 30, 1999.
Provision for Loan Losses. During the fiscal year ended June 30, 2000,
the provision for loan losses was approximately $17,000. The provision for loan
losses for the fiscal year ended June 30, 1999 was approximately $27,000. 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 decreased approximately
$76,000, or 39.2%, for the fiscal year ended June 30, 2000, from $194,000 for
the year ended June 30, 1999 to $118,000. The decrease was primarily
attributable to a decrease in prepayment penalties associated with mortgage loan
refinances.
Non-Interest Expense. Non-interest expense decreased approximately
$185,000, or 8.6%, for the fiscal year ended June 30, 2000, from $2.2 million
for the year ended June 30, 1999 to $2.0 million. This decrease was primarily
attributable to a decrease in salaries and employee benefits of approximately
$177,000, or 12.27% for the fiscal year ended June 30, 2000. Other operating
expenses increased by approximately $2,000, or 0.37%, for the fiscal year ended
June 30, 2000.
5
<PAGE>
Provision for Income Taxes. During the fiscal year ended June 30, 2000,
the provision for income tax expense increased approximately $44,000, or 14.1%.
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, 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 $427,000, or 5.8%, for the fiscal year ended June 30, 1999
compared with the fiscal year ended June 30, 1998. Total interest expense
decreased approximately $418,000, or 9.3%, 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 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 by approximately
$103,000, from $92,000 for the fiscal year ended June 30, 1998 to $194,000 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
$24,000, or 1.1%, in 1999. 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 $1.4 million for the fiscal years ended June 30,
1999 and 1998. Other operating expenses decreased by approximately $45,000, or
7.3%, for the fiscal year ended June 30, 1999 compared with the fiscal year
ended June 30, 1998.
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.
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 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
6
<PAGE>
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, 2000, based on the most recent information provided by the OTS, it
was estimated that the Bank's NPV would decrease 11%, 23% and 34% and increase
9%, 15% and 20% 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.
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 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
7
<PAGE>
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.
8
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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, 2000 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,
---------------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------------
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................. $ 39,996 $ 3,143 7.86% $ 41,508 $ 3,185 7.67%
Securities....................... 49,435 3,383 6.84 52,145 3,502 6.72
Other interest-earning assets.... 6,598 416 6.30 6,828 303 4.44
--------- --------- --------- ----------
Total interest-earning assets.. 96,029 6,942 7.23 100,481 6,990 6.96
Non-interest-earning assets........ 2,079 2,009
--------- ---------
Total assets................... $ 98,108 $ 102,490
========= =========
Interest-bearing liabilities:
Deposits......................... $ 81,270 4,098 5.04 $ 83,137 4,100 4.93
-------- --------- --------- ----------
Total interest-bearing liabilities 81,270 4,098 5.04 83,137 4,100 4.93
--------- ----------
Non-interest-bearing liabilities... 812 1,106
--------- ---------
Total liabilities.............. 82,082 84,243
Equity............................. 16,026 18,247
--------- ---------
Total liabilities and equity... $ 98,108 $ 102,490
========= =========
Net interest income.............. $ 2,844 $ 2,890
======== ==========
Interest rate spread............. 2.19% 2.03%
======== ========
Net interest margin.............. 2.96% 2.88%
======== ========
Ratio of average interest-earning
assets to average interest-bearing
liabilities................... 118.16% 120.86%
======== ======
(TABLE CONTINUED)
Year Ended June 30,
----------------------------------------
1998
----------------------------------------
Average
Average Yield/
BALANCE INTEREST COST
------- -------- ------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable................. $ 38,751 $3,081 7.95%
Securities....................... 58,426 4,046 6.92
Other interest-earning assets.... 6,252 291 4.65
--------- ---------
Total interest-earning assets.. 103,429 7,418 7.17
Non-interest-earning assets........ 1,844
---------
Total assets................... $ 105,273
=========
Interest-bearing liabilities:
Deposits......................... $ 85,262 4,519 5.30
--------- ---------
Total interest-bearing liabilities 85,262 4,519 5.30
---------
Non-interest-bearing liabilities... 1,667
---------
Total liabilities..............
Equity............................. 18,344
---------
Total liabilities and equity... $ 105,273
=========
Net interest income.............. $ 2,899
=========
Interest rate spread............. 1.87%
========
Net interest margin.............. 2.80%
========
Ratio of average interest-earning
assets to average interest-bearing
liabilities................... 121.31%
========
</TABLE>
9
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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,
------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------------ --------------------------------------
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................................. $ 74 $ (116) $ (42) $ (114) $ 219 $ 105
Securities............................ 63 (182) (119) (78) (431) (509)
Other interest-earning assets......... 125 (12) 113 47 (71) (24)
-------- --------- ------- --------- ----------- -----------
Total interest-earning assets....... 262 (310) (48) (145) (283) (428)
-------- --------- -------- -------- ---------- ----------
Interest expense
Deposits............................. 90 (92) (2) (306) (113) (419)
-------- --------- -------- --------- ----------- ----------
Total interest-bearing liabilities... 90 (92) (2) (306) (113) (419)
-------- --------- -------- --------- ----------- ----------
Change in net interest income........... $ 172 $ (218) $ (46) $ 161 $ (170) $ (9)
======== ========= ======== ========= =========== ==========
</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, 2000, the Bank had approximately
$5.7 million in cash on hand and interest-bearing deposits in other banks, which
represented 5.9% of total assets. The Bank's
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average liquidity ratio well exceeded the required minimum at and during the
fiscal year ended June 30, 2000. At June 30, 2000, the Bank's level of liquid
assets, as measured for regulatory compliance purposes, was $19.8 million, or
22.9%.
