-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PcjfaYj7Fp0hvngOAYIqppDl6jSBk+adr/55RU53xkdWLvzNuxVIU9qQzo6Yu1kJ /jG+NdLOXvJORApOWPmyYw== 0000928385-98-001982.txt : 19980928 0000928385-98-001982.hdr.sgml : 19980928 ACCESSION NUMBER: 0000928385-98-001982 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN BANC CO INC CENTRAL INDEX KEY: 0000946453 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 631146351 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-13964 FILM NUMBER: 98714707 BUSINESS ADDRESS: STREET 1: 221 S. 6TH STREET CITY: GADSDEN STATE: AL ZIP: 35901-4102 BUSINESS PHONE: 2055433860 MAIL ADDRESS: STREET 1: 221 S 6TH STREET CITY: GADSDEN STATE: AL ZIP: 35901-4102 10KSB 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- (Mark One) FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 [_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _______________ Commission File Number: 1-13964 THE SOUTHERN BANC COMPANY, INC. ________________________________________________________ (Name of Small Business Issuer in Its Charter) Delaware 63-1146351 _____________________________________________ _______________ (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 221 S. 6th Street, Gadsden, Alabama 35901 _________________________________________ ---------- (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number, Including Area Code: (256) 543-3860 Securities registered pursuant to Section 12(b) of the Act: Common stock, par value $.01 per share American Stock Exchange - -------------------------------------- -------------------------------------- (Title of Class) (Name of Exchange on Which Registered) Securities registered pursuant to Section 12(g) of the Act: Not Applicable Check whether the issuer: (1) filed all reports required by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Registrant's revenues for the fiscal year ended June 30, 1998: $542,885 As of September 21, 1998, the aggregate market value of the 801,362 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on such date was approximately $11.1 million based on the closing sales price of $13.875 per share of the registrant's Common Stock on September 21, 1998 as listed on the American Stock Exchange. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 10% of the registrant's outstanding voting stock are affiliates. Number of shares of Common Stock outstanding as of September 21, 1998: 1,230,313 Transitional Small Business Disclosure Format Yes _____ No X ------- DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents incorporated by reference and the part of this report into which the document is incorporated: 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended June 30, 1998 (the "Annual Report"). (Parts I and II) 2. Portions of the Proxy Statement for the registrant's 1998 Annual Meeting of Stockholders (the "Proxy Statement"). (Part III) 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 First Federal Savings and Loan Association of Gadsden (the "Association") for the purpose of serving as a savings institution holding company of the Association upon the acquisition of all of the capital stock issued by the Association upon the Conversion. Before the Conversion, the Company did not engage in any material operations. After the Conversion, the Company's principal assets have been the outstanding capital stock of the Association, a portion of the net proceeds of the Conversion and a note receivable from the Company's Employee Stock Ownership Plan ("ESOP"), and the Company's principal business has been the business of the Association and its subsidiaries. The holding company structure permits the Company to expand the financial services offered through the Association. As a holding company, the Company has greater flexibility than the Association to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions. The Company is classified as a unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision ("OTS"). As long as the Company remains a unitary savings institution holding company, under current law the Company could diversify its activities in such a manner as to include any activities allowed by law or regulation to a unitary savings institution holding company. See "Proposed Regulatory Changes" below. The Company's executive offices are located at 221 S. 6th Street, Gadsden, Alabama 35901, and its telephone number is (256) 543-3860. First Federal Savings and Loan Association of Gadsden. The Association is a conservative and independent community-oriented savings institution dedicated to providing quality customer service. The Association was organized in 1936 as a federally chartered mutual savings and loan association, at which time it also became a member of the Federal Home Loan Bank ("FHLB") System and obtained federal deposit insurance. The Association currently operates through four banking offices located in Gadsden, Albertville, Guntersville and Centre, Alabama. At June 30, 1998, the Association had total assets of $105.1 million, deposits of $85.9 million and stockholders' equity of $18.6 million, or 17.67% of total assets. As a federally chartered savings institution, the Association is subject to extensive regulation by the OTS. The lending activities and other investments of the Association must comply with various federal regulatory requirements, and the OTS periodically examines the Association for compliance with various regulatory requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the authority to conduct special examinations. The Association must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). See "Proposed Regulatory Changes" below. PROPOSED REGULATORY CHANGES On May 13, 1998, the U.S. House of Representatives by one vote passed H.R. 10 (the "Act"), the "Financial Services Competition Act of 1998," which calls for a sweeping modernization of the banking system that would permit affiliations between commercial banks, securities firms, insurance companies and, subject to certain limitations, other commercial enterprises. The stated purposes of the Act are to enhance consumer choice in the financial services marketplace, level the playing field among providers of financial services and increase competition. 1 H.R. 10 removes the restrictions contained in the Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956, thereby allowing qualified financial holding companies to control banks, securities firms, insurance companies, and other financial firms. Conversely, securities firms, insurance companies and financial firms would be allowed to own or affiliate with a commercial bank. Under the new framework, the Federal Reserve would serve as an umbrella regulator to oversee the new financial holding company structure. Securities affiliates would be required to comply with all applicable federal securities laws, including registration and other requirements applicable to broker-dealers. The Act also provides that insurance affiliates be subject to applicable state insurance regulations and supervision. The Act preserves the thrift charter and all existing thrift powers, but restricts the activities of new unitary thrift holding companies. The Senate is now considering the legislation but may further modify the Act. At this time, it is unknown whether the Act will be enacted, or if enacted, what form the final version of such legislation might take. Business Strategy The Association's business strategy has been to operate as a profitable and independent community-oriented savings institution dedicated to providing quality customer service. Generally, the Association has sought to implement this strategy by using retail deposits as its sources of funds and maintaining most of its assets in mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA"), loans secured by owner-occupied one- to four-family residential real estate located in the Association's market area, U.S. government and agency securities, interest- earning deposits, cash and equivalents and consumer loans. The Association's business strategy incorporates the following key elements: (1) remaining a community-oriented financial institution while maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a community-based institution can offer; (2) attracting a relatively strong retail deposit base from the communities served by the Association's four banking offices; (3) maintaining asset quality by emphasizing investment in local residential mortgage loans, mortgage-backed securities and other securities issued or guaranteed by the U.S. government or agencies thereof; and (4) maintaining liquidity and capital substantially in excess of regulatory requirements. MARKET AREA The Association considers its primary market area to consist of Etowah, Cherokee and Marshall Counties in which the Association has its four offices. The City of Gadsden in which the Association's main office is located is in Etowah County, approximately 65 miles northeast of Birmingham, Alabama. Based upon the 1990 population census, the combined population of Etowah, Cherokee and Marshall Counties was approximately 100,000. The economy in the Association's market area includes a mixture of manufacturing and agriculture. Large local employers include Goodyear Tire and Rubber Company which has a plant located in Etowah County and Gulf States Steel Corp., a local manufacturer of steel. According to the Alabama Department of Industrial Relations, the unemployment rates for May 1998 in Etowah, Cherokee and Marshall Counties were 5.2%, 4.1% and 5.6%, respectively, as compared to 4.0% for the state of Alabama. COMPETITION The Association experiences substantial competition both in attracting and retaining savings deposits and in the making of mortgage and other loans. Direct competition for savings deposits comes from other savings institutions, credit unions, regional bank holding companies and commercial banks located in its primary market area. Significant competition for the Association's other deposit products and services comes from money market mutual funds and brokerage firms. The 2 primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by various financial institutions. Competition for origination or real estate loans normally comes from other savings institutions, commercial banks, credit unions, mortgage bankers, and mortgage brokers. The Association's primary competition comes from institutions headquartered in the Association's market area as well as numerous additional commercial banks which have branch offices located in the Association's market area. Many competing financial institutions have financial resources substantially greater than the Association and offer a wider variety of deposit and loan products. LENDING ACTIVITIES General. The Association's principal lending activity consists of the origination of loans secured by mortgages on existing one- to four-family residences in the Association's market area. The Association also makes a variety of consumer loans and limited amounts of non-residential real estate loans. Historically, the Association has not made commercial business loans. Savings institutions generally are subject to the lending limits applicable to national banks. With certain limited exceptions, the maximum amount that a savings institution or a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings institutions are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the savings institution is in compliance with its fully phased-in capital requirements; (iii) the loans comply with applicable loan-to-value requirements, and; (iv) the aggregate amount of loans made under this authority does not exceed 15% of unimpaired capital and surplus. At June 30, 1998, the maximum amount that the Association could have loaned to any one borrower without prior OTS approval was $4.6 million. At such date, the largest aggregate amount of loans that the Association had outstanding to any one borrower was approximately $237,000. 3 Loan Portfolio Composition. The following table sets forth selected data relating to the composition of the Association's loan portfolio by type of loan at the dates indicated. At June 30, 1998, the Association had no concentrations of loans exceeding 10% of total loans that are not disclosed below.
At June 30, ------------------------------------ 1998 1997 ----------------- ----------------- Amount % Amount % -------- ------- -------- ------- (Dollars in thousands) Type of Loan: - ------------ Real estate loans: One- to four-family residential (1).. $36,528 88.77% $32,678 90.32% Non-residential...................... 216 0.52 278 0.77 Consumer loans......................... 3,748 9.11 2,617 7.23 Savings account loans.................. 657 1.60 609 1.68 ------- ------ ------- ------ Total gross loans...................... 41,149 100.00% 36,182 100.00% ====== ====== Less: Unearned income...................... 245 133 Discounts on loans purchased......... -- -- Deferred loan fees (costs), net...... (325) (207) Allowance for loan losses............ 76 76 ------- ------- Total.............................. $41,153 $36,180 ======= =======
_____________ (1) One- to four-family residential includes second mortgage loans on which the Association also has the first mortgage. The proceeds of these second mortgage loans were used for improvements and consumer purposes. Second mortgage loan balances at June 30, 1998 and 1997 were approximately $974,000 and $1.1 million, respectively. The following table sets forth information at June 30, 1998 regarding the dollar amount of loans maturing or repricing in the Association's portfolio, based on contractual terms to maturity or repricing period. Demand loans, loans having no schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.
