SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
| | TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number: 1-13964
THE SOUTHERN BANC COMPANY, INC.
-------------------------------
(Name of Small Business Issuer in Its Charter)
DELAWARE 63-1146351
-------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
221 S. 6TH STREET, GADSDEN, ALABAMA 35901
-------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (256) 543-3860
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
-------------------------------------- --------------------------------------
(Title of Class) (Name of Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant's revenues for the fiscal year ended June 30, 2000: $645,725
The aggregate market value of the 757,817 shares of Common Stock of the
registrant issued and outstanding held by non-affiliates was approximately $8.0
million based on the closing sales price of $10.56 per share of the registrant's
Common Stock on September 25, 2000 as listed on the American Stock Exchange. For
purposes of this calculation, it is assumed that directors, executive officers
and beneficial owners of more than 10% of the registrant's outstanding voting
stock are affiliates.
Number of shares of Common Stock outstanding as of September 25, 2000: 1,006,498
Transitional Small Business Disclosure Format Yes No X
-------- ------
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the part of this
report into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 2000 (the "Annual Report"). (Parts I and II)
2. Portions of the Proxy Statement for the registrant's 2000 Annual Meeting of
Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Southern Banc Company, Inc. The Southern Banc Company, Inc. (the
"Company") was incorporated under the laws of the State of Delaware in May 1995
at the direction of management of The Southern Bank Company, formerly First
Federal Savings and Loan Association of Gadsden (the "Bank"), for the purpose of
serving as the savings institution holding company of the Bank upon the
Company's acquisition of all of the capital stock issued by the Bank in
connection with the Bank's conversion from mutual to stock form.
The holding company structure permits the Company to expand the
financial services offered through the Bank. As a holding company, the Company
has greater flexibility than the Bank to diversify its business activities
through existing or newly formed subsidiaries or through acquisition or merger
with other financial institutions. The Company qualifies as a unitary savings
institution holding company and is subject to regulation by the Office of Thrift
Supervision ("OTS"). The Company's principal business is the business of the
Bank. At June 30, 2000, the Company had total consolidated assets of $98.1
million, deposits of $81.4 million, net loans receivable of $39.8 million and
stockholders' equity of $16.3 million.
The Company's executive offices are located at 221 S. 6th Street,
Gadsden, Alabama 35901, and its telephone number is (256) 543-3860.
The Southern Bank Company. The Bank is an independent
community-oriented savings institution dedicated to providing quality customer
service. The Bank was organized in 1936 as a federally chartered mutual savings
and loan association, at which time it also became a member of the Federal Home
Loan Bank ("FHLB") System and obtained federal deposit insurance.
In 1999, the Bank changed it corporate title from "First Federal
Savings and Loan Association of Gadsden" to "The Southern Bank Company." The
change of name was made to eliminate any confusion between the Company and the
Bank and to increase public awareness of the expanded banking services which the
Bank is authorized to offer. The Bank currently operates through four
full-service banking offices located in Gadsden, Albertville, Guntersville and
Centre, Alabama.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the
authority to conduct special examinations. The Bank must file reports with OTS
describing its activities and financial condition and is also subject to certain
reserve requirements promulgated by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board").
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain matters discussed in this document are "forward looking
statements," intended to qualify for the safe harbors from liability established
by the Private Securities Legislation Reform Act of 1995. These forward looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects," "estimates," or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also forward
looking statements. Such forward looking statements are subject to certain risks
and
1
<PAGE>
uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated as
of the date of this report. Stockholders, potential investors, and other readers
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are only made as of the date of
this report and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
BUSINESS STRATEGY
The Bank's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Bank has sought to implement this
strategy by using retail deposits as its sources of funds and maintaining most
of its assets in mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA") and the Federal National Mortgage Association ("FNMA"), loans secured
by owner-occupied one-to-four-family residential real estate located in the
Bank's market area, U.S. government and agency securities, interest-earning
deposits, cash and equivalents, and consumer loans. The Bank's business strategy
incorporates the following key elements: (1) remaining a community-oriented
financial institution while maintaining a strong core customer base by providing
quality service and offering customers the access to senior management and
services that a community-based institution can offer; (2) attracting a retail
deposit base from the communities served by the Bank's four banking offices; (3)
maintaining asset quality by emphasizing investment in local residential
mortgage loans, mortgage-backed securities and other securities issued or
guaranteed by the U.S. government or agencies thereof; and (4) maintaining
liquidity and capital substantially in excess of regulatory requirements.
MARKET AREA
The Bank considers its primary market area to consist of Etowah,
Cherokee and Marshall Counties in which the Bank has its four offices. The City
of Gadsden, in which the Bank's main office is located, is in Etowah County,
approximately 65 miles northeast of Birmingham, Alabama. Based upon the 1990
population census, the combined population of Etowah, Cherokee and Marshall
Counties was approximately 190,000.
The economy in the Bank's market area includes a mixture of
manufacturing and agriculture. For many years the two major industrial employers
were Goodyear Tire and Rubber Company ("Goodyear") and Gulf States Steel
Corporation ("Gulf States"). At present, Goodyear employs 1,205 workers which is
a decline from 1,600 workers as of January 1999. Negotiations are currently
underway between Goodyear and state and local government for assistance in
modernizing the Gadsden plant. If successful, the modernization would increase
production and create approximately 300 jobs. Gulf States, which previously
employed 1,850 workers, ceased production on August 21, 2000 after operating
under Chapter 11 Bankruptcy since July 1999. Currently, Honda Motor Company is
constructing a manufacturing plant in Talladega County only 17 miles from the
Etowah County line. According to projections, the Honda Plant, suppliers and
additional economic opportunities for local businesses could produce
approximately 900 jobs for Etowah County residents. According to the Alabama
Department of Industrial Relations, the unemployment rates for August 2000 in
Etowah, Cherokee and Marshall Counties were 6.0%, 5.3% and 4.9%, respectively,
as compared to 4.5% for the State of Alabama.
2
<PAGE>
COMPETITION
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings
institutions, credit unions, regional bank holding companies and commercial
banks located in its primary market area. Significant competition for the Bank's
other deposit products and services comes from money market mutual funds and
brokerage firms. The primary factors in competing for loans are interest rates
and loan origination fees and the range of services offered by various financial
institutions. Competition for origination of real estate loans normally comes
from other savings institutions, commercial banks, credit unions, mortgage
bankers, and mortgage brokers.
The Bank's primary competition comes from institutions headquartered in
the Bank's market area as well as numerous additional commercial banks which
have branch offices located in the Bank's market area. Many competing financial
institutions have financial resources substantially greater than the Bank and
offer a wider variety of deposit and loan products.
LENDING ACTIVITIES
General. The Bank's principal lending activity consists of the
origination of loans secured by mortgages on existing one-to-four-family
residences and a variety of consumer loans in the Bank's market area. The Bank
also makes limited amounts of non-residential real estate loans. The Bank is
authorized to make commercial business loans; however, that has not been its
focus historically.
Savings institutions generally are subject to the lending limits
applicable to national banks. With certain limited exceptions, the maximum
amount that a savings institution or a national bank may lend to any borrower
(including certain related entities of the borrower) at one time may not exceed
15% of the unimpaired capital and surplus of the institution, plus an additional
10% of unimpaired capital and surplus for loans fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 15% of unimpaired capital and
surplus.
At June 30, 2000, the maximum amount that the Bank could have loaned to
any one borrower without prior OTS approval was approximately $4.1 million. At
such date, the largest aggregate amount of loans that the Bank had outstanding
to any one borrower was approximately $252,000.