At June 30, 2000, the Bank had $16.3 million of total equity, or 16.6%
of total assets. The Bank continued to exceed its regulatory capital requirement
ratios at June 30, 2000. Tangible capital and core capital were each $14.7
million, which represented 14.8% of adjusted total assets, and risk-based
capital was $14.8 million, which represented 50.0% of total risk-weighted assets
at June 30, 2000. Such amounts exceeded the respective minimum required ratios
of 1.5%, 4.0% and 8.0% by 13.3%, 10.8% and 42.0%, respectively. At June 30,
2000, 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 2 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.
11
<PAGE>
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 SUBSIDIARIES as
of June 30, 2000 and 1999 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
then ended June 30, 2000. 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 auditing standards generally accepted
in the United States. 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 Subsidiaries as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000 in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Birmingham, Alabama
August 18, 2000
12
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
ASSETS
2000 1999
CASH AND EQUIVALENTS:
<S> <C> <C>
Cash on hand and in other banks $ 1,498,835 $ 1,379,871
Interest-bearing deposits in other banks 4,247,611 7,300,785
----------- -----------
5,746,446 8,680,656
SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE 27,108,816 21,350,466
SECURITIES HELD TO MATURITY (FAIR VALUES OF $23,640,455 AND $23,646,445, 23,886,255 23,706,524
LOANS RECEIVABLE, NET 39,840,261 42,108,709
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE 676,947 601,477
PREMISES AND EQUIPMENT, NET 472,563 258,557
PREPAID EXPENSES AND OTHER ASSETS 355,225 168,666
----------- -----------
Total assets $98,086,513 $96,875,055
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $81,436,491 $79,733,677
OTHER LIABILITIES 330,725 496,638
----------- -----------
Total liabilities 81,767,216 80,230,315
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 500,000 shares authorized; 0 0
Common stock, par value $.01 per share; 3,500,000 shares authorized; 14,548 14,548
Additional paid-in capital 13,744,707 13,723,149
Retained earnings 10,034,813 9,684,032
Unearned compensation (535,417) (724,696)
Shares held in trust, 65,275 shares in 2000 and 1999 (846,197) (846,197)
Treasury stock at cost, 446,252 and 380,652 shares in 2000 and 1999 (5,624,141) (4,991,316)
Accumulated other comprehensive loss (469,016) (214,780)
----------- -----------
Total stockholders' equity 16,319,297 16,644,740
----------- -----------
Total liabilities and stockholders' equity $98,086,513 $96,875,055
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on loans $3,184,222 $3,221,414 $3,080,942
Interest and dividends on securities available for sale 1,618,026 1,286,155 1,253,456
Interest and dividends on securities held to maturity 1,603,952 2,068,895 2,792,400
Other interest income 537,938 414,190 290,785
---------- ---------- ----------
Total interest income 6,944,138 6,990,654 7,417,583
INTEREST EXPENSE:
Interest on deposits 3,889,578 4,100,296 4,518,576
Interest on borrowed funds 191,576 0 0
---------- ---------- ----------
Total interest expense 4,081,154 4,100,296 4,518,576
---------- ---------- ----------
Net interest income 2,862,984 2,890,358 2,899,007
PROVISION FOR LOAN LOSSES 17,000 27,000 0
---------- ---------- ----------
Net interest income after provision for loan 2,845,984 2,863,358 2,899,007
---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees 107,654 153,362 88,523
Miscellaneous income, net 10,578 41,015 3,277
---------- ---------- ----------
Total noninterest income 118,232 194,377 91,800
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,263,249 1,439,904 1,400,837
Office building and equipment expense 86,396 77,503 91,264
Deposit insurance expense 32,391 52,213 55,657
Other expense 579,791 577,656 623,121
---------- ---------- ----------
Total noninterest expense 1,961,827 2,147,276 2,170,879
---------- ---------- ----------
Income before provision for income taxes 1,002,389 910,459 819,928
PROVISION FOR INCOME TAXES 356,664 312,558 277,043
---------- ---------- ----------
Net income $ 645,725 $ 597,901 $ 542,885
========== ========== ==========
EARNINGS PER SHARE:
Basic $.71 $.59 $.51
Diluted $.71 $.57 $.49
AVERAGE SHARES OUTSTANDING--BASIC 903,202 1,014,959 1,061,133
AVERAGE SHARES OUTSTANDING--DILUTED 910,934 1,048,023 1,118,613
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
ADDITIONAL SHARES
COMMON PAID-IN RETAINED UNEARNED HELD IN
STOCK CAPITAL EARNINGS COMPENSATION TRUST
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 $14,548 $13,642,623 $ 9,253,350 $(1,396,305) $(520,789)
Net income 0 0 542,885 0 0
Change in unrealized gain (loss) on securities 0 0 0 0 0
Comprehensive income
Amortization of unearned compensation 0 32,470 0 237,758 0
Dividends declared ($.35 per share) 0 0 (362,894) 0 0
Exercise of stock options (8,599 shares) 0 0 0 100,489 0
Purchase of shares held in trust 0 0 0 0 (21,600)
------- ----------- ----------- ----------- ---------
BALANCE, JUNE 30, 1998 14,548 13,675,093 9,433,341 (1,058,058) (542,389)
Net income 0 0 597,901 0 0
Change in unrealized gain (loss) on securities 0 0 0 0 0
Comprehensive income
Purchase of treasury stock, at cost 0 0 0 0 0
Amortization of unearned compensation 0 48,056 0 333,362 0