Due Within 1 Due After 1 through Due After 5 Year After 5 Years After Years After 6/30/98 6/30/98 6/30/98 Total -------- -------- -------- ------- (In thousands) Real estate mortgage (1).. $ 1,580 $ 2,311 $ 32,853 $36,744 Consumer and savings accounts................ 2,049 2,110 246 4,405 -------- -------- -------- ------- Total................ $ 3,629 $ 4,421 $ 33,099 $41,149 ======== ======== ======== =======
____________ (1) Real estate mortgage loans includes second mortgage loans on which the Association also has the first mortgage. The proceeds of these second mortgage loans were used for improvements and consumer purposes. Second mortgage loan balances at June 30, 1998 totaled $974,000. 4 The following table sets forth at June 30, 1998, the dollar amount of gross loans due after one year after that date, based upon contractual maturity dates or period to reprice, and whether such loans have fixed or adjustable rates.
Predetermined Floating or Rate Adjustable Rates ------------- ---------------- (In thousands) Real estate................... $35,081 $1,663 Consumer and savings account.. 4,405 -- ------- ------ Total........................ $39,486 $1,663 ======= ======
Scheduled contractual principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of long-term loans is substantially less than their contractual terms, due to prepayments. The average life of mortgage loans tends to increase when current mortgage loan market rates are higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are lower than rates on existing mortgage loans. Originations, Purchases and Sales of Loans. The Association's loans are primarily originated by salaried loan officers of the Association. In addition, from time to time, the Association purchases loans. During fiscal 1998, the Association purchased six real estate loans totaling $682,000 from a financial institution in Tuscaloosa, Alabama. The Association has not sold any loans in recent years. One- to Four-Family Residential Lending. Historically, the Association's principal lending activity has been the origination of fixed rate loans secured by first mortgages on existing one- to four-family residences in the Association's market area. The purchase price or appraised value of most of such residences generally has been between $24,000 and $290,000, with the Association's loan amounts averaging approximately $50,000. At June 30, 1998, $36.5 million, or 88.77%, of the Association's total loans were secured by one- to four-family residences, a substantial portion of which were existing, owner- occupied, single-family residences in the Association's market area. At June 30, 1998, $35.0 million, or 95.47%, of the Association's one- to four-family residential loans had fixed rates and $1.7 million, or 4.53%, had adjustable rates. The Association's one- to four-family residential mortgage loans generally are for terms of up to 21 years, amortized on a monthly basis, with principal and interest due each month. The majority of the Association's one- to four-family mortgage loans are underwritten with terms of 15 years or less. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain "due-on- sale" clauses which permit the Association to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. In January 1995, the Association introduced a new mortgage loan product which provides for a term of up to 21 years with the interest rate increasing one percentage point every seven years. This increase is not contingent upon any corresponding increase in market interest rates. As of June 30, 1998, the Association had originated $6.1 million of these graduated rate loans. The Association intends to continue originating such loans subject to market demands. The Association's lending policies generally limit the maximum loan-to- value ratio on one- to four-family residential mortgage loans secured by owner- occupied properties to 90% of the lesser of the appraised value or purchase price for loans up to $250,000. The Association's lending policies generally require private mortgage insurance for any loan that exceeds an 80% loan-to- value ratio. Pursuant to its "First-Time Home Buyer Plan," the Association may lend up to 100% of the purchase price of a one- to four-family residence provided that the borrower (or third party) provides additional collateral in the form of a pledge of a savings deposit or certificate of deposit equal to 25% of the loan amount for loans up to 15 years and 28% of the loan amount for loans with terms greater than 15 years up to 21 years. Securities may also be pledged as additional collateral but such securities must have a current market value equal to 140% of the required collateral amount. 5 The Association has not originated any adjustable rate, one- to four- family residential mortgage loans in recent years. However, total loans at June 30, 1998 included adjustable rate loans with an aggregate principal balance of $1.7 million, substantially all of which were purchased during fiscal 1996. The rates at which interest accrues on these loans are adjustable annually, generally with limitations on adjustments of 2.0% per adjustment period and 6.0% - - 6.5% over the life of the loan. While such loans may include initial discounted rates, they were underwritten and borrowers were qualified based on the fully indexed interest rate. The Association's adjustable rate loans do not permit negative amortization. The Association also originates second mortgage loans on properties for which the Association holds the first mortgage. Such loans, when combined with the first mortgage, generally are limited to 75% of the appraised value. Such loans have a fixed rate and a maximum term of 10 years. The retention of adjustable and graduated rate loans in the Association's portfolio helps reduce the Association's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable and graduated rate loans may increase due to increases in interest costs to borrowers. Further, adjustable and graduated rate loans which provide for initial rates of interest below the fully indexed rates may be subject to increased risk of delinquency or default as the higher, fully indexed rate of interest subsequently replaces the lower, initial rate. Further, although adjustable rate loans allow the Association to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed rate period before the first adjustment and the periodic and lifetime interest rate adjustment limitations and the ability of borrowers to convert the loans to fixed rates. Accordingly, there can be no assurance that yields on the Association's adjustable rate loans will fully adjust to compensate for increases in the Association's cost of funds. Finally, adjustable rate loans increase the Association's exposure to decreases in prevailing market interest rates, although decreases in the Association's cost of funds tend to offset this effect. Consumer Lending. The Association's consumer loans consist of home equity lines of credit secured by first or second mortgages on single-family residences in the Association's market area, new and used automobile loans and demand loans secured by savings accounts at the Association. These loans totaled approximately $734,000, $2.3 million and $657,000, respectively, at June 30, 1998. Management plans to continue the Association's expansion of these programs as part of the Association's plan to provide a wider range of financial services to the Association's customers while increasing the Association's portfolio yields. The Association makes home equity lines of credit secured by the borrower's residence. These loans, combined with the first mortgage loan, which usually is from the Association, generally are limited to 75% of the appraised value of the residence as long as the first mortgage is held by the Association and 65% if the first mortgage is held by another lender. Home equity lines of credit are open-end with the rate on such loans adjusting monthly based on the Prime Rate as published in the Wall Street Journal as of the first day of the month plus 1.5%. The Association's new and used automobile loans generally are underwritten in amounts up to 85% of the purchase price, dealer cost or the loan value as published by the National Automobile Dealers Association or the "Black Book." The terms of such loans generally do not exceed 60 months with loans for older used cars underwritten for shorter terms. The Association requires that the vehicles be insured and that the Association be listed as loss payee on the insurance policy. The Association originates a portion of its automobile loans on an indirect basis through various dealerships located in its market area. See " -- Loan Solicitation and Processing." The Association generally makes savings account loans for up to 80% of the balance of the account. The interest rate on these loans is generally two percentage points above the rate paid on the account, and interest is billed on a monthly basis. These loans are payable on demand, and the account must be pledged as collateral to secure the loan. 6 Consumer loans generally involve more risk than first mortgage loans. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against the Association, and a borrower may be able to assert against the Association claims and defenses which it has against the seller of the underlying collateral. In underwriting consumer loans, the Association considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. Loan Solicitation and Processing. The Association's loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers as well as walk-in customers. In addition, the Association originates a portion of its automobile loans on an indirect basis through various dealerships located in the Association's market area. The Association's solicitation programs consist of calls by the Association's officers to local realtors and builders and advertisements in local newspapers, billboards and real estate-related periodicals. Real estate loans are originated by the Association's staff loan officers and executive officers, none of whom receives commissions for loan originations. Loan applications are accepted at each of the Association's offices for processing and approval. Upon receipt of a loan application from a prospective borrower, the Association's staff preliminarily reviews the information provided and makes an initial determination regarding the qualification of the borrower. If not disapproved, the application then is placed in processing, and a credit report, verifications and other information is generally gathered relating to the loan applicant's employment, income and credit standing. It is the Association's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from an Association-approved appraiser. The Association requires that all borrowers complete an environmental questionnaire. The Association generally does not obtain a formal environmental report on the real estate at the time a loan is made, except when the Association becomes aware of a particular risk of environment contamination. It is the Association's policy to record a lien on the real estate securing the loan and, in most instances, to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a designated flood plain, paid flood insurance policies are required. The Board of Directors has the overall responsibility and authority for general supervision of the Association's loan policies. The Board has established written lending policies for the Association. The Association has established a loan committee which is comprised of Board members and Executive Officers. Any loan committee member has the authority to approve mortgage loans of $200,000 or under. Mortgage loans over $200,000 require the approval of one committee member accompanied by the approval of the Chairman of the Board. Consumer loans up to $15,000 may be approved by individual loan officers. Consumer loans greater than $15,000 must be approved by at least two members of the Association's consumer loan committee which is comprised of all of the Association's loan officers. Loan applicants are promptly notified of the decision of the Association. It has been management's experience that substantially all approved loans are funded. Interest Rates and Loan Fees. Interest rates charged by the Association on mortgage loans are primarily determined by competitive loan rates offered in its market area and the Association's minimum yield requirements. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Federal Reserve Board, the general supply of money in the economy, tax policies and governmental budget matters. 7 The Association receives fees in connection with loan originations, loan modifications, late payments and changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Association typically receives fees of up to 1.0% in connection with the origination of fixed rate mortgage loans. The excess, if any, of loan origination fees over direct loan origination expenses is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. Collection Policies. When a borrower fails to make a payment on a loan, the Association generally takes prompt steps to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower, and a late charge is imposed, if applicable. All loans on which payments are 30 or more days delinquent are designated as "special mention." The Association's Board of Directors reviews a list of all classified assets on a monthly basis. See " -- Asset Classification, Allowances for Losses and Non- performing Assets." If a loan remains delinquent 90 days or more, the Association generally makes demand for payment and/or initiates foreclosure or other legal proceedings. Asset Classification, Allowances for Losses and Non-performing Assets. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as substandard if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require an institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, an institution must either establish a specific allowance for loss in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with an institution's classifications. If an institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. The Association regularly reviews its assets to determine whether any assets require classification or re- classification. The Board of Directors reviews and approves all classifications on a monthly basis. At June 30, 1998, the Association had no assets classified as loss or doubtful, $11,000 of assets classified as substandard and $757,000 of assets designated as special mention. In extending credit, the Association recognizes that losses will occur and that the risk of loss will vary with, among other things, the type of credit being extended, the creditworthiness of the obligor over the term of the obligation, general economic conditions and, in the case of a secured obligation, the quality of the security. It is management's policy to maintain allowances for losses based on, among other things, regular reviews of delinquencies and credit portfolio quality, character and size, the Association's and the industry's historical and projected loss experience and current and forecasted economic conditions. The Association increases its allowance for loan losses by charging provisions for losses against the Association's income. Federal examiners may disagree with an institution's allowance for loan losses. Management actively monitors the Association's asset quality and charges off loans against the allowance for losses on such loans and makes additional loss provisions in its discretion. Although management believes it uses the best information available to make determinations with respect to the allowance for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. The Association's methodology for maintaining the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not yet been identified. Management conducts regular reviews of the Association's assets and evaluates the adequacy of its allowance for loan losses based on an assessment of risk in the Association's assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market, regulatory 8 reviews conducted in the regulatory examination process and economic conditions generally. Allowances are provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value or net realizable value of the security. At the date of foreclosure or other repossession, the Association transfers the property to real estate acquired in settlement of loans at the lower of recorded investment in the loan or fair value, net of estimated cost of disposition. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a property would yield in a current sale between a willing buyer and a willing seller. Fair value is measured by market transactions. If a market does not exist, fair value of the property is estimated based on selling prices of similar properties in active markets or, if there are no active markets for similar properties, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value generally is determined through an appraisal at the time of foreclosure. Any amount of the recorded investment in the loan in excess of fair value is charged-off against the allowance for loan losses. Subsequent to foreclosure, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate may be recorded if certain conditions are met. At June 30, 1998, the Association had no properties acquired in settlement of loans. The following table sets forth an analysis of the Association's allowance for loan losses for the periods indicated.