3
<PAGE>
Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated. At June 30, 2000, the Bank had no concentrations of loans
exceeding 10% of total loans that are not disclosed below.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
2000 1999
------------------------------- ------------------------------
AMOUNT % AMOUNT %
------ ----- ------ ---
(Dollars in thousands)
TYPE OF LOAN:
------------
Real estate loans:
<S> <C> <C> <C> <C>
One-to-four-family residential(1).............. $ 33,401 83.48% $ 36,702 87.17%
Non-residential................................ 96 0.24 302 0.72
Consumer loans................................... 5,746 14.36 4,451 10.57
Savings account loans............................ 769 1.92 647 1.54
----------- ---------- ------------ ----------
Total gross loans................................ 40,012 100.00% 42,102 100.00%
=========== ===========
LESS:
----
Unearned income................................ 383 240
Discounts on loans purchased................... 9 --
Deferred loan fees (costs), net................ (335) (345)
Allowance for loan losses...................... 115 98
----------- ------------
Total....................................... $ 39,840 $ 42,109
============ ============
---------------
(1) One-to-four-family residential includes second mortgage loans on which the
Bank also has the first mortgage. The proceeds of these second mortgage
loans were used for improvements and consumer purposes. Second mortgage
loan balances at June 30, 2000 and 1999 were approximately $1,462,000 and
$1,464,000, respectively.
</TABLE>
The following table sets forth information at June 30, 2000 regarding
the dollar amount of loans maturing or repricing in the Bank's portfolio, based
on contractual terms to maturity or repricing period. Demand loans, loans having
no schedule of repayments and no stated maturity and overdrafts are reported as
due in one year or less.
<TABLE>
<CAPTION>
Due After
Due Within 1 through Due After
1 Year 5 Years 5 Years After
AFTER 6/30/00 AFTER 6/30/00 6/30/00 TOTAL
------------- ------------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage(1)................. . $ 233 $ 2,081 $ 31,183 $ 33,497
Consumer and savings account loans... 1,856 4,212 447 6,515
------------- --------------- ------------ -----------
Total................................ $ 2,089 $ 6,293 $ 31,630 $ 40,012
============= =============== ============ ===========
</TABLE>
---------------
(1) Real estate mortgage loans includes second mortgage loans on which the Bank
also has the first mortgage. The proceeds of these second mortgage loans
were used for improvements and consumer purposes. Second mortgage loan
balances at June 30, 2000 totaled $1,462,000.
4
<PAGE>
The following table sets forth at June 30, 2000, the dollar amount of
gross loans due after one year after that date, based upon contractual maturity
dates or period to reprice, and whether such loans have fixed or adjustable
rates.
<TABLE>
<CAPTION>
Predetermined Floating or
RATE ADJUSTABLE RATES
---------------- ----------------
(In thousands)
<S> <C> <C>
Real estate.................................... $ 31,248 $ 2,249
Consumer and savings account loans............. 6,515 --
------------ ------------
Total...................................... $ 37,763 $ 2,249
============ ===========
</TABLE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are higher than rates on existing mortgage loans and tends to decrease when
current mortgage loan market rates are lower than rates on existing mortgage
loans.
Originations, Purchases and Sales of Loans. The Bank's loans are
primarily originated by salaried loan officers of the Bank. In addition, from
time to time, the Bank purchases loans. During fiscal 2000, the Bank purchased
one real estate loan totaling approximately $40,000. During the fiscal year
ended June 30, 2000, the Bank originated and sold a total of $596,000 in loans
to the secondary market.
One-to-Four-Family Residential Lending. Historically, the Bank's
principal lending activity has been the origination of fixed rate loans secured
by first mortgages on existing one-to-four-family residences in the Bank's
market area. The purchase price or appraised value of most of such residences
generally has been between $24,000 and $290,000, with the Bank's loan amounts
averaging approximately $54,000. At June 30, 2000, $33.4 million, or 83.5% of
the Bank's total loans were secured by one-to-four-family residences, a
substantial portion of which were existing, owner-occupied, single-family
residences in the Bank's market area. At June 30, 2000, $31.2 million, or 93.4%
of the Bank's one-to-four-family residential loans had fixed rates, and $2.2
million, or 6.6%, had adjustable rates.
The Bank's one-to-four-family residential mortgage loans generally are
for terms of up to 21 years, amortized on a monthly basis, with principal and
interest due each month. The majority of the Bank's one-to-four-family mortgage
loans are underwritten with terms of 15 years or less. Residential real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms. These loans customarily contain "due-on-sale" clauses which
permit the Bank to accelerate repayment of a loan upon transfer of ownership of
the mortgaged property. In 1995, the Bank introduced a new mortgage loan product
which provides for a term of up to 21 years with the interest rate increasing
one percentage point every seven years. This increase is not contingent upon any
corresponding increase in market interest rates. As of June 30, 2000, the Bank
had originated $7.4 million of these graduated rate loans. The Bank intends to
continue originating such loans subject to market demands.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on one-to-four-family residential mortgage loans secured by owner-occupied
properties to 97% of the lesser of the appraised value or purchase price. The
Bank's lending policies generally require private mortgage insurance for any
loan that exceeds an 80% loan-to-value ratio. Pursuant to its "First-Time Home
Buyer Plan," the Bank may lend up to 100% of the purchase price of a
one-to-four-family residence provided that the borrower (or third party)
provides additional collateral in the form of a pledge of a savings deposit
5
<PAGE>
or certificate of deposit equal to 25% of the loan amount for loans up to 15
years and 28% of the loan amount for loans with terms greater than 15 years up
to 21 years. Securities may also be pledged as additional collateral, but such
securities must have a current market value equal to 140% of the required
collateral amount.
The Bank has not originated any adjustable rate, one-to-four-family
residential mortgage loans in recent years. However, total loans at June 30,
2000 included adjustable rate loans with an aggregate principal balance of $2.2
million, substantially all of which were purchased during fiscal 1996. The rates
at which interest accrues on these loans are adjustable annually, generally with
limitations on adjustments of 2.0% per adjustment period and 6.0% - 6.5% over
the life of the loan. While such loans may include initial discounted rates,
they were underwritten and borrowers were qualified based on the fully indexed
interest rate. The Bank's adjustable rate loans do not permit negative
amortization.
The Bank also originates second mortgage loans. Such loans, when
combined with the first mortgage, generally are limited to 75% of the appraised
value. Such loans have a fixed rate and a maximum term of 10 years.
The retention of adjustable and graduated rate loans in the Bank's
portfolio helps reduce the Bank's exposure to increases in prevailing market
interest rates. However, there are unquantifiable credit risks resulting from
potential increases in costs to borrowers in the event of upward repricing of
adjustable rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable and graduated rate loans may increase
due to increases in interest costs to borrowers. Adjustable and graduated rate
loans which provide for initial rates of interest below the fully indexed rates
may be subject to increased risk of delinquency or default as the higher, fully
indexed rate of interest subsequently replaces the lower, initial rate. Further,
although adjustable rate loans allow the Bank to increase the sensitivity of its
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed rate period before the
first adjustment, the periodic and lifetime interest rate adjustment
limitations, and the ability of borrowers to convert the loans to fixed rates.
Accordingly, there can be no assurance that yields on the Bank's adjustable rate
loans will fully adjust to compensate for increases in the Bank's cost of funds.
Finally, adjustable rate loans increase the Bank's exposure to decreases in
prevailing market interest rates, although decreases in the Bank's cost of funds
tend to offset this effect.
Consumer Lending. The Bank's consumer loans consist primarily of home
equity lines of credit secured by first or second mortgages on single-family
residences in the Bank's market area, new and used automobile loans, and secured
demand loans. These loans totaled approximately $1.1 million, $4.6 million and
$800,000, respectively, at June 30, 2000. Management plans to continue the
Bank's expansion of these programs as part of the Bank's plan to provide a wider
range of financial services to the Bank's customers while increasing the Bank's
portfolio yields.