Dividends declared ($.35 per share) 0 0 (347,210) 0 0
Purchase of shares held in trust 0 0 0 0 (303,808)
------- ----------- ----------- ----------- ---------
BALANCE, JUNE 30, 1999 14,548 13,723,149 9,684,032 (724,696) (846,197)
Net income 0 0 645,725 0 0
Change in unrealized loss on securities 0 0 0 0 0
Comprehensive income
Purchase of treasury stock, at cost 0 0 0 0 0
Amortization of unearned compensation 0 21,558 0 194,028 0
Dividends declared ($.35 per share) 0 0 (294,944) (4,749) 0
------- ----------- ----------- ----------- ---------
BALANCE, JUNE 30, 2000 $14,548 $13,744,707 $10,034,813 $ (535,417) $(846,197)
======= =========== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
(TABLE CONTINUED)
NON-OWNER
TREASURY UNREALIZED CHANGES IN
STOCK GAIN (LOSS) TOTAL EQUITY
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 $(3,000,128) $ (62,113) $17,931,186
Net income 0 0 542,885 $542,885
Change in unrealized gain (loss) on securities 0 109,640 109,640 109,640
----------
Comprehensive income 652,525
Amortization of unearned compensation 0 0 270,228
Dividends declared ($.35 per share) 0 0 (362,894)
Exercise of stock options (8,599 shares) 0 0 100,489
Purchase of shares held in trust 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 0 (262,307) (262,307) (262,307)
----------
Comprehensive income 335,594
Purchase of treasury stock, at cost (1,991,188) 0 (1,991,188)
Amortization of unearned compensation 0 0 381,418
Dividends declared ($.35 per share) 0 0 (347,210)
Purchase of shares held in trust 0 0 (303,808)
---------- ---------- -----------
BALANCE, JUNE 30, 1999 (4,991,316) (214,780) 16,644,740
Net income 0 0 645,725 645,725
Change in unrealized loss on securities 0 (254,236) (254,236) (254,236)
----------
Comprehensive income 391,489
Purchase of treasury stock, at cost (632,825) 0 (632,825)
Amortization of unearned compensation 0 0 215,586
Dividends declared ($.35 per share) 0 0 (299,693)
---------- ---------- -----------
BALANCE, JUNE 30, 2000 $(5,624,141) $(469,016) $16,319,297
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
15
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 645,725 $ 597,901 $ 542,885
Adjustments to reconcile net income to net cash provided
Depreciation 41,194 38,186 46,176
Accretion, net (33,892) (187,428) (15,581)
Amortization of intangible asset 28,172 32,973 38,847
Amortization of unearned compensation 215,586 381,418 270,228
Provision for loan losses 17,000 27,000 0
Deferred income tax provision (benefit) (26,997) (77,771) 31,167
Change in assets and liabilities:
Decrease (increase) in accrued interest and dividends (75,470) 135,368 23,876
Decrease (increase) in prepaid expenses and other assets (186,559) 6,682 392,588
Increase (decrease) in other liabilities (165,913) 113,955 (205,027)
------------ ------------ -----------
Net cash provided by operating activities 458,846 1,068,284 1,125,159
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (10,223,478) (16,350,702) (12,304,906)
Proceeds from maturities and principal payments on 4,481,656 16,946,256 7,808,031
Purchases of securities held to maturity (13,231,431) (5,780,036) (5,004,063)
Proceeds from maturities and principal payments on securities 12,791,904 16,237,441 15,110,735
Purchase of loans 0 0 (685,400)
Net loan (originations) repayments 2,268,448 (982,371) (4,287,542)
Capital expenditures (255,200) (45,370) (30,812)
------------ ------------ -----------
Net cash provided by (used in) investing activities (4,168,101) 10,025,218 606,043
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares held in trust 0 (303,808) (21,600)
Purchase of treasury stock (632,825) (1,991,188) 0
Cash dividends paid (294,944) (347,210) (362,894)
Increase (decrease) in deposits, net 1,702,814 (6,192,158) (832,879)
Proceeds from exercise of stock options 0 0 100,489
------------ ------------ -----------
Net cash provided by (used in) financing activities 775,045 (8,834,364) (1,116,884)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,934,210) 2,259,138 614,318
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,680,656 6,421,518 5,807,200
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,746,446 $ 8,680,656 $ 6,421,518
============ ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes, net of refund received $ 358,000 $ 284,079 $ 224,222
============ ============ ===========
Interest $ 4,514,570 $ 4,059,596 $ 4,504,499
============ ============ ===========
Noncash transactions:
Change in unrealized net gain (loss) on securities
available for sale, net of deferred taxes (benefit) $ (254,236) $ 262,307 $ 109,640
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
16
<PAGE>
THE SOUTHERN BANC COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
1. ORGANIZATION AND 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 The Southern Bank Company (the "Bank"),
formerly the First Federal Savings and Loan Association of Gadsden, upon the
Bank's conversion from a federally chartered mutual savings association to a
federally chartered stock savings association (the "Conversion"). The
accompanying consolidated financial statements include the accounts of the
Company and its two wholly owned subsidiaries: the Bank and First Service
Corporation. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Bank 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 Bank
operates from its four offices in the northeast portion of Alabama and
originates the majority of its loans in this market area.