Year Ended June 30, ------------------------- 1998 1997 ---- ---- (In thousands) Balance at beginning of period................... $ 76 $ 78 Charge-offs...................................... -- (2) Recoveries....................................... -- -- Provision for loan losses........................ -- -- ----- ----- Balance at end of period......................... $ 76 $ 76 ===== =====
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.
At June 30, ------------------------------------------ 1998 1997 --------------------- ------------------- Percent Percent of Loans of Loans in Category in Category to Total to Total Amount Loans Amount Loans ------ ----------- ------ ----------- (Dollars in thousands) Real estate loans: One- to four-family residential.... $ 48 88.77% $ 48 90.87% Non-residential.................... -- 0.52 -- 0.77 Consumer and savings account loans... 28 10.71 28 8.36 ----- ------ ----- ------ Total allowance for loan losses.. $ 76 100.00% $ 76 100.00% ===== ====== ===== ======
9 The Association ceases accrual of interest on a loan when payment on the loan is delinquent in excess of 90 days. Income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has been reestablished, in which case the loan is returned to accrual status. The following table sets forth information with respect to the Association's non-performing assets at the dates indicated.
At June 30, ------------------------------- 1998 1997 -------- ------- (Dollars in thousands) Loans accounted for on a non-accrual basis: (1) Real estate loans: One- to four-family residential............................... $ 11 $ -- Non-residential............................................... -- -- Consumer and savings account loans.............................. -- -- Other loans..................................................... -- -- ----- ----- Total......................................................... $ 11 $ -- ===== ===== Accruing loans which are contractually past due 90 days or more: Real estate loans: One- to four-family residential............................... $ -- $ -- Non-residential............................................... -- -- Consumer and savings account loans.............................. -- -- Other loans..................................................... -- -- ----- ----- Total......................................................... $ -- $ -- ===== ===== Total of non-accrual and accruing loans 90 days past due loans................................. $ 11 $ -- ===== ===== Percentage of total loans......................................... 0.03 --% ===== ===== Other non-performing assets (2)................................... $ -- $ -- ===== ===== Percentage of total assets........................................ 0.01% --% ===== =====
- ------------------------- (1) The Association ceases accrual of interest on a loan when payment on the loan is delinquent in excess of 90 days. Income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has been reestablished, in which case the loan is returned to accrual status. (2) Other non-performing assets may include real estate or other assets acquired by the Association through foreclosure or repossession. Real estate owned is recorded at the lower of the recorded investment in the loan or fair value of the property, less estimated costs of disposition. Interest income foregone on non-accrual loans was considered insignficant for the year ended June 30, 1998. At June 30, 1998, management had identified no loans which were not reflected in the preceding table but as to which known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms. 10 INVESTMENT ACTIVITIES The Association is permitted under federal law to make certain investments, including investments in securities issued by FNMA, FHLMC, GNMA, various federal agencies and state and municipal governments, deposits at the FHLB of Atlanta, certificates of deposits in federally insured institutions, certain bankers' acceptances and federal funds. The Association may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. Federal regulations require the Association to maintain an investment in FHLB of Atlanta stock and a minimum amount of liquid assets which may be invested in cash and specified securities. From time to time, the OTS adjusts the percentage of liquid assets which savings institutions are required to maintain. For additional information, see "Regulation -- Regulation of the Association -- Liquidity Requirements." The Association invests in investment securities in order to diversify its assets, manage cash flow and interest rate risk, obtain yield and maintain the minimum levels of qualified and liquid assets required by regulatory authorities. The investment activities of the Association consist primarily of investments in mortgage-backed securities, U.S. Treasury and U.S. Government agency securities and other securities. Investment decisions are generally made by the President of the Association and are ratified by the Board of Directors. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Association's investment policy. The Association's investment policy does not permit the Association to invest in any futures, options or high risk mortgage derivatives, including residual interests in collateralized mortgage obligations and other real estate mortgage investment conduits, stripped mortgage-backed securities and other investments that exhibit a high degree of price volatility. The Association adopted SFAS No. 115 as of June 30, 1993. Upon implementation of SFAS No. 115, certain investment and mortgage-backed securities were transferred to a portfolio of securities designated as available for sale. The remaining securities are considered to be held to maturity. Securities designated as "available for sale" are carried at their fair value with unrealized gains or losses, net of tax effect, recognized in equity. Securities designated as held to maturity are carried at amortized cost. At June 30, 1998, investment securities with an aggregate amortized cost and an aggregate fair value of $22.2 million were included in the portfolio of securities designated as available for sale. The aggregate impact on equity was an increase of $110,000 for the year ended June 30, 1998. Securities designated as "held to maturity" are those assets which the Association has the ability and management has the intent to hold to maturity. Upon acquisition, securities are classified as to the Association's intent. For additional information, see Notes 8 and 9 of Notes to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 of this report. Mortgage-Backed Securities. The Association maintains a substantial portfolio of mortgage-backed securities in the form of GNMA, FHLMC and FNMA participation certificates. GNMA, FHLMC and FNMA certificates are each guaranteed by their respective agencies as to principal and interest, and GNMA certificates are backed by the full faith and credit of the U.S. Government. Mortgage-backed securities generally entitle the Association to receive a pro rata portion of the cash flows from an identified pool of mortgages. Although mortgage-backed securities generally yield less than the loans which are exchanged for such securities, they present substantially lower credit risk, they are more liquid than individual mortgage loans, and they may be used to collateralize obligations of the Association. In addition, the Association's portfolio of mortgage-backed securities qualify as "Qualified Thrift Investments" for purposes of determining the Association's compliance with the "Qualified Thrift Lender" test and may also be considered for purposes of meeting certain definitional tests prescribed by the Internal Revenue Code which entitle thrift institutions to favorable tax treatment. See "Regulation of the Association -- Qualified Thrift Lender Test" and "Taxation -- Federal Income Taxation." Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable- rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, 11 are passed on to the certificate holder. The life of a mortgage-backed pass- through security is equal to the life of the underlying mortgages. The actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage- backed security. The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accreted over the estimated life of the securities using a level yield method. Prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities. The Association's mortgage-backed securities portfolio consists primarily of seasoned fixed-rate and adjustable rate mortgage-backed securities. At June 30, 1998, the Association had $37.5 million in mortgage-backed securities (representing 35.68% total assets) which are considered to be held to maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA. Agency Notes. The Association has also invested in notes issued by the FHLB, FHLMC and FNMA. Such notes had an aggregate balance of $18.0 million at June 30, 1998 and are neither insured nor guaranteed by the United States. These notes provide for interest rates to increase at specified intervals to pre-established rates. The issuing agency has the right to prepay such notes at face value at certain pre-established dates. The weighted average maturity and coupon rate of the Association's agency notes were 44.7 months and 6.12%, respectively, at June 30, 1998. The following table sets forth the carrying value of the Association's investment portfolio at the dates indicated.
At June 30, ---------------------- 1998 1997 ------- ------- (In thousands) Securities available for sale: (1) U.S. Treasury securities................ $ 7,938 $ 6,661 U.S. Government agency securities....... 13,506 10,165 Federal Home Loan Bank stock............ 795 795 ------- ------- Total securities available for sale.. $22,239 $17,621 ======= ======= Securities held to maturity: (2) U.S. Treasury securities................ $ -- $ 1,000 U.S. Government agency securities....... 34,077 44,157 ------- ------- Total securities held to maturity.... $34,077 $45,157 ======= ======= Total securities.......................... $56,316 $62,778 ======= =======
- ------------------------- (1) The carrying value is the approximate fair value of the security at each reporting date. (2) The carrying value is the amortized cost of the security at each reporting date. 12 The following table sets forth information regarding the scheduled maturities, amortized costs, fair values and weighted average yields for the Association's investment securities at June 30, 1998.