The Bank makes home equity lines of credit secured by the borrower's
residence. These loans, combined with the first mortgage loan, which usually is
from the Bank, generally are limited to 75% of the appraised value of the
residence as long as the first mortgage is held by the Bank and 70% if the first
mortgage is held by another lender. Home equity lines of credit are open-end
with the rate on such loans adjusting monthly based on the Prime Rate as
published in The Wall Street Journal as of the first day of the month.
The Bank's new and used automobile loans generally are underwritten in
amounts up to 85% of the purchase price, dealer cost or the loan value as
published by the National Automobile Dealers Association (i.e., the "Black
Book"). The terms of such loans generally do not exceed 60 months with loans for
older used cars underwritten for shorter terms. The Bank requires that the
vehicles be insured
6
<PAGE>
and that the Bank be listed as loss payee on the insurance
policy. The Bank originates a portion of its automobile loans on an indirect
basis through various dealerships located in its market area. See " -- Loan
Solicitation and Processing."
The Bank generally makes savings account loans for up to 80% of the
balance of the account. The interest rate on these loans is generally two
percentage points above the rate paid on the account, and interest is billed on
a monthly basis. These loans are payable on demand, and the account must be
pledged as collateral to secure the loan.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank, and a borrower may be able to assert against the
Bank claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan, and the value of the collateral.
Loan Solicitation and Processing. The Bank's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers, as well as walk-in customers. In addition, the Bank
originates a portion of its automobile loans on an indirect basis through
various dealerships located in the Bank's market area. The Bank's solicitation
programs consist of calls by the Bank's officers to local realtors and builders
and advertisements in local newspapers, billboards and real estate-related
periodicals. Real estate loans are originated by the Bank's staff loan officers
and executive officers, none of whom receives commissions for loan originations.
Loan applications are accepted at each of the Bank's offices for processing and
approval.
Upon receipt of a loan application from a prospective borrower, the
Bank's staff obtains the necessary information and then prepares the file for
processing. Once in processing, a credit report and verifications of the loan
applicant's employment, income and credit standing are made. It is the Bank's
policy to obtain an appraisal of the real estate intended to secure a proposed
mortgage loan from a Bank-approved appraiser. The Bank generally does not obtain
a formal environmental report on the real estate at the time a loan is made,
except when the Bank becomes aware of a particular risk of environmental
contamination.
It is the Bank's policy to record a lien on the real estate securing
the loan and, in most instances, to obtain a title insurance policy which
insures that the property is free of prior encumbrances. Borrowers must also
obtain hazard insurance policies prior to closing and, when the property is in a
designated flood plain, paid flood insurance policies are required.
The Board of Directors has the overall responsibility and authority for
general supervision of the Bank's loan policies. The Board has established
written lending policies for the Bank. The Bank has established a loan committee
which is comprised of Board members and Executive Officers. Any loan committee
member has the authority to approve mortgage loans of $200,000 or under.
Mortgage loans over $200,000 require the approval of one committee member
accompanied by the approval of the Chairman of the Board. Consumer loans up to
$20,000 may be approved by individual loan officers. Consumer loans greater than
$20,000 must be approved by at least two members of the Bank's consumer
7
<PAGE>
loan committee which is comprised of all of the Bank's loan officers. Loan
applicants are promptly notified of the decision of the Bank. It has been
management's experience that substantially all approved loans are funded.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and the Bank's minimum yield requirements. Mortgage loan rates
reflect factors such as prevailing market interest rate levels, the supply of
money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic conditions, the monetary
policies of the federal government, including the Federal Reserve Board, the
general supply of money in the economy, tax policies and governmental budget
matters.
The Bank receives fees in connection with loan originations, loan
modifications, late payments, changes of property ownership, and for
miscellaneous services related to its loans. Loan origination fees are
calculated as a percentage of the loan principal. The Bank typically receives
fees of up to 1.0% in connection with the origination of fixed rate mortgage
loans. The excess, if any, of loan origination fees over direct loan origination
expenses is deferred and accreted into income over the contractual life of the
loan using the interest method. If a loan is prepaid, refinanced or sold, all
remaining deferred fees with respect to such loan are taken into income at such
time.
Collection Policies. When a borrower fails to make a payment on a loan,
the Bank generally takes prompt steps to have the delinquency cured and the loan
restored to current status. Once the payment grace period has expired (in most
instances 15 days after the due date), a late notice is mailed to the borrower,
and a late charge is imposed, if applicable. Loans on which payments are 30 or
more days delinquent and possess credit deficiencies or potential weaknesses are
designated as "special mention." The Bank's Board of Directors reviews a list of
all classified assets on a monthly basis. See " -- Asset Classification,
Allowances for Losses and Non-performing Assets." If a loan remains delinquent
90 days or more, the Bank generally makes demand for payment and/or initiates
foreclosure or other legal proceedings.
Asset Classification, Allowances for Losses and Non-performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose an institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require an institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, an institution must either
establish a specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount. Federal examiners may disagree
with an institution's classifications. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS Regional Director. The Bank regularly reviews its assets to determine
whether any assets require classification or re-classification. The Board of
Directors reviews and approves all classifications on a monthly basis. At June
30, 2000, the Bank had $1,772 of assets classified as loss, no assets classified
as doubtful, $36,104 of assets classified as substandard and $752,249 of assets
designated as special mention.
In extending credit, the Bank recognizes that losses will occur and
that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the
8
<PAGE>
term of the obligation, general economic conditions and, in the case of a
secured obligation, the quality of the security. It is management's policy to
maintain allowances for losses based on, among other things, regular reviews of
delinquencies and credit portfolio quality, character and size, the Bank's
historical loss experience and current and forecasted economic conditions. The
Bank increases its allowance for loan losses by charging provisions for losses
against the Bank's income.
Management actively monitors the Bank's asset quality and charges off
loans against the allowance for losses on such loans and makes additional loss
provisions in its discretion. Allowances are provided for individual assets, or
portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
or net realizable value of the collateral. Although management believes it uses
the best information available to make determinations with respect to the
allowance for losses, future adjustments may be necessary if economic conditions
differ substantially from the economic conditions in the assumptions used in
making the initial determinations.
At the date of foreclosure or other repossession, the Bank transfers
the property to real estate acquired in settlement of loans at the lower of
recorded investment in the loan or fair value, net of estimated cost of
disposition. Fair value is defined as the amount in cash or cash-equivalent
value of other consideration that a property would yield in a current sale
between a willing buyer and a willing seller. Fair value is measured by market
transactions. If a market does not exist, fair value of the property is
estimated based on selling prices of similar properties in active markets or, if
there are no active markets for similar properties, by discounting a forecast of
expected cash flows at a rate commensurate with the risk involved. Fair value
generally is determined through an appraisal at the time of foreclosure. Any
amount of the recorded investment in the loan in excess of fair value is
charged-off against the allowance for loan losses. Subsequent to foreclosure,
the property is periodically evaluated by management and an allowance is
established if the estimated fair value of the property, less estimated costs to
sell, declines. If, upon ultimate disposition of the property, net sales
proceeds exceed the net carrying value of the property, a gain on sale of real
estate may be recorded if certain conditions are met. At June 30, 2000, the Bank
had no properties acquired in settlement of loans.