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 income and expense 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. A substantial
portion of the Company's loans are secured by real estate in its primary market
area. Accordingly, the ultimate collectibility 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, 2000 and 1999.
17
<PAGE>
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 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
Bank maintains an extensive credit risk monitoring process that considers
several factors including: current economic conditions affecting the Bank'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.
The provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans receivable 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 Bank 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.
18
<PAGE>
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
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 ($76,090 and $104,262 at June 30, 2000 and 1999,
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 $28,172, $32,973, and $38,847 in fiscal
years 2000, 1999, and 1998, 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 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Under certain conditions, a derivative may be specifically designated as a
hedge. Accounting for changes in fair values of derivatives will depend on their
designation. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133. This Statement amends the effective date of SFAS No.
133, which will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Given the Company's June 30 fiscal year-end, this
Statement will be effective July 1, 2000. In June 2000, the FASB issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities--An Amendment to FASB Statement No. 133. This Statement addresses a
limited number of issues causing implementation difficulties for numerous
entities that apply SFAS 133, and amends the accounting and reporting standards
of SFAS 133 for certain derivative instruments and certain hedging activities.
Management is completing its assessment of the impact of these Statements on the
Company's financial position and results of operations but believes the impact
will not be significant.
PRIOR YEAR CLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
presentation.
19
<PAGE>
2. REGULATORY MATTERS
The Bank 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and 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 Bank 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, 2000 and 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 2000 and 1999, the most recent notification from the regulatory
authorities categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum Total risk-based, Tier 1 risk-based, and 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 Bank:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- -------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
JUNE 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $14,769 50.0% $2,367 8.0% $2,960 10.0%
Tier 1 (core) capital (to risk weighted 14,654 49.5 1,184 4.0 1,776 6.0
Tier 1 (core) capital (to adjusted total 14,654 14.8 3,956 4.0 4,945 5.0
Tangible capital (to adjusted total 14,654 14.8 1,484 1.5 N/A N/A
JUNE 30, 1999:
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
Tier 1 (core) capital (to adjusted total 15,750 16.2 3,893 4.0 4,867 5.0
Tangible capital (to adjusted total 15,750 16.2 1,460 1.5 N/A N/A
</TABLE>
20
<PAGE>
The following table is a reconciliation of the Bank's stockholder's equity to
Tangible, Tier 1, and Risk-based capital as required by the OTS:
2000 1999
---- ----
(In thousands)
Stockholder's equity $14,261 $15,639
Intangible assets (76) (104)
Unrealized loss on securities available for sale 469 215
------- -------
Tangible and Tier 1 capital 14,654 15,750
Allowance for loan losses 115 98
------- -------
Total risk based capital $14,769 $15,848
======= =======
Total assets $98,516 $97,225
Adjusted total assets 98,909 97,336
Total risk weighted assets 29,599 28,324
Pursuant to OTS regulations, an institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution and has
not been advised by the OTS that it is in need of more than the normal
supervision can, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of (i) 100% of
its net income to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(ii) 75% of its net income over the most recent four-quarter period. Any
additional capital distributions require prior regulatory approval.
The Company's principal source of funds for dividend payments is dividends from
the Bank. Certain restrictions exist regarding the ability of the Bank to pay
dividends to the Company. At July 1, 2000, dividend payments by the Bank were
subject to regulatory approval. The Company's ability to pay dividends will be
largely dependent upon dividends to the Company from the Bank. Pursuant to the
Office of Thrift Supervision ("OTS") regulations, the Bank will not be permitted
to pay dividends on its capital stock or repurchase shares of its stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account or if stockholders' equity would be reduced below the amount
required by the OTS.