One Year or Less One to Five Years Five to Ten Years More than Ten Years ------------------ ----------------- ----------------- ------------------- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield --------- ------- -------- ------- -------- ------- --------- -------- (Dollars in thousands) Securities available for sale: (1) U.S. treasury securities........... $4,101 6.7% $ 3,837 5.0% $ -- --% $ -- --% U.S. Government agency securities....................... 1,965 5.8 3,291 6.4 5,862 6.6 2,387 6.7 Federal Home Loan Bank stock....... 795 7.3 -- -- -- -- -- -- ------ ------- ------- ------- Total securities available for sale. $6,861 6.3% $ 7,128 5.7% $ 5,862 6.6% $ 2,387 6.7% ====== ======= ======= ======= Securities held to maturity: (2) U.S. Government agency securities........................ $ 28 9.6% $ 4,764 7.5% $10,412 7.3% $18,873 7.1% ------ ------- ------- ------- Total securities held to maturity... $ 28 9.6% $ 4,764 7.5% $10,412 7.3% $18,813 7.1% ====== ======= ======= ======= Total securities.................... $6,889 6.3% $11,892 6.5% $16,274 7.1% $21,260 7.0% ====== ======= ======= ======= Total Investment Portfolio ---------------------------- Amortized Fair Average Cost Value Yield --------- ------- -------- (Dollars in thousands) Securities available for sale: (1) U.S. treasury securities........... $ 7,879 $ 7,938 5.8% U.S. Government agency securities....................... 13,488 13,505 6.4 Federal Home Loan Bank stock....... 795 795 7.3 ------- ------- Total securities available for sale. $22,162 $22,238 6.3% ======= ======= Securities held to maturity: (2) U.S. Government agency securities........................ $34,077 $34,811 7.2% ------- ------- Total securities held to maturity... $34,077 $34,811 7.2% ======= ======= Total securities.................... $56,239 $57,049 6.9% ======= =======
_________________ (1) Carrying values of securities available for sale is their approximate fair value at the reporting date. Average yield on securities available for sale is based on their amortized historical costs at the reporting date. (2) Carrying values of securities held to maturity is their amortized historical cost at their reporting date. Average yield on securities held to maturity is based on their amortized historical cost at the reporting date. For additional information, see Notes 8 and 9 of Notes to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this report. 13 DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS General. Deposits are the primary source of the Association's funds for lending and other investment purposes. In addition to deposits, the Association derives funds from loan principal repayments, interest payments and maturing investments. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions. Deposits. The Association attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit which range in term from seven days to ten years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. The Association also offers Individual Retirement Accounts ("IRAs"). The Association's policies are designed primarily to attract deposits from local residents through the Association's branch network rather than from outside the Association's market area. The Association's interest rates, maturities, service fees and withdrawal penalties on deposits are established by management on a periodic basis. Management determines deposit interest rates and maturities based on the Association's funds acquisition and liquidity requirements, the rates paid by the Association's competitors, the Association's growth goals and applicable regulatory restrictions and requirements. The Association does not solicit deposits from brokers and currently does not bid for public unit funds. The Association plans to remain competitive in its primary market area by introducing new products and services which include various checking account products, enhancements to the savings portfolio, offering competitive interest rates and fees, and to attract new customers by providing full service banking. 14 Deposits in the Association as of June 30, 1998 were represented by the various programs described below.
Interest Minimum Minimum Percentage of Rate Term Category Amount Balances Total Savings - -------- -------- --------- -------- -------- -------------- (In thousands) 1.978% None NOW Accounts $ 100 $ 646 0.75% 2.748 None Passbook Statement Accounts 100 4,597 5.35 3.998 None Gold Star Savings Account 100 599 0.70 4.625 None Money Market Deposit Account 1,500 400 0.47 4.625 None High Yield Account 100 4,208 4.90 2.250 None Best Checking Account 50 275 0.32 1.802 None Merit Checking 50 722 0.84 2.248 None Classic 55 Checking 50 1,857 2.16 -- None Free Checking -- 151 0.18 -- None Business checking 50 20 0.02 Certificates of Deposit ----------------------- 2.750 91 Days 3-Month Money Market 1,000 19 0.02 2.750 5 Month Fixed Term, Fixed Rate 1,000 119 0.14 4.900 182 Days 6-Month Money Market 1,000 2,520 2.93 5.271 7 Month Fixed Term, Fixed Rate 1,000 454 0.53 5.366 8 Month Fixed Term, Fixed Rate 1,000 119 0.14 5.000 9 Month Fixed Term, Fixed Rate 1,000 820 0.95 5.564 10 Month Fixed Term, Fixed Rate 1,000 3,776 4.39 5.540 12 Month Fixed Term, Fixed Rate 1,000 5,410 6.30 5.397 14 Month Fixed Term, Fixed Rate 1,000 12,062 14.04 5.629 18 Month Fixed Term, Fixed Rate 1,000 4,353 5.07 5.649 18 Month Fixed Term, Fixed Rate - IRA 250 4,363 5.08 5.411 20 Month Fixed Term, Fixed Rate 1,000 5,764 6.71 5.652 24 Month Fixed Term, Fixed Rate 1,000 4,804 5.59 5.010 30 Month Fixed Term, Fixed Rate 1,000 3,550 4.13 5.670 36 Month Fixed Term, Fixed Rate 1,000 4,304 5.01 7.494 48 Month Fixed Term, Fixed Rate 1,000 10,572 12.30 5.994 60 Month Fixed Term, Fixed Rate 1,000 5,495 6.40 5.592 72 Month Fixed Term, Fixed Rate 1,000 1,549 1.80 6.035 96 Month Fixed Term, Fixed Rate 1,000 57 0.07 5.778 120 Month Fixed Term, Fixed Rate 1,000 764 0.89 5.050 3-Month-State Fixed Term, Fixed Rate 1,000 1,425 1.66 5.466 Negotiated Negotiated Jumbo 100,000 152 0.18 ------- ------ Total $85,926 100.00% ======= ======
15 The following tables set forth the average balances and average interest rates paid based on month-end balances for deposits in the Association as of the dates indicated.
Year Ended June 30, -------------------------------------------------------------------------- 1998 1997 ------------------------------------ ------------------------------------ Interest- Interest- Bearing Bearing Passbook Demand Certificates Passbook Demand Certificates Savings Deposits of Deposit Savings Deposits of Deposit --------- ---------- ------------- --------- ---------- ------------- (Dollars in thousands) Average balance.......... $7,210 $7,829 $73,157 $8,102 $7,612 $73,494 Average interest rate.... 2.85% 3.07% 5.65% 2.88% 3.20% 5.72%
The following table sets forth the certificates of deposit in the Association classified by rates at the dates indicated.
At June 30, ----------------------- 1998 1997 ----------- ---------- (In thousands) 2.00 - 4.00%....... $ 310 $ 326 4.01 - 6.00%....... 68,465 62,271 6.01 - 8.00%....... 3,553 11,404 8.01 - 10.00%....... 122 119 ------- ------- $72,450 $74,120 ======= =======
The following table indicates the amount of the certificates of deposit of $100,000 or more in the Association by time remaining until maturity at June 30, 1998.