9
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Balance at beginning of period............................ $ 98 $ 76
Charge-offs............................................... -- (5)
Recoveries................................................ -- --
Provision for loan losses................................. 17 27
------------ ------------
Balance at end of period.................................. $ 115 $ 98
============ ============
Ratio of net charge-offs during the period to average
loans outstanding during the period..................... 0.00% 0.00%
============ =============
</TABLE>
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
2000 1999
-------------------------------- ---------------------------------
Percent of Percent of
Loans in Loans in
Category Category
to Total to Total
AMOUNT LOANS AMOUNT LOANS
-------- ----------- ------------ --------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C>
One-to four-family residential....... $ 55 83.48% $ 55 87.17%
Non-residential...................... -- .24 -- 0.72
Consumer and savings account loans..... 60 16.28 43 12.11
----------- ----------- ----------- -----------
Total allowance for loan losses... $ 115 100.00% $ 98 100.00%
=========== ============ =========== ===========
</TABLE>
The Bank ceases accrual of interest on a loan when payment on the loan
is delinquent in excess of 90 days. Income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has been
reestablished, in which case the loan is returned to accrual status.
10
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------
2000 1999
---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:(1) Real estate loans:
<S> <C> <C>
One-to-four-family residential........................ $ 18 $ 6
Non-residential...................................... -- --
Consumer and savings account loans........................ 1 4
Other loans............................................... -- --
------------ ------------
Total.................................................. $ 19 $ 10
============ ============
Accruing loans which are contractually past due 90 days or more:
Real Estate loans:
One-to-four-family residential.......................... $ -- $ --
Non-residential......................................... -- --
Consumer and savings account loans........................ -- --
Other loans............................................... -- --
------------ ------------
Total.................................................. $ -- $ --
============ ============
Total of non-accrual and accruing loans
Percentage of total loans................................. 0.05% 0.02%
============ ============
Other non-performing assets(2)............................ $ -- $ --
============ ============
Percentage of total assets................................ 0.02% 0.01%
============ ============
</TABLE>
------------------
(1) The Bank ceases accrual of interest on a loan when payment on the loan is
delinquent in excess of 90 days. Income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
been reestablished, in which case the loan is returned to accrual status.
(2) Other non-performing assets may include real estate or other assets
acquired by the Bank through foreclosure or repossession. Real estate owned
is recorded at the lower of the recorded investment in the loan or fair
value of the property, less estimated costs of disposition.
Interest income foregone on non-accrual loans was considered
insignificant for the year ended June 30, 2000.
At June 30, 2000, management had identified no loans which were not
reflected in the preceding table but as to which known information about
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms.
11
<PAGE>
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to make certain investments,
including investments in securities issued by FNMA, FHLMC, GNMA, various federal
agencies and state and municipal governments; deposits at the FHLB of Atlanta;
certificates of deposits in federally insured institutions; certain bankers'
acceptances; and federal funds. The Bank may also invest, subject to certain
limitations, in commercial paper having one of the two highest investment
ratings of a nationally recognized credit rating agency, and certain other types
of corporate debt securities and mutual funds. Federal regulations require the
Bank to maintain an investment in FHLB of Atlanta stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets which savings
institutions are required to maintain. For additional information, see
"Regulation -- Regulation of the Bank -- Liquidity Requirements."
The Bank invests in investment securities in order to diversify its
assets, manage cash flow and interest rate risk, obtain yields, and maintain the
minimum levels of qualified and liquid assets required by regulatory
authorities. The investment activities of the Bank consist primarily of
investments in mortgage-backed securities, U.S. Treasury and U.S. Government
agency securities, and other securities. Investment decisions are generally made
by the President of the Bank and are ratified by the Board of Directors.
Investment and aggregate investment limitations and credit quality parameters of
each class of investment are prescribed in the Bank's investment policy. The
Bank's investment policy does not permit the Bank to invest in any futures,
options or high risk mortgage derivatives, including residual interests in
collateralized mortgage obligations and other real estate mortgage investment
conduits, stripped mortgage-backed securities and other investments that exhibit
a high degree of price volatility.
Securities designated as "available for sale" are carried at their fair
value with unrealized gains or losses, net of tax effect, recognized in equity.
Securities designated as held to maturity are carried at amortized cost. At June
30, 2000, investment securities with an aggregate amortized cost of $27.8
million and an aggregate fair value of $27.1 million were included in the
portfolio of securities designated as available for sale. The aggregate impact
on equity was a net decrease of approximately $254,000 for the year ended June
30, 2000. The gross unrealized loss on securities available for sale for the
year ended June 30, 2000 was approximately $734.000. For additional information,
see Consolidated Statements of Stockholders' Equity and Note 6 to Consolidated
Financial Statements in the Annual Report filed as Exhibit 13 to this Report.
Securities designated as "held to maturity" are those assets which the Bank has
the ability and management has the intent to hold to maturity. Upon acquisition,
securities are classified as to the Bank's intent.
Mortgage-Backed Securities. The Bank maintains a substantial portfolio
of mortgage-backed securities in the form of GNMA, FHLMC and FNMA participation
certificates. GNMA, FHLMC and FNMA certificates are each guaranteed by their
respective agencies as to principal and interest, and GNMA certificates are
backed by the full faith and credit of the U.S. Government. Mortgage-backed
securities generally entitle the Bank to receive a pro rata portion of the cash
flows from an identified pool of mortgages. Although mortgage-backed securities
generally yield less than the loans which are exchanged for such securities,
they present substantially lower credit risk, they are more liquid than
individual mortgage loans, and they may be used to collateralize obligations of
the Bank. In addition, the Bank's portfolio of mortgage-backed securities
qualify as "Qualified Thrift Investments" for purposes of determining the Bank's
compliance with the "Qualified Thrift Lender" test and may also be considered
for purposes of meeting certain definitional tests prescribed by the Internal
Revenue Code which entitle thrift institutions to favorable tax treatment. See
"Regulation -- Regulation of the Bank -- Qualified Thrift Lender Test" and " --
Taxation -- Federal Income Taxation."
12
<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated life of the securities using a
level yield method. Prepayments of the underlying mortgages depend on many
factors, including the type of mortgage, the coupon rate, the age of the
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates. The
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. During periods of falling mortgage interest rates, prepayments
generally increase, and, conversely, during periods of rising mortgage interest
rates, prepayments generally decrease. If the coupon rate of the underlying
mortgage significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable-rate mortgage-backed securities.
The Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate and adjustable rate mortgage-backed securities. At June 30,
2000, the Bank had $23.9 million in mortgage-backed securities (representing
24.4% of total assets) which are considered to be held to maturity and which are
insured or guaranteed by FNMA, FHLMC or GNMA.
Agency Notes. The Bank has also invested in notes issued by the FHLB,
FHLMC and FNMA. Such notes had an aggregate balance of $15.8 million at June 30,
2000 and are neither insured nor guaranteed by the United States. The issuing
agency has the right to prepay such notes at face value at certain
pre-established dates. The weighted average maturity and coupon rate of the
Bank's agency notes were 65 months and 6.729%, respectively, at June 30, 2000.
13
<PAGE>
The following table sets forth the carrying value of the Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------
2000 1999
---- ----
(In thousands)
Securities available for sale:(1)
<S> <C> <C>
U.S. Treasury securities................................................. $ 4,273 $ 5,306
U.S. Government agency securities........................................ 22,112 15,321
Federal Home Loan Bank stock............................................. 724 724
----------- -----------
Total securities available for sale.................................... $ 27,109 $ 21,351
=========== ===========
Securities held to maturity:(2)
U.S. Government agency securities........................................ $ 23,886 $ 23,706
----------- -----------
Total securities held to maturity...................................... $ 23,886 $ 23,706
=========== ===========
Total securities........................................................... $ 50,995 $ 45,057
=========== ===========
</TABLE>
---------------
(1) The carrying value is the approximate fair value of the security at each
reporting date. (2) The carrying value is the amortized cost of the security at
each reporting date.