3. 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, 2000, 1999, and 1998. Common stock outstanding consists of issued shares
less unallocated ESOP shares and shares held in trust (see Note 4). Diluted
earnings per share for the years ended June 30, 2000, 1999, and 1998, 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.
21
<PAGE>
The following table represents the earnings per share calculations for the years
ended June 30, 2000, 1999, and 1998 accompanied by the effect of this accounting
change on previously reported earnings per share:
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ------
2000:
<S> <C> <C> <C>
Basic earnings per share $645,725 903,202 $.71
Diluted securities: ----
Management recognition plan shares 7,732
Incentive stock option plan shares 0
-------- ---------
Diluted earnings per share $645,725 910,934 $.71
======== ========= ====
1999:
Basic earnings per share $597,901 1,014,959 $.59
Diluted securities: ----
Management recognition plan shares 22,401
Incentive stock option plan shares 10,663
-------- ---------
Diluted earnings per share $597,901 1,048,023 $.57
======== ========= ====
1998:
Basic earnings per share $542,885 1,061,133 $.51
Diluted securities: ----
Management recognition plan shares 24,449
Incentive stock option plan shares 33,031
-------- ---------
Diluted earnings per share $542,885 1,118,613 $.49
======== ========= ====
</TABLE>
4. EMPLOYEE RETIREMENT AND SAVINGS PLANS
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
In connection with the Conversion, the Bank 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 to the Bank and secured by the common
stock owned by the ESOP. The note due from the ESOP has been reflected as a
separate component of stockholders' equity as unearned compensation. 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.
Expense related to the ESOP was approximately $113,000, $285,000, and $166,000
for 2000, 1999, and 1998. Unearned compensation related to the ESOP was
approximately $459,901 and $515,000 at June 30, 2000 and 1999, respectively.
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 (i.e. unearned
compensation) is charged/credited to additional paid-in capital in accordance
with AICPA Statement of Position 93-6, Employers' Accounting for Employee Stock
Ownership Plans.
22
<PAGE>
MANAGEMENT RECOGNITION PLAN ("MRP")
During fiscal 1996, the Bank 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 Bank. The aggregate fair market
value of the shares purchased by the MRP is reflected in shares held in trust at
the time of purchase. As shares in the MRP are granted to employees, an amount
equal to the award is reclassified from shares held in trust to unearned
compensation. Compensation is earned ratably over the stipulated vesting period.
The expense related to the MRP was approximately $112,000, $112,000, and
$104,000 for 2000, 1999, and 1998, respectively. Unearned compensation related
to the MRP was approximately $75,516 and $175,710 for 2000 and 1999,
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.
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
$38,770, $38,132, and $94,996 for fiscal years 2000, 1999, and 1998,
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 Bank 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 Bank 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 compensation expense for the SERA of approximately
$18,000 and $60,000 for the year ended June 30, 2000 and 1999, respectively. The
projected benefit obligation, accumulated benefit obligation, and vested benefit
obligation were all $197,883 and $197,546 at June 30, 2000 and 1999,
respectively. The components of the net periodic cost as of 2000 and 1999,
respectively, are service costs of $3,704 and $5,186, interest cost of $9,695
and $13,233, and net amortization and deferred cost (benefit) of $(13,062) and
$33,900. In determining the actuarial present value of the projected benefit
obligation, the discount rate was 7% and the increase in share value was 10%.
23
<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.
5. 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.
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, 2000. Under
the Option Plan, the options vest 20% per year and become exercisable upon the
participant's completion of each of five years of service. Had compensation
costs for these plans been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
2000 1999 1998
Net income:
As reported $645,725 $597,901 $542,885
Pro forma 619,119 555,592 494,676
Earnings per share:
As reported:
Basic $.71 $.59 $.51
Diluted .71 .55 .49
Pro forma:
Basic .69 .57 .47
Diluted .68 .53 .44
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.
The Company has purchased shares in the open market to be issued upon exercise
of stock options. Such shares are reflected at cost as shares held in trust in
the accompanying statements of financial condition. During 2000 and 1999 the
Company purchased 0 and 24,005 shares, respectively, which will be used for the
exercise of options.
24
<PAGE>
A summary of the status of the Company's stock option plan at June 30, 2000,
1999, and 1998, and the changes during the years then ended is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 123,577 $11.96 111,777 $11.69 120,376 $11.69
Forfeitures 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 (8,599) 11.69
Granted 0 0.00 11,800 14.56 0 0.00
------- ------ ------- ------ ------- ------
Outstanding at end of year 123,577 $11.96 123,577 $11.96 111,777 $11.69
======= ====== ======= ====== ======= ======
Exercisable at end of year 93,838 $11.69 68,114 $11.69 43,402 $11.69
======= ====== ======= ====== ======= ======
Weighted average fair value of the options N/A $1.74 $1.70
====== ======= =======
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000: 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.
Shares held in trust related to the Option Plan amounted to approximately
$666,907 and $662,417 at June 30, 2000 and 1999, respectively, and are shown as
a reduction of stockholders' equity in the accompanying statements of financial
condition.
6. SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gain and loss, and fair value of securities
designated as available for sale are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
---- ---- ------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,306,717 $ 9,035 $ (42,837) $ 4,272,915
U.S. Government agency securities 22,812,080 3,596 (704,175) 22,111,501
Federal Home Loan Bank stock 724,400 0 0 724,400
----------- -------- ---------- ------------
$27,843,197 $12,631 $(747,012) $27,108,816
=========== ======== ========== ============
JUNE 30, 2000
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
---- ---- ------ ----------
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>
25
<PAGE>
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, 2000
-------------------------------
AMORTIZED
COST FAIR VALUE
Due in one year or less $ 3,954,773 $ 3,937,246
Due after one year through five years 11,346,151 11,006,546
Due after five years through ten years 6,221,871 5,961,891
Due after ten years 5,596,002 5,478,733
------------ ------------
27,118,797 26,384,416
Federal Home Loan Bank stock 724,400 724,400
------------ ------------
$27,843,197 $27,108,816
============ ============
A security designated as available for sale with a carrying value (fair value)
of $1,286,391 has been pledged as collateral for certain large deposits (public
funds) with an aggregate balance of $1,325,000 at June 30, 2000.
7. SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gain and loss, and fair value of securities
designated as held to maturity are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
---- ---- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government agency securities $23,886,255 $139,132 $(384,932) $23,640,455
----------- -------- --------- -----------
$23,886,255 $139,132 $(384,932) $23,640,455
=========== ======== ========= ===========
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
=========== ======== ========= ===========
</TABLE>
26
<PAGE>
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, 2000
--------------------------------
AMORTIZED
COST FAIR VALUE
Due in one year or less $ 196,144 $ 195,469
Due after one year through five years 3,948,550 3,924,805
Due after five years through ten years 13,179,277 13,036,158
Due after ten years 6,562,284 6,484,023
-------------- -------------
$23,886,255 $23,640,455
============== =============
8. LOANS RECEIVABLE
Loans receivable are summarized as follows:
June 30,
--------------------------
2000 1999
---- ----
Mortgage loans:
Secured by one to four family residential $33,401,335 $36,702,144
Secured by nonresidential properties 96,136 301,936
Consumer loans 5,745,397 4,450,682
Share loans 769,409 647,406
----------- -----------
40,012,277 42,102,168
Less:
Unearned interest income 382,977 240,453
Deferred loan fees (costs), net (325,797) (344,830)
Allowance for loan losses 114,836 97,836
----------- -----------
Loans receivable, net $39,840,261 $42,108,709
=========== ===========
Loans secured by one to four family residential properties include second
mortgage loans on properties for which the Bank 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, 2000 and 1999 were
approximately $1,462,000 and $1,464,000, respectively.
As a savings and loan institution, the Bank has a credit concentration in
residential real estate mortgage loans. Substantially all of the Bank's
customers are located in its trade area of Etowah, Marshall, and Cherokee
Counties in Alabama. Although the Bank 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 Bank. 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, 2000 and 1999, $363,889 and
$442,075, respectively, of these loans were outstanding. During fiscal 2000,
$167,576 of new loans were made and repayments totaled $245,762.
27
<PAGE>
An analysis of the Company's allowance for loan losses is as follows:
For the Years Ended
June 30,
-------------------------------------
2000 1999 1998
---- ---- ----
Balance, beginning of year $ 97,836 $75,673 $75,673
Provision for loan losses 17,000 27,000 0
Charge-offs, net of recovery 0 (4,837) 0
--------- ------- -------
Balance, end of year $114,836 $97,836 $75,673
========= ======= =======
At June 30, 2000 and 1999, nonaccrual loans totaled approximately $18,705 and
$10,333, respectively. Interest income foregone on nonaccrual loans was not
significant for fiscal years 2000, 1999, and 1998, respectively.
9. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
June 30,
---------------------------
2000 1999
---- ----
Land $ 320,085 $ 170,085
Building and improvements 332,674 254,677
Leasehold improvements 63,956 58,793
Furniture, fixtures, and equipment 583,463 561,422
----------- -----------
1,300,178 1,044,977
Less accumulated depreciation (827,615) (786,420)
----------- -----------
$ 472,563 $ 258,557
=========== ===========
Depreciation expense charged to office building and equipment expense in 2000,
1999, and 1998, totaled approximately $41,000, $38,000, and $46,000,
respectively.
28
<PAGE>
10. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 June 30, 1999
------------- -------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Demand, NOW, and Money Market accounts, including
noninterest bearing deposits of
$143,076 and $162,173 at
June 30, 2000 and June 30, 1999,
<S> <C> <C> <C> <C>
respectively $ 6,107,584 7.50% $ 7,814,777 9.80%
Passbook savings 5,235,751 6.43 5,713,307 7.17
------------ ------ ------------ ------
11,343,335 13.93 13,528,084 16.97
Certificates of deposit:
2.00- 4.00% 5,400,448 6.63 7,490,137 9.39
4.01- 6.00% 37,065,603 45.52 57,545,893 72.18
6.01- 8.00% 27,509,481 33.78 1,047,695 1.31
8.01-10.00% 117,624 0.14 121,868 0.15
------------ ------ ------------ ------
70,093,156 86.07 66,205,593 83.03
------------ ------ ------------ ------
$81,436,491 100.00% $79,733,677 100.00%
============ ====== ============ ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $11,614,430 and $9,629,583 at June 30, 2000 and
1999, respectively.