Certificates Maturity Period of Deposit --------------- ------------ (In thousands) Three months or less........... $ 2,788 Over three through six months.. 2,131 Over six through 12 months..... 1,719 Over 12 months................. 4,021 ------- Total........................ $10,659 =======
Borrowings. Savings deposits historically have been the primary source of funds for the Association's lending, investment and general operating activities. The Association is authorized, however, to use advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, the Association is required to own stock in the FHLB of Atlanta and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. The Association does not have any borrowings from the FHLB, and management currently does not expect to borrow from the FHLB in the future. 16 SUBSIDIARY ACTIVITIES Federally chartered savings institutions are permitted to invest up to 2% of their assets in subsidiary service corporations, plus an additional 1% in subsidiaries engaged in specific community purposes. Under such limitation, as of June 30, 1998, the Association was authorized to invest approximately $2.1 million in the stock of or loans to subsidiaries. The Association has one wholly owned subsidiary, First Service Corporation of Gadsden, Alabama, Inc. ("First Service"), an Alabama corporation, which holds the Association's investment in data processing operations. At June 30, 1998, the Association's total investment in the subsidiary was $37,000. In July 1998, First Service Corporation of Gadsden transferred its assets and assigned its liabilities to the Association. Following the transfer and assignment, the Association sold First Service Corporation to the Company. REGULATION OF THE ASSOCIATION General. As a federally chartered savings institution, the Association is subject to extensive regulation by the OTS. The lending activities and other investments of the Association must comply with various federal regulatory requirements, and the OTS periodically examines the Association for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations. The Association must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. See "Proposed Regulatory Changes" above. Federal Home Loan Bank System. The Association is a member of the FHLB System, which consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Association is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at least equal to a percentage of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or a fraction of its advances (borrowings) from the FHLB of Atlanta, whichever is greater. The Association was in compliance with this requirement with an investment in FHLB of Atlanta stock at June 30, 1998 of $795,000. The FHLB of Atlanta serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the OTS and the Board of Directors of the FHLB of Atlanta. Long-term advances may only be made for the purpose of providing funds for residential housing finance. At June 30, 1998, the Association had no advances outstanding with the FHLB of Atlanta. See "Deposit Activity and Other Sources of Funds -- Borrowings." Liquidity Requirements. The Association is required to maintain average daily balances of liquid assets (cash, deposits maintained pursuant to Federal Reserve Board requirements, time and savings deposits in certain institutions, obligations of the United States and states and political subdivisions thereof, shares in mutual funds with certain restricted investment policies, highly rated corporate debt and mortgage loans and mortgage-related securities with less that one year to maturity or subject to pre-arranged sale within one year) equal to the monthly average of not less than a percentage (currently 4%) of its net withdrawable savings deposits plus short-term borrowings. Monetary penalties may be imposed for failure to meet liquidity requirements. The average daily liquidity ratio of the Association for the month of June 1998 was 26.02%. Qualified Thrift Lender Test. The Association is currently subject to OTS regulations which use the concept of a qualified thrift lender ("QTL") to determine eligibility for FHLB advances and for certain other purposes. A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or 17 indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). To qualify as a QTL, a savings institution must either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are defined as total assets less intangibles, property used by an institution in its business and liquidity investments in an amount not exceeding 20% of assets. All of the following may be included as Qualified Thrift Investments: investments in residential mortgages, home equity loans, loans made for educational purposes, small business loans and credit card loans and shares of stock issued by the FHLB. Subject to a 20% of portfolio assets limit, savings institutions are also able to treat the following as Qualified Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, (ii) investments, both debt and equity, in the capital stock or obligations of any other security issued by a service corporation or operating subsidiary, provided that such subsidiary derives at least 80% of its annual gross revenues from activities directly related to purchasing, financing, constructing or improving, repairing domestic residential housing or manufactured housing, (iii) 200% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas, and (iv) loans for personal, family, household or educational purposes, provided that the dollar amount treated as Qualified Thrift Investments may not exceed 10% of the savings institution's portfolio assets. A savings institution shall be deemed a Qualified Thrift Lender as long as its percentage of Qualified Thrift Investments continues to equal or exceed 65% in at least nine out of each 12 months. An institution will cease to be a Qualified Thrift Lender if its percentage of Qualified Thrift Investments as measured by monthly averages over the immediately preceding 12-month period falls below 65% for four or more months. An institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired. At June 30, 1998, approximately substantially more than 65% of the Association's portfolio assets were invested in Qualified Thrift Investments as currently defined. Regulatory Capital Requirements. Under OTS capital standards, savings institutions must maintain "tangible" capital equal to at least 1.5% of adjusted total assets, "core" capital equal to at least 3% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to at least 8% of "risk-weighted" assets. In addition, the OTS has adopted regulations which impose certain restrictions on institutions that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated CAMELS 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital. See "Prompt Corrective Regulatory Action." Core capital is defined as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill." Core capital is generally reduced by the amount of an institution's intangible assets for which no market exists. Limited exceptions to the deduction of intangible assets are provided for purchased mortgage servicing rights, purchased credit card relationships and qualifying supervisory goodwill held by an eligible institution. Tangible capital is given the same definition as core capital but does not include an exception for qualifying supervisory goodwill and is reduced by the amount of all the savings institution's intangible assets with only a limited exception for purchased mortgage servicing rights and purchased credit card relationships. 18 Core and tangible capital generally are required to be reduced by an amount equal to a savings institution's debt and equity investments in subsidiaries engaged in activities not permissible to national banks. As of June 30, 1998, the Association had no material investments in, or extensions of credit to, non-includible subsidiaries. OTS regulations further provide that core and tangible capital need not be reduced by the amount of core deposit intangibles resulting from branch purchase transactions consummated (or under firm contract) prior to March 4, 1994, to the extent permitted by OTS, provided that such core deposit intangibles are valued in accordance with generally accepted accounting principles, supported by credible assumptions, and have their amortization adjusted at least annually to reflect decay rates (past and present) in the acquired customer base. As of June 30, 1998, the Association had $137,000 of core deposit intangibles resulting from the acquisition of its Centre, Alabama branch. Adjusted total assets are a savings institution's total assets as determined under generally accepted accounting principles, adjusted for certain goodwill amounts, and increased by a pro rated portion of the assets of subsidiaries in which the institution holds a minority interest and which are not engaged in activities for which the capital rules require the institution to net its debt and equity investments against capital. Adjusted total assets are reduced by the amount of assets that have been deducted from capital, the portion of the institution's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. At June 30, 1998, the Association's adjusted total assets for purposes of the core and tangible capital requirements were $105.6 million. In determining compliance with the risk-based capital requirement, a savings institution is allowed to use both core capital and supplementary capital provided the amount of supplementary capital used does not exceed the institution's core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the institution's general loss allowances. Total core and supplementary capital are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements, all equity investments and that portion of the institution's land loans and non-residential construction loans in excess of 80% loan-to-value ratio. As of June 30, 1998, the Association had no high ratio land or non- residential construction loans and no equity investments for which OTS regulations require a deduction from total capital. The risk-based capital requirement is measured against risk-weighted assets which equal the sum of each asset and the credit-equivalent amount of each off-balance sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, one- to four-family first mortgages not more than 90 days past due with original loan-to-value ratios under 80% are assigned a risk weight of 50%. Consumer and residential construction loans are assigned a risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S. Government securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight. As of June 30, 1998, the Association's risk-weighted assets were approximately $27.8 million. 19 At June 30, 1998, the Association exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Association's regulatory capital compliance at June 30, 1998 and 1997.
To Be Well Capitalized for For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- -------------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------- ------- ------ ------------ -------- -------- (Dollars in thousands) June 30, 1998: Total capital (to risk-weighted assets)............................ $15,845 56.9% $2,228 8.0% $2,785 10.0% Tier 1 (core) capital (to risk- weighted assets)................... 15,769 56.6 N/A N/A 1,671 6.0 Tier 1 (core) capital (to adjusted total assets)...................... 15,769 14.9 3,165 3.0 5,276 5.0 Tangible capital (to adjusted total assets)...................... 15,769 14.9 1,583 1.5 N/A N/A June 30, 1997: Total capital (to risk-weighted assets)............................ $14,857 60.7% $1,956 8.0% $2,446 10.0% Tier 1 (core) capital (to risk- weighted assets)................... 14,781 60.4 N/A N/A 1,467 6.0 Tier 1 (core) capital (to adjusted total assets)...................... 14,781 14.0 3,165 3.0 5,275 5.0 Tangible capital (to adjusted total assets)...................... 14,781 14.0 1,580 1.5 N/A N/A
The OTS' risk-based capital requirements require that savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. An institution's interest rate risk will be measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. An institution will be considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than two percent of the current estimated economic value of its assets. An institution with a greater than normal interest rate risk will be required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The OTS calculates the sensitivity of a savings institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from an institution's total capital will be based on the institution's Thrift Financial Report filed two quarters earlier. Institutions with less than $300 million in assets and a risk-based capital ratio above 12% are generally exempt from filing the interest rate risk schedule with their Thrift Financial Reports. However, the OTS requires any exempt institution that it determines may have a high level of interest rate risk exposure to file such schedule on a quarterly basis and may be subject to an additional capital requirement based upon its level of interest rate risk as compared to its peers. The Association has been informed by the OTS that it is expected to become required to file such reports on a quarterly basis at some time 20 in the future although implementation of this requirement has been indefinitely delayed by the OTS. Based on the Association's substantial capital level, management does not expect that implementation of this requirement will have a material effect on the Association. In addition to requiring generally applicable capital standards for savings institutions, the Director of the OTS is authorized to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as the Director determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. Such circumstances would include a high degree of exposure of interest rate risk, prepayment risk, credit risk and concentration of credit risk and certain risks arising from non-traditional activities. The Director of the OTS may treat the failure of any institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any institution which fails to maintain capital at or above the minimum level required by the Director to submit and adhere to a plan for increasing capital. Such an order may be enforced in the same manner as an order issued by the FDIC. Deposit Insurance. The Association is required to pay assessments based on a percent of its insured deposits to the FDIC for insurance of its deposits by the SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set semi-annual assessments for SAIF-insured institutions at a level necessary to maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher percentage of estimated insured deposits that the FDIC determines to be justified for that year by circumstances indicating a significant risk of substantial future losses to the SAIF. The FDIC has established a risk-based assessment system for insured depository institutions. Under the system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC which will be determined by the institution's capital level and supervisory evaluations. Based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized - - - using the same percentage criteria as under the prompt corrective action regulations. See "Prompt Corrective Regulatory Action." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. The FDIC adopted the current assessment schedule for SAIF deposit insurance pursuant to which the assessment rate for well-capitalized institutions with the highest supervisory ratings is zero and institutions in the lowest risk assessment classification are assessed at the rate of 0.31% of insured deposits. Until December 31, 1999, however, SAIF-insured institutions, will be required to pay assessments to the FDIC at the rate of 6.5 basis points to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to finance takeovers of insolvent thrifts. During this period, BIF members will be assessed for these obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO payments. Since the SAIF now meets its designated reserve ratio, SAIF members are permitted to convert to the status of members of the BIF and may merge with or transfer assets to a BIF member. However, substantial entrance and exit fees apply to conversions from SAIF to BIF insurance and such fees may make a SAIF to BIF conversion prohibitively expensive. The FDIC has adopted a regulation which provides that any insured depository institution with a ratio of Tier 1 capital to total assets of less than 2% will be deemed to be operating in an unsafe or unsound condition, which would constitute grounds for the initiation of termination of deposit insurance proceedings. The FDIC, however, would not initiate termination of insurance proceedings if the depository institution has entered into and is in compliance with a 21 written agreement with its primary regulator, and the FDIC is a party to the agreement, to increase its Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is defined as the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights and qualifying supervisory goodwill eligible for inclusion in core capital under OTS regulations and minus identified losses and investments in certain securities subsidiaries. Insured depository institutions with Tier 1 capital equal to or greater than 2% of total assets may also be deemed to be operating in an unsafe or unsound condition notwithstanding such capital level. The regulation further provides that in considering applications that must be submitted to it by savings institutions, the FDIC will take into account whether the institution is meeting the Tier 1 capital requirement for state non-member banks of 4% of total assets for all but the most highly rated state non-member banks. Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain average daily reserves equal to various percentages of its accounts. The percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of June 30, 1998, the Association met its reserve requirements. Dividend Limitations. Under OTS regulations, the Association would not be permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the remaining balance of the liquidation account established for the benefit of certain depositors of the Association at the time of the Conversion. In addition, the Association is required by OTS regulations to give the OTS 30 days' prior notice of any proposed declaration of dividends to the Company. OTS regulations impose additional limitations on the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Association. Under these regulations, an institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirements (a "Tier 1 Association") is generally permitted, after notice, to make capital distributions during a calendar year in the amount equal to the greater of: (a) 75% of its net income for the previous four quarters; or (b) 100% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded the ratio of its fully phased-in risk-based capital ratio requirement to its assets at the beginning of the calendar year. An institution with total capital in excess of current minimum capital ratio requirements but not in excess of its fully phased-in requirements (a "Tier 2 Association") is permitted, after notice, to make capital distributions without OTS approval of up to 75% of its net income for the previous four quarters, less dividends already paid for such period. An institution that fails to meet current minimum capital requirements (a "Tier 3 Association") is prohibited from making any capital distributions without the prior approval of the OTS. A Tier 1 Association that has been notified by the OTS that its is in need of more than normal supervision will be treated as either a Tier 2 or Tier 3 Association. The Association is a Tier 1 Association. Despite the above authority, the OTS may prohibit any institution from making a capital distribution that would otherwise be permitted by the regulation, if the OTS were to determine that the distribution constituted an unsafe or unsound practice. Under the OTS prompt corrective action regulations, the Association would be prohibited from making any capital distributions if, after making the distribution, it would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "Prompt Corrective Regulatory Action." In addition to the foregoing, earnings of the Association appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to the Company without payment of taxes at the then current tax rate on the amount of earnings removed from the reserves for such distributions. See "Taxation." The Company intends to make full use of this favorable tax treatment afforded to the 22 Association and the Company and does not contemplate use of any post-Conversion earnings of the Association in a manner which would limit either company's bad debt deduction or create federal tax liabilities. Limits on Loans to One Borrower. Savings institutions generally are subject to the lending limits applicable to national banks. With certain limited exceptions, an institution's loans and extensions of credit outstanding to a person at one time shall not exceed 15% of the unimpaired capital and surplus of the institution. An institution may lend an additional amount, equal to 10% of unimpaired capital and surplus, if such loan is fully secured by readily marketable collateral. Savings institutions are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of the OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the institution is in compliance with its fully phased-in capital requirements; (iii) the loans comply with applicable loan-to-value requirements, and; (iv) the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus. The lending limits generally do not apply to purchase money mortgage notes taken from the purchaser of real property acquired by the institution in satisfaction of debts previously contracted if no new funds are advanced to the borrower and the institution is not placed in a more detrimental position as a result of the sale. Certain types of loans are excepted from the lending limits, including loans secured by savings deposits. At June 30, 1998, the maximum amount that the Association could have lent to any one borrower under the 15% limit was approximately $2.8 million. At such date, the largest aggregate amount of loans that the Association had outstanding to any one borrower was approximately $237,000. Transactions with Related Parties. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Section 106 of the Bank Holding Company Act of 1956, as amended ("BHCA") which also applies to the Association, prohibits the Association from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions. Further, savings institutions are subject to the restrictions contained in Section 22(h) and Section 22(g) of the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of a savings institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution's loans-to-one-borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus and an additional 10% of such capital and surplus for loans fully secured by certain readily marketable collateral). Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10% stockholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a 23 majority of the board of directors of the institution with any "interested" director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Section 22(g) of the Federal Reserve Act and Regulation O requires that loans to executive officers of a depository institution requires that loans not be made on terms more favorable than those afforded to other borrowers, requires approval for such extensions of credit by the board of directors of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the BHCA prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") generally is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A significantly undercapitalized institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt, with certain exceptions. If an institution's ratio of tangible capital to total assets falls below the "critical capital level" established by the appropriate federal banking regulator, the institution is subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. Under the OTS regulation implementing the prompt corrective action provisions of FDICIA, the OTS measures an institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). An institution that is not subject to an order or written directive to meet or maintain a specific capital level is deemed "well capitalized" if it also has: (i) a total risk-based capital ratio 24 of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized" savings institution is an institution that does not meet the definition of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a regulatory composite rating of 1). An "undercapitalized institution" is an institution that has (i) a total risk-based capital ratio less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the institution has a regulatory composite rating of 1). A "significantly undercapitalized" institution is defined as an institution that has: (i) a total risk-based capital ratio of less than 6.0%; (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized" savings institution is defined as an institution that has a ratio of tangible equity (core capital, subject to certain adjustments) to total assets of 2.0% or less. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any regulatory composite rating category. Standards for Safety and Soundness. FDICIA requires each federal bank regulatory agency to prescribe, by regulation, safety and soundness standards for institutions under its authority. In 1995, these agencies, including the OTS, released interagency guidelines establishing such standards and adopted rules with respect to safety and soundness compliance plans. The OTS guidelines require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution's business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss and should take into account factors such as comparable compensation practices at comparable institutions. If the OTS determines that a savings institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A savings institution must submit an acceptable compliance plan to the OTS within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Association meets substantially all the standards adopted in the interagency guidelines and, therefore, does not believe that the implementation of these regulatory standards will materially affect its operations. Additionally, each federal banking agency is required to establish standards relating to the adequacy of asset and earnings quality. In 1995, these agencies, including the OTS, issued proposed guidelines relating to asset and earnings quality. Under the proposed guidelines, a savings institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management does not believe that the asset and earnings standards, in the form proposed by the OTS, would have a material effect on the Association. REGULATION OF THE COMPANY General. The Company is a savings institution holding company and, as such, subject to OTS registration, regulation, examination, supervision and reporting requirements. As a subsidiary of a savings institution holding company, the Association is subject to certain restrictions in its dealings with the Company and affiliates thereof. See "Proposed Regulatory Changes" above. The Company also is required to file certain reports with, and otherwise comply with the rules and regulations of, the Securities and Exchange Commission ("SEC") under the federal securities laws. Activities Restrictions. The Board of Directors of the Company presently intends to operate the Company as a unitary savings institution holding company. There are generally no restrictions on the activities of a unitary savings institution holding company. However, if the Director of the OTS determines that there is reasonable cause to believe 25 that the continuation by an institution holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director of the OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings institution holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, register as, and become subject to, the restrictions applicable to a bank holding company. See "Regulation of the Association --Qualified Thrift Lender Test." Legislative initiatives have been introduced in the U.S. Congress which could result in the imposition of restrictions on the activities of unitary savings institution holding companies in the future. If the Company were to acquire control of another savings institution, other than through merger or other business combination with the Association, the Company would thereupon become a multiple savings institution holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, the activities of the Company and any of its subsidiaries (other than the Association or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings institution holding company or subsidiary thereof which is not an institution shall commence or continue for a limited period of time after becoming a multiple savings institution holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by, the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings institution holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. A multiple savings institution holding company must obtain the approval of the OTS prior to engaging in the activities described in (vii) above. Restrictions on Acquisitions. Savings institution holding companies may not acquire, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings institution holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of an institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings institution holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of