14
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized costs, fair values and weighted average yields for the
Bank's investment securities at June 30, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
--------------------- --------------------- ----------------------
Carrying Average Carrying Average Carrying Average
VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Securities available for sale:(1)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities...... $ 3,288 5.7% $ 985 5.7% $ -- --%
U.S. Government agency
Federal Home Loan Bank stock.. 724 7.7 -- -- -- --
------- ------- -------- -------- -------- -------
Total securities available for sale $ 4,662 6.1% $ 11,007 6.3% $ 5,962 7.0%
======= ======== ======== ======== ======== =======
Securities held to maturity:(2)
U.S. Government agency
Total securities............... $ 4,858 6.1% $ 14,956 6.6% $ 19,141 7.0%
======= ======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
(TABLE CONTINUED)
More than Ten Years Total Investment Portfolio
--------------------- -----------------------------------
Carrying Average Amortized Fair Average
VALUE YIELD COST VALUE YIELD
--------- --------- ----------- --------- --------
Securities available for sale:(1)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities...... $ -- --% $ 3,955 $ 4,273 5.7%
U.S. Government agency
Federal Home Loan Bank stock.. -- -- 724 724 7.7
-------- ------ --------- -------- --------
Total securities available for sale $ 5,478 6.6% $ 27,843 $ 27,109 6.5%
======== ====== ========= ======== ========
Securities held to maturity:(2)
U.S. Government agency
Total securities............... $ 12,040 6.9% $ 51,729 $ 50,750 6.8%
======== ====== ========= ======== =========
</TABLE>
--------------------
(1) Carrying value of securities available for sale is their approximate
fair value at the reporting date. Average yield on securities available
for sale is based on their amortized historical costs at the reporting
date.
(2) Carrying value of securities held to maturity is their amortized
historical cost at their reporting date. Average yield on securities
held to maturity is based on their amortized historical cost at the
reporting date.
For additional information, see Notes 6 and 7 of Notes to Consolidated
Financial Statements in the Annual Report filed as Exhibit 13 to this Report.
15
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions.
Deposits. The Bank attracts deposits principally from within its market
area by offering a variety of deposit instruments, including regular checking,
passbook, statement savings accounts and certificates of deposit which range in
term from seven days to ten years. Deposit terms vary, principally on the basis
of the minimum balance required, the length of time the funds must remain on
deposit and the interest rate. The Bank also offers Individual Retirement
Accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents through the Bank's branch network rather than from outside the
Bank's market area. The Bank's interest rates, maturities, service fees and
withdrawal penalties on deposits are established by management on a periodic
basis. Management determines deposit interest rates and maturities based on the
Bank's funds acquisition and liquidity requirements, the rates paid by the
Bank's competitors, the Bank's growth goals, and applicable regulatory
restrictions and requirements. The Bank does not solicit deposits from brokers
and currently does not bid for public unit funds.
The Bank plans to remain competitive in its primary market area by
introducing new products and services which include various checking account
products, enhancements to the savings portfolio, offering competitive interest
rates and fees, and to attract new customers by providing full service banking.
16
<PAGE>
Deposits in the Bank as of June 30, 2000 were represented by the
various programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
RATE TERM CATEGORY AMOUNT BALANCES TOTAL SAVINGS
---- ---- -------- ------ -------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
1.961% None NOW Accounts $ 100 $ 362 0.44%
2.520 None Passbook Statement Accounts 100 3,608 4.43
3.989 None Gold Star Savings Account 100 1,628 2.00
2.020 None Money Market Deposit Account 1,500 345 0.42
1.752 None High Yield Account 100 1,458 1.79
2.250 None Best Checking Account 50 202 0.25
1.944 None Merit Checking 50 674 0.83
2.249 None Classic 55 Checking 50 1,522 1.87
0.000 None Free Checking -- 111 0.14
0.000 None Business Checking 50 44 0.05
2.128 None First Checking 50 1,391 1.71
CERTIFICATES OF DEPOSIT
-----------------------
2.000 91 Days 3-Month Money Market 1,000 7 0.01
5.884 5 Month Fixed Term, Fixed Rate 1,000 5,034 6.18
4.300 182 Days 6-Month Money Market 1,000 1,796 2.21
5.730 7 Month Fixed Term, Fixed Rate 1,000 4,027 4.95
4.992 8 Month Fixed Term, Fixed Rate 1,000 4,364 5.36
3.000 9 Month Fixed Term, Fixed Rate 1,000 380 0.47
4.100 10 Month Fixed Term, Fixed Rate 1,000 881 1.08
4.000 12 Month Fixed Term, Fixed Rate 1,000 1,229 1.51
4.005 14 Month Fixed Term, Fixed Rate 1,000 2,337 2.87
4.083 18 Month Fixed Term, Fixed Rate 1,000 1,270 1.56
4.276 18 Month-IRA Fixed Term, Fixed Rate - IRA 250 1,890 2.32
4.285 20 Month Fixed Term, Fixed Rate 1,000 2,507 3.08
4.866 24 Month Fixed Term, Fixed Rate 1,000 2,405 2.95
5.325 30 Month Fixed Term, Fixed Rate 1,000 4,971 6.10
6.093 36 Month Fixed Term, Fixed Rate 1,000 7,934 9.74
5.560 48 Month Fixed Term, Fixed Rate 1,000 1,633 2.01
5.347 60 Month Fixed Term, Fixed Rate 1,000 4,263 5.24
4.924 72 Month Fixed Term, Fixed Rate 1,000 146 0.18
5.525 96 Month Fixed Term, Fixed Rate 1,000 37 0.05
5.733 120 Month Fixed Term, Fixed Rate 1,000 852 1.05
5.745 3-Month-State Fixed Term, Fixed Rate 1,000 1,325 1.63
5.000 Negotiated Negotiated Jumbo 100,000 58 0.07
5.500 11 Month Fixed Term, Fixed Rate 1,000 3,081 3.78
5.481 17 Month Fixed Term, Fixed Rate 1,000 3,556 4.37
7.000 19 Month Fixed Term, Fixed Rate 1,000 14,109 17.32
------ ---------
Total.............. $ 81,437 100.00%
======== =========
</TABLE>
17
<PAGE>
The following tables set forth the average balances and average
interest rates paid for deposits in the Bank as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -------------------------------------------
Interest- Interest-
Bearing Bearing
Passbook Demand Certificates Passbook Demand Certificates
SAVINGS DEPOSITS OF DEPOSIT SAVINGS DEPOSITS OF DEPOSIT
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance.......... $ 5,106 $ 6,160 $ 70,006 $ 5,119 $ 8,759 $ 67,757
Average interest rate.... 3.92% 2.44% 5.07% 3.39% 2.82% 5.35%
</TABLE>
The following table sets forth the certificates of deposit in the Bank
classified by rates at the dates indicated.
At June 30,
------------------------------
2000 1999
-------- ------
(In thousands)
2.00 - 4.00%...... $ 5,400 $ 7,490
4.01 - 6.00%...... 37,066 57,546
6.01 - 8.00%...... 27,509 1,048
8.01 - 10.00%..... 118 122
---------- ----------
$ 70,093 $ 66,206
========== ==========
The following table indicates the amount of the certificates of deposit
of $100,000 or more in the Bank by time remaining until maturity at June 30,
2000.
Certificates
MATURITY PERIOD OF DEPOSITS
--------------- -----------
(In thousands)
Three months or less.................... $ 2,255
Over three through six months........... 1,683
Over six through twelve months.......... 1,389
Over twelve months...................... 6,287
------------
Total.............................. $ 11,614
============
18
<PAGE>
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending, investment and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB system, the Bank is required to own stock in the FHLB of
Atlanta and is authorized to apply for advances. Advances are made pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank had no borrowings from the FHLB as of June 30, 2000, and
management currently does not expect to borrow from the FHLB in the future.