At June 30, 2000, the scheduled maturities of time deposits are as follows:
2001 $39,843,488
2002 20,937,681
2003 7,049,260
2004 1,533,367
2005 647,688
Thereafter 81,672
-----------
Total $70,093,156
===========
Interest expense on deposits consisted of the following:
For the Years Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
Passbook savings $ 199,670 $ 173,306 $ 149,106
NOW accounts 150,082 247,099 240,356
Certificates of deposit 3,539,826 3,679,891 4,129,114
----------- ----------- ----------
$3,889,578 $4,100,296 $4,518,576
=========== =========== ==========
29
<PAGE>
11. INCOME TAXES
The provision (benefit) for income taxes for the periods indicated is summarized
as follows:
For the Years Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
Current Provision:
Federal $338,311 $342,262 $216,746
State 45,350 48,067 29,130
-------- -------- --------
383,661 390,329 245,876
Deferred provision (benefit) (26,997) (77,771) 31,167
-------- -------- --------
$356,664 $312,558 $277,043
======== ======== ========
The differences between the provision (benefit) for income taxes and the amount
computed by applying the statutory federal income tax rate of 34% to income
before taxes were as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Pretax income at statutory rates $333,944 $313,813 $273,142
Add (deduct):
State income tax, net of federal tax benefit 10,554 26,183 21,494
Other, net 12,166 (27,438) (17,593)
-------- -------- --------
$356,664 $312,558 $277,043
======== ======== ========
Effective income tax rate 36% 34% 34%
======== ======== ========
</TABLE>
The components of the net deferred tax asset or liability at June 30, 2000 and
1999 were as follows:
June 30,
--------
2000 1999
---- ----
Amortization of intangibles $ 78,806 $ 68,552
Reserves for employee benefit plans 164,911 160,547
Depreciation 13,069 5,362
Unrealized net loss on securities available for sale 178,226 81,616
Other 17,686 14,703
Deferred tax asset 452,698 330,780
FHLB stock dividend (58,919) (58,919)
Bad debt reserve, net (8,462) (17,462)
Accretion of discount on securities (145,659) (133,887)
Deferred loan fees and costs, net (140,239) (144,900)
Other (312) (112)
Deferred tax liability (353,591) (355,280)
Net deferred tax asset (liability) $ 99,107 $ (24,500)
30
<PAGE>
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 Bank 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.
12. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
June 30,
--------
2000 1999
---- ----
Securities available for sale $334,331 $254,431
Securities held to maturity 155,648 145,540
Loans receivable 164,493 180,399
Dividends receivable - FHLB stock 13,956 13,821
Interest-bearing deposits in other banks 8,519 7,286
-------- --------
$676,947 $601,477
======== ========
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has lease agreements for its branch offices. Rental expense under
these leases aggregated $20,115, $18,546, and $16,694, for fiscal years 2000,
1999, and 1998, respectively. The aggregate annual minimum rental commitments
under the terms of all noncancellable leases at June 30, 2000 are as follows:
FISCAL YEAR AMOUNT
----------- ------
2001 $15,348
2002 15,348
2003 15,348
2004 8,069
2005 0
-------
$54,113
=======
31
<PAGE>
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 off-balance sheet exposure the Bank has
is its commitment to originate loans and fund unused lines of credit. At June
30, 2000, the Company had no outstanding commitments to originate residential
real estate loans. Additionally, at June 30, 2000, the Bank had provided
approximately $653,721 in unused lines of credit.
LITIGATION
The Company is a party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the consolidated financial statements.
STOCK CONVERSION
On October 5, 1995, the Conversion of the Bank 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 Bank established a liquidation account in an amount equal to its
regulatory capital as of the latest practicable date prior to consummation of
the Offering.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
32
<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, 2000 AT JUNE 30, 1999
---------------- ----------------
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 $ 5,746 $ 5,746 $ 8,681 $ 8,681
Securities--AFS 27,109 27,109 21,350 21,350
Securities--HTM 23,886 23,640 23,706 23,646
Loans receivable, net 39,840 39,037 42,109 42,530
LIABILITIES:
Deposits 81,436 81,650 79,734 79,730
Other liabilities 331 331 497 497
</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 (AFS)
and held to maturity (HTM) have a readily determinable fair value. Fair
values for these securities are based on quoted market prices, where
available. If not available, fair values are based on market prices of
comparable instruments. The carrying value of accrued interest on these
instruments approximates fair value.