the voting shares of an under-capitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings institution holding company's other subsidiaries must have tangible capital of at least 6-1/2% of total assets, there must not be more than one common director or officer between the savings institution holding company and the issuing savings institution, and transactions between the savings institution and the savings institution holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of the OTS, no director or officer of a savings institution holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings institution holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings institution holding company which controls savings institutions in more than one state if: (i) the multiple savings institution holding company involved controls an institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the FDIC Act; or (iii) the statutes of the state in which the institution 26 to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings institution holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). OTS regulations permit federal savings institutions to branch in any state or states of the United States and its territories. Except in supervisory cases or when interstate branching is otherwise permitted by state law or other statutory provision, a federal institution may not establish an out-of-state branch unless (i) the federal institution qualifies as a QTL or as a "domestic building and loan association" under (S)7701(a)(19) of the Internal Revenue Code and the total assets attributable to all branches of the institution in the state would qualify such branches taken as a whole for treatment as a QTL or as a domestic building and loan association and (ii) such branch would not result in (a) formation of a prohibited multi-state multiple savings holding company or (b) a violation of certain statutory restrictions on branching by savings institution subsidiaries of banking holding companies. Federal savings institutions generally may not establish new branches unless the institution meets or exceeds minimum regulatory capital requirements. The OTS will also consider the institution's record of compliance with the Community Reinvestment Act of 1977 in connection with any branch application. Under the BHCA, bank holding companies are specifically authorized to acquire control of any savings institution. Pursuant to rules promulgated by the Federal Reserve Board, owning, controlling or operating an institution is a permissible activity for bank holding companies, if the savings institution engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies. A bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings institution plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the BHCA. Federal Securities Law. The Common Stock is registered with the SEC under the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), and under OTS regulations, generally may not be deregistered for at least three years after the Conversion. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act. TAXATION General. The Company, the Association and the Association's subsidiaries file a consolidated federal income tax return on a calendar year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. Federal Income Taxation. Thrift institutions, such as the Association, generally are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same manner as other corporations. For tax years beginning before December 31, 1995, however, by meeting certain definitional tests and other conditions prescribed by the Internal Revenue Code, thrift institutions could benefit from special deductions for annual additions to tax bad debt reserves with respect to loans. For purposes of the bad debt reserve deduction, loans were separated into "qualifying real property loans," which generally were loans secured by interests in improved real property, and "nonqualifying loans," which were all other loans. The bad debt reserve deduction with respect to nonqualifying loans was based on actual loss experience. The bad debt reserve deduction with respect to qualifying real property loans could be based upon actual loss experience (the "experience method") or a percentage of taxable income determined without regard to such deduction (the "percentage of taxable income method"). The Association historically used whichever method resulted in the highest bad debt reserve deduction in any given year. 27 Legislation enacted in August 1996 repealed the percentage of taxable income method of calculating the bad debt reserve. Savings institutions, like the Association, which have previously used that method are required to recapture into taxable income post-1987 reserves in excess of the reserves calculated under the experience method over a six-year period beginning with the first taxable year beginning after December 31, 1995. The start of such recapture may be delayed until the third taxable year beginning after December 31, 1995 if the dollar amount of the institution's residential loan originations in each year is not less than the average dollar amount of residential loan originated in each of the six most recent years disregarding the years with the highest and lowest originations during such period. For purposes of this test, residential loan originations would not include refinancings and home equity loans. Beginning with the first taxable year beginning after December 31, 1995, savings institutions, such as the Association, will be treated the same as commercial banks. Institutions with $500 million or more in assets will be able to take a tax deduction only when a loan is actually charged off. Institutions with less than $500 million in assets will still be permitted to make deductible bad debt additions to reserves, but only using the experience method. As a result, thrifts must recapture into taxable income the amount of their post-1987 tax bad debt reserves over a six-year period beginning after 1995. This recapture can be deferred for up to two years if the thrift satisfies a residential loan portfolio test. At June 30, 1998, the Association's post-1987 tax bad debt reserve subject to recapture was approximately $185,000. The Association recaptured approximately $103,000 of this reserve into taxable income in the current year. The recapture did not have any effect on the Association's net income because the related tax expense had already been accrued. Under the experience method, the bad debt deduction to an addition to the reserve for qualifying real property loans is an amount determined under a formula based generally on the bad debts actually sustained by a savings institution over a period of years. Under the percentage of taxable income method, the bad debt reserve deduction for qualifying real property loans was computed as 8% of the thrift's taxable income. The maximum deduction could be taken as long as not less than 60% of the total dollar amount of the assets of an institution fell within certain designated categories. If the amount of qualifying assets fell below 60%, the institution would get no deduction and could be required to recapture, generally over a period of years, its existing bad debt reserves (although net operating loss carryforwards could be used to offset such recapture). The bad debt deduction under the percentage of taxable income method was limited to the extent that the amount accumulated in the reserve for losses on qualifying real property loans exceeded 6% of such loans outstanding at the end of the taxable year. In addition, the amount claimed as a bad debt deduction when added to accumulated loss reserves was limited to the excess, if any, of 12% of total deposits or withdrawable accounts of depositors at year-end in excess of the sum of surplus, undivided profits and reserves at the beginning of the year. The percentage bad debt deduction was reduced by the deduction for losses on nonqualifying loans. Earnings appropriated to the Association's tax bad debt reserves and claimed as tax deductions will not be available for the payment of cash dividends or other distributions to the Company (including distributions made upon dissolution or liquidation), unless the Association includes the amounts distributed in taxable income, along with the amounts deemed necessary to pay the resulting federal income tax. At June 30, 1998, the Association had approximately $2.8 million of pre-1988 accumulated bad debt reserves for which federal income taxes have not been provided. For taxable years beginning after June 30, 1986, the Internal Revenue Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI") and is payable to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. The other items of tax preference that constitute AMTI include (a) tax-exempt interest on newly-issued (generally, issued on or after August 8, 1986) private activity bonds other than certain qualified bonds and (b) for taxable years including 1987 through 1989, 50% of the excess of (i) the taxpayer's pre-tax adjusted net book 28 income over (ii) AMTI (determined without regard to this latter preference and prior to reduction by net operating losses). For taxable years beginning after 1989, this latter preference has been replaced by 75% of the excess (if any) of (i) adjusted current earnings as defined in the Internal Revenue Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses). For any taxable year beginning after 1986, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum taxes may be used as credits against regular tax liabilities in future years. In addition, for taxable years after 1986 and before 1992, corporations, including savings institutions, are also subject to an environmental tax equal to 0.12% of the excess of AMTI for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2.0 million. The Association is not currently paying any amount of alternative minimum tax but may, depending on future results of operations, be subject to this tax. The Association's federal income tax returns have not been examined by the regulatory authorities within the past five years. For additional information, see Note 13 of Notes to Consolidated Financial Statements in the Annual Report filed as Exhibit 13 to this report. State Taxation. The state of Alabama imposes a 6.0% excise tax on the earnings of financial institutions such as the Association and the Company. In addition to the excise taxes, the state of Alabama imposes an annual state franchise tax for domestic and foreign corporations. A domestic corporation, including a federally chartered stock savings bank domiciled in Alabama, is assessed a domestic franchise tax of approximately 1.0% based on the aggregate par value of its issued and outstanding common stock. Foreign corporations, such as the Company which is incorporated in Delaware, are assessed a foreign franchise tax of 0.3% based on a total of capital (as defined by statute) deemed to be employed in the state of Alabama. The foreign corporation's investment in the capital of an Alabama corporation is excluded from the taxable base. The Company also is subject to the Delaware franchise tax. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS The following table sets forth information regarding the executive officers of the Company and/or the Association during fiscal 1998 who do not serve on the Board of Directors.
Age at June 30, Name 1998 Principal Title - ------------------ ------ --------------------------------- Rodney Rich 46 Vice President of the Association Margaret Stewart 68 Secretary of the Association Peggy Smith 42 Treasurer of the Association
RODNEY RICH serves as Vice President and the Association's chief lending officer. He joined the Association in 1984 as Assistant Vice President. He was promoted to Vice President in 1989. MARGARET STEWART serves as Secretary of the Association. She joined the Association in 1960 as teller. She was appointed Secretary in 1966. PEGGY SMITH serves as Treasurer of the Association. She joined the Association in 1980. EMPLOYEES As of June 30, 1998, the Association had 28 full-time and one part- time employees, none of whom was represented by a collective bargaining agreement. 29 ITEM 2. DESCRIPTION OF PROPERTY - -------------------------------- The following table sets forth information regarding the Association's offices at June 30, 1998.
Net Book Owned Year Value at Approximate or Opened June 30, 1998 Square Footage Leased ------ ------------- -------------- ------ MAIN OFFICE: 221 South 6th Street 1968 $200,645 6,500 Owned Gadsden, Alabama 35901 BRANCH OFFICES: 202 Sand Mountain Drive 1965 3,379 1,405 Leased Albertville, Alabama 35950 395 Gunter Avenue 1971 97 1,000 Leased Guntersville, Alabama 35976 390 W. Main Street 1994 5,894 2,263 Leased Centre, Alabama 35960