SUBSIDIARY ACTIVITIES
Federally chartered savings institutions are permitted to invest up to
2% of their assets in subsidiary service corporations, plus an additional 1% in
subsidiaries engaged in specific community purposes. Under such limitation, as
of June 30, 2000, the Bank was authorized to invest approximately $2.0 million
in the stock of or loans to subsidiaries. The Bank currently does not have a
subsidiary.
REGULATION
GENERAL
The Bank is chartered as a federal savings institution under the Home
Owners' Loan Act, as amended (the "HOLA"), which is implemented by regulations
adopted and administered by the OTS. As a federal savings institution, the Bank
is subject to regulation, supervision and regular examination by the OTS. The
OTS also has extensive enforcement authority over all savings institutions and
their holding companies, including the Bank and the Company. Federal banking
laws and regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law. In
addition, the FDIC has certain regulatory and examination authority over
OTS-regulated savings institutions and may recommend enforcement actions against
savings institutions to the OTS. The supervision and regulation of the Bank is
intended primarily for the protection of the deposit insurance fund and the
Bank's depositors rather than for holders of the Company's stock or for the
Company as the holder of the stock of the Bank.
As a savings and loan holding company, the Company is registered with
the OTS and subject to OTS regulation and supervision under the HOLA. The
Company also is required to file certain reports with, and otherwise comply with
the rules and regulations of, the Commission under the federal securities laws.
The following discussion is intended to be a summary of certain
statutes, rules and regulations affecting the Bank and the Company. A number of
other statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the "GLB
Act") was enacted into law. The GLB Act makes sweeping changes in the authorized
activities of banks and their holding companies. In particular, the GLBA Act
repealed the Glass-Steagall Act, which had generally prevented
19
<PAGE>
banks from affiliating with securities firms, and also permitted bank holding
companies for the first time to affiliate with insurance companies. A new
"financial holding company," which owns only well capitalized and well-managed
banks, will be permitted to engage in a variety of financial activities,
including insurance and securities underwriting and insurance agency activities.
The financial holding company provisions of the GLB Act are not expected to have
a material effect on the Company or the Bank.
The GLB Act also places substantial restrictions on the activities of
companies that apply to become savings and loan holding companies after May 4,
1999. However, the GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities that they were permitted to engage in prior to the enactment of the
Act. Under such authority, the Company's business powers are essentially
unlimited, provided that the Bank remains a qualified thrift lender. However,
the GLB Act further provides that a unitary thrift holding company in existence
on May 4, 1999, will lose its exempt status if it or its subsidiary thrift is
sold to any unaffiliated company other than another grandfathered unitary thrift
holding company. The GLB Act is not expected to have a material effect on the
activities in which the Company and the Bank currently engage, except to the
extent that competition with banks and bank holding companies may increase as
they engage in activities not permitted prior to enactment of the GLB Act.
In addition, the GLB Act adopts a number of consumer protections,
including provisions intended to protect privacy of bank customers' financial
information and new requirements for the disclosure of ATM fees imposed by banks
on customers of other banks. Most of the GLB Act's provisions have delayed
effective dates and require the adoption of implementing regulations to
implement the statutory provisions. Accordingly, at this time the Bank is unable
to predict the eventual impact of the Act on its operations.
REGULATION OF THE BANK
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations.
BRANCHING. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like the Bank to establish
branches in any state of the United States, provided that the federal savings
institution qualifies as a "domestic building and loan association" under the
Internal Revenue Code. See "-- Qualified Thrift Lender Test." The authority for
a federal savings institution to establish an interstate branch network would
facilitate a geographic diversification of the institution's activities.
REGULATORY CAPITAL. The OTS' capital adequacy regulations require
savings institutions such as the Bank to meet three minimum capital standards: a
"core" capital requirement of 4% of adjusted total assets (or 3% if the
institution is rated Composite 1 under the CAMELS examination rating system), a
"tangible" capital requirement of 1.5% of adjusted total assets, and a
"risk-based" capital requirement of 8% of total risk-based capital to total
risk-weighted assets. In addition, the OTS has adopted regulations imposing
certain restrictions on savings institutions that have a total risk-based
capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets
of less than 4% or a ratio of Tier 1 capital to total assets of less than 4%.
See "-- Prompt Corrective Regulatory Action."
20
<PAGE>
The core capital, or "leverage ratio," requirement mandates that most
savings institutions maintain core capital equal to at least 3% of adjusted
total assets. "Core capital" includes common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries and
certain nonwithdrawable accounts and pledged deposits and is generally reduced
by the amount of the savings institution's intangible assets, with limited
exceptions for permissible mortgage servicing rights ("MSRs") and purchased
credit card relationships. Core capital is further reduced by the amount of a
savings institution's investments in and loans to subsidiaries engaged in
activities not permissible for national banks. At June 30, 2000, the Bank had no
such investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital equal to
at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital,
provided that the amount of supplementary capital does not exceed the amount of
core capital. Supplementary capital includes preferred stock that does not
qualify as core capital, nonwithdrawable accounts and pledged deposits to the
extent not included in core capital, perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements and a portion of the institution's loan and lease loss allowance.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight,
which range from 0% to 100% as assigned by the OTS capital regulations based on
the risks the OTS believes are inherent in the type of asset. Comparable risk
weights are assigned to off-balance sheet assets.
The OTS risk-based capital regulation also includes an interest rate
risk ("IRR") component that requires savings institutions with greater than
normal IRR, when determining compliance with the risk-based capital
requirements, to maintain additional total capital. The OTS has, however,
indefinitely deferred enforcement of its IRR requirements.
The following table sets forth the Bank's compliance with its
regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>
The Bank's Capital Capital Requirements Excess Capital
----------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. $ 14,654 14.8% $ 1,484 1.5% $ 13,170 13.3%
Core capital.................. $ 14,654 14.8% $ 3,956 4.0% $ 10,698 10.8%
Total risk-based capital...... $ 14,769 50.0% $ 2,367 8.0% $ 12,402 42.0%
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the federal banking regulators are required to take prompt
corrective action in respect of depository institutions that do not meet certain
minimum capital requirements, including a leverage limit and a risk-based
capital requirement. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. The federal banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable agency
will take various
21
<PAGE>
prompt corrective actions to resolve the problems of any institution that fails
to satisfy the capital standards.
Under the joint prompt corrective action regulations, a
"well-capitalized" institution is one that is not subject to any regulatory
order or directive to meet any specific capital level and that has or exceeds
the following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets
("leverage ratio") of 5%. An "adequately capitalized" institution is one that
does not qualify as "well capitalized" but meets or exceeds the following
capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based
capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the
institution has the highest composite examination rating. An institution not
meeting these criteria is treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which its capital levels are below these standards. An institution that falls
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory sanctions required by OTS regulations. As of June 30, 2000,
the Bank was "well-capitalized" as defined by the regulations.
FEDERAL DEPOSIT INSURANCE. The FDIC has adopted a risk-based insurance
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. Assessment rates for SAIF-member institutions like the Bank depend on the
capital category and supervisory category to which they are assigned and
currently range from 0 basis points to 27 basis points. In addition, all
FDIC-insured institutions are required to pay assessments to the FDIC to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to recapitalize the
predecessor to the SAIF. The assessment rate for FICO bond servicing is
approximately .0216% of insured deposits for the year 2000.