LOANS RECEIVABLE, NET
For loans with rates which are repriced in coordination with movements
in market rates and with no significant change in credit risk, fair
value estimates are based on carrying values. The fair values for
certain mortgage loans are based on quoted market prices of similar
loans sold in conjunction with securitizing transactions, adjusted for
differences in loan characteristics. The fair values of other loans are
estimated by discounting future cash flows using current rates at which
loans with similar terms would be made to borrowers of similar credit
ratings. The carrying amount of accrued interest on loans approximates
fair values.
DEPOSITS
The fair value of deposits with no stated maturity, such as interest
and non-interest demand deposits, NOW accounts, savings accounts, and
money market accounts, is, by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). Fair
values for 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.
33
<PAGE>
OTHER LIABILITIES
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.
15. 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, 2000 and 1999 are
presented below:
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---- ----
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,517 $ 403
Investment in subsidiary 14,261 15,640
ESOP loan receivable 548 654
Other assets 31 35
-------- ---------
Total assets $16,357 $16,732
======== =========
LIABILITIES:
Other liabilities $ 38 $ 87
-------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock 0 0
Common stock 15 15
Paid-in capital 13,744 13,723
Retained earnings 10,034 9,684
Unearned compensation (535) (725)
Shares held in trust (846) (846)
Treasury stock (5,624) (4,991)
Unrealized loss on securities available for sale, net (469) (215)
-------- ---------
Total stockholders' equity 16,319 16,645
-------- ---------
Total liabilities and stockholders' equity $16,357 $16,732
======== =========
</TABLE>
34
<PAGE>
STATEMENT OF INCOME
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---- ----
INCOME FROM SUBSIDIARY:
<S> <C> <C>
Dividends $2,000 $1,000
Interest 45 102
------ ------
Total income 2,045 1,102
OPERATING EXPENSE 31 66
------ ------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS 2,014 1,036
INCOME TAXES 34 16
------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS 1,980 1,020
DISTRIBUTIONS (OVER) UNDER CURRENT YEAR SUBSIDIARY EARNINGS (1,334) (422)
------ ------
Net income $ 646 $ 598
====== ======
</TABLE>
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 646 $ 598
Distributions over (under) current year subsidiary earnings 1,334 422
------- --------
1,980 1,020
Adjustments to reconcile net income to net cash provided by operating
activities:
Decrease in other assets 4 9
Increase (decrease) in other liabilities (49) (26)
------- --------
Net cash provided by operating activities 1,935 1,003
------- --------
INVESTING ACTIVITIES:
Net cash provided by investing activities 0 0
------- --------
FINANCING ACTIVITIES:
Capital contributions to plan trust 0 (304)
Payments received on ESOP loan 106 182
Purchase of treasury stock (633) (1,991)
Dividends paid (294) (347)
------- --------
Net cash provided by (used in) financing activities (821) (2,460)
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,114 (1,457)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 403 1,860
------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,517 $ 403
======= ========
</TABLE>
35
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS AND EXECUTIVE OFFICERS: MAIN OFFICE:
James B. Little Jr. 221 S. 6th Street
Chairman of the Board and Chief Executive Gadsden, Alabama
Officer of the Company and the Bank
BRANCH OFFICES:
Craig G. Cantrell 202 Sand Mountain Drive
Retired Albertville, Alabama
Thomas F. Dowling 2204 Henry Street
Dentist Guntersville, Alabama
Gadsden, Alabama
390 W. Main Street
Grady Gillam Centre, Alabama
Retired
Rex G. Keeling Jr. INDEPENDENT PUBLIC ACCOUNTANTS:
Property/Casualty Salesman with Insurance Facilities
Arthur Andersen LLP
Gates Little Birmingham, Alabama
President of the Company and
the Bank GENERAL COUNSEL:
James B. Little III Inzer, Haney & McWhorter, P.A.
New Capital Partners, LLC Gadsden, Alabama
Founder and Partner
SECURITIES AND REGULATORY COUNSEL:
Fred Taylor
Owner of Taylor Realty Kutak Rock
Albertville, Alabama Washington, D.C.
OFFICERS: ANNUAL STOCKHOLDERS MEETING:
Rodney Rich November 9, 2000 - 5:00 p.m.
Vice President of the Bank The Southern Bank Company
221 S. 6th Street
Janice Stephens Gadsden, Alabama
Comptroller of the Bank Record Date - September 15, 2000
Teresa Elkins A COPY OF THE ANNUAL REPORT ON FORM 10-
Vice President of the Bank KSB FOR THE FISCAL YEAR ENDED JUNE 30, 2000
AS FILED WITH THE SEC WILL BE FURNISHED TO
Peggy Smith STOCKHOLDERS AS OF THE RECORD DATE UPON
Secretary of the Company and Secretary-Treasurer of the Bank WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY, 221 SOUTH 6TH STREET, GADSDEN,
Martha Garrett AL 35901.
Vice President of the Bank
Annette Espy
Vice President of the Bank
</TABLE>
36
<PAGE>
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THE SOUTHERN BANC COMPANY, INC.
221 SOUTH 6TH STREET o GADSDEN, ALABAMA 35901 o (256) 543-3860