The Federal Deposit Insurance Act also provides that the FDIC may not
assess regular insurance assessments for the SAIF unless required to maintain or
to achieve the designated reserve ratio of 1.25%, except for such assessments on
those institutions that are not classified as "well-capitalized" or that have
been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. The Bank is classified as
"well-capitalized" and has not been found by the OTS to have such supervisory
weaknesses.
QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests
or to suffer a number of sanctions, including restrictions on activities. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code (the "Code") by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans, and investments in
premises of the institution or (ii) satisfy the HOLA's QTL test by maintaining
at least 65% of "portfolio assets" in certain "Qualified Thrift Investments."
For purposes of the HOLA's QTL test, portfolio assets are defined as total
assets less intangibles, property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (a) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing, (b) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions, and (c) loans to small businesses, student loans and credit card
loans. In addition, subject to a 20% of portfolio assets
22
<PAGE>
limit, savings institutions are able to treat as Qualified Thrift Investments
200% of their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months. An initial failure to qualify as
a QTL results in a number of sanctions, including the imposition of certain
operating restrictions and a restriction on obtaining additional advances from
its Federal Home Loan Bank. If a savings institution does not requalify under
the QTL test within the three-year period after it fails the QTL test, it would
be required to terminate any activity not permissible for a national bank and
repay as promptly as possible any outstanding advances from its Federal Home
Loan Bank. In addition, the holding company of such an institution, such as the
Company, would similarly be required to register as a bank holding company with
the Federal Reserve Board. At June 30, 2000, the Bank qualified as a QTL.
SAFETY AND SOUNDNESS STANDARDS. The FDI Act requires the federal
banking agencies, including the OTS, to prescribe for all insured depository
institutions standards relating to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, asset quality and compensation, fees
and benefits and such other operational and managerial standards as the agencies
deem appropriate. The federal banking agencies have adopted final regulations
and Interagency Guidelines Establishing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards pursuant to the
statute. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth;
asset quality; earnings; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A savings institution must give notice to the OTS at
least 30 days before declaration of a proposed capital distribution to its
holding company, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. Under the OTS capital
distribution regulations, a savings institution that (i) qualifies for expedited
treatment of applications by maintaining one of the two highest supervisory
examination ratings, (ii) will be at least adequately capitalized after the
proposed capital distribution and (iii) is not otherwise restricted by
applicable law in making capital distributions may, without prior approval by
the OTS, make capital distributions during a calendar year equal to its net
income for such year plus its retained net income for the preceding two years.
Capital distributions in excess of such amount would require prior OTS approval.
Under OTS regulations, the Bank would not be permitted to pay dividends
on its capital stock if its regulatory capital would thereby be reduced below
the amount then required for the liquidation account established for the benefit
of certain depositors of the Bank at the time of the Conversion. In addition,
under the prompt corrective action regulations of the OTS, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "-- Prompt Corrective Regulatory
Action."
23
<PAGE>
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. See "Taxation."
TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions
imposed by Sections 23A and 23B of the Federal Reserve Act on extensions of
credit to, and certain other transactions with, the Company and other
affiliates, and on investments in the stock or other securities thereof. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Further, such secured loans and other transactions and
investments by the Bank are generally limited in amount as to the Company and as
to any other affiliate to 10% of the Bank's capital and surplus and as to the
Company and all other affiliates to an aggregate of 20% of the Bank's capital
and surplus. These restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses.
RESERVE REQUIREMENTS. Pursuant to regulations of the Federal Reserve
Board (the "FRB"), all FDIC-insured depository institutions must maintain
average daily reserves against their transaction accounts. No reserves are
required to be maintained on the first $5.0 million of transaction accounts, and
reserves equal to 3% must be maintained on the next $44.3 million of transaction
accounts, plus reserves equal to 10% on the remainder. These percentages are
subject to adjustment by the FRB. Because required reserves must be maintained
in the form of vault cash or in a non-interest-bearing account at a Federal
Reserve Bank, the effect of the reserve requirement is to reduce the amount of
the institution's interest-earning assets. As of June 30, 2000, the Bank met its
reserve requirements.
LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
qualifying mortgage-related securities and mortgage loans, securities of certain
mutual funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable accounts plus short-term
borrowings. The average daily liquidity ratio of the Bank for the month ended
June 30, 2000 was 22.9%.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System
consists of 12 district Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of capital
stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement, with an investment in FHLB stock at June 30, 2000 of $724,000.
Banks and savings associations generally may obtain long-term FHLB advances only
for the purpose of providing funds for residential housing finance; however,
depository institutions with less than $500 million in assets may also obtain
such financing for use in small business and small farm lending. At June 30,
2000, the Bank had no advances outstanding from the FHLB.
REGULATION OF THE COMPANY
The Company is a savings and loan holding company under the HOLA and,
as such, is subject to OTS regulation, supervision and examination. In addition,
the OTS has enforcement authority over the
24
<PAGE>
Company and its non-savings institution subsidiaries and may restrict or
prohibit activities that are determined to represent a serious risk to the
safety, soundness or stability of the Bank or any other subsidiary savings
institution.
Under the HOLA, a savings and loan holding company is required to
obtain the prior approval of the OTS before acquiring another savings
institution or savings and loan holding company. A savings and loan holding
company may not (i) acquire, with certain exceptions, more than 5% of a
non-subsidiary savings institution or a non-subsidiary savings and loan holding
company; or (ii) acquire or retain control of a depository institution that is
not insured by the FDIC. In addition, while the Bank generally may acquire a
savings institution by merger in any state without restriction by state law, the
Company could acquire control of an additional savings institution in a state
other than Kentucky only if such acquisition is permitted under the laws of the
target institution's home state.
As a unitary savings and loan holding company, grandfathered under the
GLB Act, the Company generally is not subject to any restriction as to the types
of business activities in which it may engage, provided that the Bank continues
to satisfy the QTL test. See "Regulation - Financial Modernization Legislation"
and "-- Regulation and Supervision of the Bank -- Qualified Thrift Lender Test."
Upon any non-supervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for financial
holding companies under the Bank Holding Company Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
TAXATION
GENERAL. The Company and the Bank file a consolidated federal income
tax return on a calendar year basis. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
FEDERAL INCOME TAXATION. Savings institutions, such as the Bank,
generally are subject to the provisions of the Internal Revenue Code of 1986, as
amended, in the same manner as other corporations. For tax years beginning
before December 31, 1995, however, by meeting certain definitional tests and
other conditions prescribed by the Internal Revenue Code, thrift institutions
could benefit from special deductions for annual additions to tax bad debt
reserves with respect to loans. For purposes of the bad debt reserve deduction,
loans were separated into "qualifying real property loans," which generally were
loans secured by interests in improved real property, and "nonqualifying loans,"
which were all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience. The bad debt reserve
deduction with respect to qualifying real property loans could be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method"). The Bank historically used whichever method resulted in the
highest bad debt reserve deduction in any given year.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience method over a six-year period beginning with the first taxable year
beginning after December 31, 1995. The start of such recapture may be delayed
until the third taxable year beginning after December 31, 1995 if the dollar
amount of the institution's residential loan originations in each year is not
less than the average dollar amount of residential loan originated in each
25
<PAGE>
of the six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, have been treated the same as
commercial banks. Institutions with $500 million or more in assets are able to
take a tax deduction only when a loan is actually charged off. Institutions with
less than $500 million in assets are still permitted to make deductible bad debt
additions to reserves, but only using the experience method. As a result,
thrifts must recapture into taxable income the amount of their post-1987 tax bad
debt reserves over a six-year period beginning after 1995. This recapture can be
deferred for up to two years if the thrift satisfies a residential loan
portfolio test. At June 30, 2000, the Bank's post-1987 tax bad debt reserve
subject to recapture was approximately $93,000. The Bank recaptured
approximately $46,000 of this reserve into taxable income in the year ended June
30, 2000. The recapture did not have any effect on the Bank's net income because
the related tax expense had already been accrued.
Under the experience method, the bad debt deduction to an addition to
the reserve for qualifying real property loans is an amount determined under a
formula based generally on the bad debts actually sustained by a savings
institution over a period of years. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real property loans was
computed as 8% of the thrift's taxable income. The maximum deduction could be
taken as long as not less than 60% of the total dollar amount of the assets of
an institution fell within certain designated categories. If the amount of
qualifying assets fell below 60%, the institution would get no deduction and
could be required to recapture, generally over a period of years, its existing
bad debt reserves (although net operating loss carryforwards could be used to
offset such recapture).
The bad debt deduction under the percentage of taxable income method
was limited to the extent that the amount accumulated in the reserve for losses
on qualifying real property loans exceeded 6% of such loans outstanding at the
end of the taxable year. In addition, the amount claimed as a bad debt deduction
when added to accumulated loss reserves was limited to the excess, if any, of
12% of total deposits or withdrawable accounts of depositors at year-end in
excess of the sum of surplus, undivided profits and reserves at the beginning of
the year. The percentage bad debt deduction was reduced by the deduction for
losses on nonqualifying loans.
Earnings appropriated to the Bank's tax bad debt reserves and claimed
as tax deductions will not be available for the payment of cash dividends or
other distributions to the Company (including distributions made upon
dissolution or liquidation), unless the Bank includes the amounts distributed in
taxable income, along with the amounts deemed necessary to pay the resulting
federal income tax. At June 30, 2000, the Bank had approximately $2.8 million of
pre-1988 accumulated bad debt reserves for which federal income taxes have not
been provided.
For taxable years beginning after June 30, 1986, the Internal Revenue
Code imposes an alternative minimum tax at a rate of 20%. The alternative
minimum tax generally applies to a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax-exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years including 1987 through 1989,
50% of the excess of (i) the taxpayer's pre-tax adjusted net book income over
(ii) AMTI (determined without regard to this latter preference and prior to
reduction by net operating losses). For taxable years beginning after 1989, this
latter preference has been replaced by 75% of the excess (if any) of (i)
adjusted current earnings as defined in the Internal Revenue Code, over (ii)
AMTI (determined without regard to this preference and
26
<PAGE>
prior to reduction by net operating losses). For any taxable year beginning
after 1986, net operating losses can offset no more than 90% of AMTI. Certain
payments of alternative minimum taxes may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1992, corporations, including savings institutions, are also subject to
an environmental tax equal to 0.12% of the excess of AMTI for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2.0 million. The Bank is not currently paying any
amount of alternative minimum tax but may, depending on future results of
operations, be subject to this tax.
The Bank's federal income tax returns have not been examined by the
regulatory authorities within the past five years. For additional information,
see Note 11 of Notes to Consolidated Financial Statements in the Annual Report
filed as Exhibit 13 to this Report.
EMPLOYEES
As of June 30, 2000, the Company and the Bank had 28 full-time
employees, none of whom was represented by a collective bargaining agreement.
27
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth information regarding the Bank's offices
at June 30, 2000.
<TABLE>
<CAPTION>
Net Book Owned
Year Value at Approximate or
OPENED JUNE 30, 2000 SQUARE FOOTAGE LEASED
---------- ------------- -------------- --------
MAIN OFFICE:
<S> <C> <C> <C> <C>
221 South 6th Street 1968 $ 216,529 6,500 Owned
Gadsden, Alabama 35901
BRANCH OFFICES:
202 Sand Mountain Drive 1965 2,901 1,405 Leased
Albertville, Alabama 35950
2204 Henry Street 2000 198,293 1,100 Owned
Guntersville, Alabama 35976
390 W. Main Street 1994 6,637 2,263 Leased
Centre, Alabama 35960
</TABLE>
The net book value of the Bank's investment in furnishings and
equipment totaled $48,155 at June 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank is a party to various legal proceedings
incident to its business. At June 30, 2000, the Company was a party to
litigation and claims 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2000.
28
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to
"Item 1. Description of Business - Regulation - Regulation of the Bank -
Limitations on Capital Distributions" herein and "Market for Common Stock and
Related Stockholder Matters" and Note 2 of the Notes to Consolidated Financial
Statements in the portions of the Annual Report filed as Exhibit 13 to this
Report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required by this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the portions of the Annual Report filed as Exhibit 13 to this
Report.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are incorporated by
reference to the Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Independent Auditors' Report in the portions of the
Annual Report filed as Exhibit 13 to this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning the directors and executive officers of the
Company is incorporated herein by reference to the section captioned "Election
of Directors" in the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the section captioned "Election of Directors -- Executive
Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and Beneficial Ownership"
and "Election of Directors" in the Proxy Statement.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Election of Directors -- Transactions with
Management" in the Proxy Statement.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
NO. DESCRIPTION
<S> <C>
3.1 * Certificate of Incorporation of The Southern Banc Company, Inc.
3.2 * Bylaws of The Southern Banc Company, Inc.
4.1 * Specimen Common Stock Certificate of The Southern Banc Company, Inc.
4.2** Rights Agreement
10.1 *** Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan
Association of Gadsden and James B. Little Jr.
10.2 *** First Federal Savings and Loan Association of Gadsden Supplemental Executive Retirement Agreement
10.3 **** The Southern Banc Company, Inc. 1996 Stock Option and Incentive Plan and trust
10.4 **** First Federal Savings and Loan Association of Gadsden Management Recognition Plan and trust
10.5 ***** 1997 Amendments to Employment Agreements between the Southern Banc Company, Inc. and First Federal
Savings and Loan Association of Gadsden and James B. Little Jr.
10.6 ***** Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan
Association of Gadsden and Gates Little
13 Annual Report to Stockholders. Except for these portions of the Annual Report to Stockholders
which are expressly incorporated herein by reference, such Annual Report is furnished for the information
of the Commission and is not to be deemed "filed" as part of this Report.
30
<PAGE>
21 Subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (SEC use only)
----------------
* Incorporated by reference to Registration Statement on Form 8-A (No. 1-13964).
** Incorporated by reference to Current Report on Form 8-K dated July 15, 1999.
*** Incorporated by reference to Registration Statement on Form S-1 (No. 33-93218).
**** Incorporated by reference to Registration Statement on Form S-8 (No. 333-3546).
***** Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 2000
</TABLE>
(b) Reports on Form 8-K. There were no Current Reports on Form 8-K filed
during the last quarter of fiscal year 2000.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the date
indicated below.
THE SOUTHERN BANC COMPANY, INC.
Date: September 27, 2000 By: /S/ JAMES B. LITTLE JR.
-------------------------------------
James B. Little Jr.
Chairman of the Board and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated below as of the date indicated above.
<TABLE>
<CAPTION>
<S> <C>
By: /S/ JAMES B. LITTLE, JR. By: /S/ THOMAS F. DOWLING
--------------------------------------------------------- ---------------------
James B. Little, Jr. Thomas F. Dowling
Chairman of the Board and Chief Executive Officer Director
(Director and Principal Executive, Financial
and Accounting Officer)
By: /S/ CRAIG G. CANTRELL By: /S/ JAMES B. LITTLE III
--------------------------------------------------------- -----------------------
Craig G. Cantrell James B. Little III
Director Director
By: /S/ GRADY GILLAM By: /S/ GATES LITTLE
--------------------------------------------------------- ----------------
Grady Gillam Gates Little
Director President and Director
By: /S/ REX G. KEELING, JR. By: /S/ FRED TAYLOR
--------------------------------------------------------- ---------------
Rex G. Keeling, Jr. Fred Taylor
Director Director
</TABLE>
32