The net book value of the Association's investment in furnishings and equipment totaled $41,358 at June 30, 1998. ITEM 3. LEGAL PROCEEDINGS - -------------------------- From time to time, the Association is a party to various legal proceedings incident to its business. At June 30, 1998, there were no legal proceedings to which the Company, the Association or its subsidiary was a party, or to which any of their property was subject, which were expected by management to result in a material loss. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------- The information required by this item is incorporated by reference to "Item 1. Business -- Regulation -- Dividend Limitations" herein and "Market Information," "Market Price of Common Stock and Dividend Information" and Note 4 of the Notes to Consolidated Financial Statements in the portions of the Annual Report filed as Exhibit 13 to this report. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------------------------------------------------------------------ The information required by this item is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the portions of the Annual Report filed as Exhibit 13 to this report. 30 ITEM 7. FINANCIAL STATEMENTS - ----------------------------- The financial statements required by this item are incorporated by reference to the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Independent Auditors' Report in the portions of the Annual Report filed as Exhibit 13 to this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE - -------------------- Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; - ---------------------------------------------------------------------- COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT - ------------------------------------------------- Information concerning the directors and executive officers of the Company is incorporated herein by reference to the sections captioned "Executive Officers Who Are Not Directors" in Item 1 of this report and "Election of Directors" in the Proxy Statement. ITEM 10. EXECUTIVE COMPENSATION - -------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Election of Directors -- Executive Compensation" in the Proxy Statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Beneficial Ownership" and "Election of Directors" in the Proxy Statement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Election of Directors -- Transactions with Management" in the Proxy Statement. ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K - ----------------------------------------------- (a) The following exhibits are filed as part of this report. No. Description --- ----------- 3.1 * Certificate of Incorporation of The Southern Banc Company, Inc. 3.2 * Bylaws of The Southern Banc Company, Inc. 4 * Specimen Common Stock Certificate of The Southern Banc Company, Inc. 31 10.1 ** + Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of Gadsden and James B. Little, Jr. 10.2 ** + First Federal Savings and Loan Association of Gadsden Supplemental Executive Retirement Agreement 10.3 *** + The Southern Banc Company, Inc. 1996 Stock Option and Incentive Plan and trust 10.4 *** + First Federal Savings and Loan Association of Gadsden Management Recognition Plan and trust 10.5 + 1997 Amendments to Employment Agreements between the Southern Banc Company, Inc. and First Federal Savings and Loan Association and James B. Little, Jr. 10.6 + Employment Agreements between The Southern Banc Company, Inc. and First Federal Savings and Loan Association of Gadsden and Gates Little. 13 Annual Report to Stockholders 21 Subsidiaries 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule - ------------------------- * Incorporated by reference to Registration Statement on Form 8-A (No. 1- 13964). ** Incorporated by reference to Registration Statement on Form S-1 (No. 33- 93218). *** Incorporated by reference to Registration Statement on Form S-8 (No. 333- 3546). + Management compensation plan or arrangement. (b) Reports on Form 8-K. There were no Current Reports on Form 8-K filed during the last quarter of fiscal year 1998. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the date indicated below. THE SOUTHERN BANC COMPANY, INC. Date: September 23, 1998 By: /s/ James B. Little, Jr. -------------------------------------- James B. Little, Jr. Chairman, President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated below as of the date indicated above. By: /s/ James B. Little By: /s/ Thomas F. Dowling ------------------- --------------------- James B. Little Thomas F. Dowling Chairman, President and Chief Executive Director Officer (Director and Principal Executive, Financial and Accounting Officer) By: /s/ Craig G. Cantrell By: /s/ W. Roscoe Johnson, III --------------------- -------------------------- Craig G. Cantrell W. Roscoe Johnson, III Director Director By: /s/ Grady Gillam By: /s/ Gates Little ---------------- ---------------- Grady Gillam Gates Little Director Director By: /s/ Rex G. Keeling, Jr. By: ----------------------- --------------- Rex G. Keeling, Jr. Fred Taylor Director Director 33 EX-10.5 2 EXHIBIT 10.5 EXHIBIT 10.5 EMPLOYMENT AGREEMENT BETWEEN FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND JAMES B. LITTLE, JR. ------------------------------- 1997 Amendment ------------------------------- WHEREAS, on August 17, 1995, First Federal Savings and Loan Association (the "Association") entered into an Employment Agreement (the "Agreement") with James B. Little, Jr. (the "Employee"); and WHEREAS, the Board of Directors of the Association and the Employee have deter mined that it is in their respective best interests to amend the Agreement (i) to improve the change-in-control protections provided thereunder, (ii) to reflect an extension of the term of his Agreement, and (iii) to make other adjustments to the Agreement as the interested parties have deemed appropriate; NOW, THEREFORE, the Agreement shall be amended as follows, with such amendment to become effective immediately. 1. The first sentence in Section 5 of the Agreement shall be amended by replacing the words "36 months thereafter" with "August 17, 2000". 2. The last sentence in Section 6(a) of the Agreement shall be amended by deleting the following phrase at the end thereof: , or be gainfully employed in any other position or job other than as provided above 3. Section 9 of the Agreement shall be amended by deleting the following words from its first sentence: (which shall only be applicable during the twelve-month period following a "Change in Control" as defined in Section 11 hereof) 4. The first sentence of Section 9(d)(1) of the Agreement shall be amended by replacing the words "set forth in Section 11(b) hereof" with the words "that begins on the date six months before a "Change in Control" (as defined in Section 11 hereof) and ends on the later of the second annual anniversary of the Change in Control or the expiration date of this Agreement (the "Protected Period")". 5. The first sentence of Section 9(d)(2) of the Agreement shall be amended by replacing the words "within the time period set forth in Section 11(b) hereof" with the words "during the Protected Period,". 6. Section 9(d)(2) shall further be amended by adding the word "or" between "at Section 1;" and "(iv) a material diminution". 1997 Amendment Page 2 of 3 7. Section 9(f) of the Agreement shall be amended by (i) replacing the words "time period set forth in Section 11(b) hereof" with the words "Protected Period," and by (ii) adding a closing parentheses at the end thereof. 8. Section 11(a)(1) of the Agreement shall be amended in its entirety to provide as follows: Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Association, without the Employee's prior written consent and for a reason other than Just Cause during the Protected Period, the Employee shall, subject to paragraph (2) of this Section 11(a), be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Code and regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the Change in Control. The amount payable under this Section 11(a)(2) shall be paid either (i) in one lump sum within ten days of the later of the date of the Change in Control and Employee's last day of employment, or (ii) if prior to the date which is 90 days before the date on which a Change in Control occurs, the Employee filed a duly executed irrevocable written election in the form attached hereto as Exhibit "A", payment of such amount shall be made according to the elected schedule. Deferred amounts shall bear interest from the date on which they would otherwise be payable until the date paid at a rate equal to 120% of the applicable federal rate, compounded semiannually, as determined under Code Section 1274(d) and the regulations thereunder. 9. The last sentence of Section 11(a)(2) of the Agreement shall be amended in its entirety to provide as follows: Within five business days of the earlier of the Association's receipt of the Employee's determination pursuant to this paragraph or the Association's determination in lieu of a determination by the Employee, the Association shall pay to, or distribute for the benefit of, the Employee such amounts as are then due the Employee under this Agreement. 10. The first sentence of Section 11(b) of the Agreement shall be amended in its entirety to provide as follows: Notwithstanding any other provision of this Agreement to the contrary, but subject to Section 11(a)(2) hereof, the Employee shall be entitled to collect the severance benefits set forth in Section 11(a)(1) hereof in the event that either (i) the Employee voluntarily terminates his employment under this Agreement for any reason with a 30-day period beginning on the date of a Change in Control, or (ii) the Employee voluntarily terminates his employment within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance 1997 Amendment Page 3 of 3 by the Employee in writing and occur during the Protected Period: (i) the --- requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty (30) miles from his primary office as of the date of the change in control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the change in control or as the same may be increased from time to time; (iii) the failure by the Association to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Association which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the change in control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or reelect the Employee to the Board of Directors of the Association, if the Employee is serving on the Board on the date of the change in control; (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Association; or (vii) a material reduction in the secretarial or other administrative support of the Employee. 11. The first sentence of Section 11(d)(2) of the Agreement shall be amended by replacing "twelve (12)" with "twenty-seven (27)". 12. Nothing contained herein shall be held to alter, vary or affect any of the terms, provisions, or conditions of the Agreement other than as stated above. WHEREFORE, the undersigned hereby approve this 1997 Amendment to the Agreement. Date of Execution: October ___, 1997 JAMES B. LITTLE, JR. _____________________ FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION By_____________________________ Attest:_________________________ Its Chairman of the Board CORPORATE SEAL EMPLOYMENT AGREEMENT BETWEEN THE SOUTHERN BANC COMPANY, INC. AND JAMES B. LITTLE, JR. ------------------------------- 1997 Amendment ------------------------------- WHEREAS, on August 17, 1995, The Southern Banc Company, Inc.(the "Company") entered into an Employment Agreement (the "Agreement") with James B. Little, Jr. (the "Employee"); and WHEREAS, the Board of Directors of the Company and the Employee have deter mined that it is in their respective best interests to amend the Agreement (i) to improve the change-in-control protections provided thereunder, (ii) to reflect an extension of the term of his Agreement, and (iii) to make other adjustments to the Agreement as the interested parties have deemed appropriate; NOW, THEREFORE, the Agreement shall be amended as follows, with such amendment to become effective immediately. 1. The first sentence in Section 5 of the Agreement shall be amended by replacing the words "36 months thereafter" with "August 17, 2000". 2. The last sentence in Section 6(a) of the Agreement shall be amended by deleting the following phrase at the end thereof: , or be gainfully employed in any other position or job other than as provided above 3. Section 9 of the Agreement shall be amended by deleting the following words from its first sentence: (which shall only be applicable during the twelve-month period following a "Change in Control" as defined in Section 11 hereof) 4. The first sentence of Section 9(d)(1) of the Agreement shall be amended by replacing the words "set forth in Section 11(b) hereof" with the words "that begins on the date six months before a "Change in Control" (as defined in Section 11 hereof) and ends on the later of the second annual anniversary of the Change in Control or the expiration date of this Agreement (the "Protected Period"),". 5. Section 11(a)(1) of the Agreement shall be amended in its entirety to provide as follows: Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Company, without the Employee's prior written consent and for a reason other than Just Cause during the Protected Period, the Employee shall be paid an amount equal to the difference between 1997 Amendment Page 2 of 3 (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the change in control. Said sum shall be paid in the manner set forth in the Employee's Employment Agreement with the Association. 6. The first sentence of Section 11(b) of the Agreement shall be amended in its entirety to provide as follows: Notwithstanding any other provision of this Agreement to the contrary, the Employee shall be entitled to collect the severance benefits set forth in Section 11(a) hereof in the event that either (i) the Employee voluntarily terminates his employment under this Agreement for any reason within the 30-day period beginning on the date of a Change in Control, or (ii) the Employee voluntarily terminates his employment within ninety (90) days following the occurrence of any of the following events, which have not been consented to in advance by the Employee in writing and occur --- during the Protected Period: (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty-five (35) miles from his primary office as of the date of the change in control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the change in control or as the same may be increased from time to time; (iii) the failure by the Company to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Company which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the change in control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or reelect the Employee to the Board, if the Employee is serving on the Board on the date of the change in control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Company. 7. Nothing contained herein shall be held to alter, vary or affect any of the terms, provisions, or conditions of the Agreement other than as stated above. 1997 Amendment Page 3 of 3 WHEREFORE, the undersigned hereby approve this 1997 Amendment to the Agreement. Date of Execution: October ___, 1997 _______________________ JAMES B. LITTLE, JR. _______________________ THE SOUTHERN BANC COMPANY, INC. By_____________________________ Attest:_________________________ Its Chairman of the Board CORPORATE SEAL EX-10.6 3 EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is entered into this 15th day of October 1997 (the "Effective Date"), by and between First Federal Savings and Loan Association of Gadsden (the "Association") and Gates B. Little (the "Employee"). WHEREAS, the Employee has heretofore been employed by the Association as Vice President and is experienced in all phases of the business of the Association; and WHEREAS, the Board of Directors of the Association believes it is in the best interests of the Association to enter into this Agreement with the Employee in order to assure continuity of management of the Association and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Association and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is employed as Vice President of the ---------- Association. The Employee shall render such administrative and management services for the Association as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Association. The Employee's other duties shall be such as the Board of Directors (the "Board") of the Association may from time to time reasonably direct, including normal duties as an officer of the Association. 2. Base Compensation. The Association agrees to pay the Employee during ----------------- the term of this Agreement a salary at the rate of $37,060 per annum, payable in cash not less frequently than monthly. The Board shall review, not less often than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his salary. 3. Discretionary Bonuses. The Employee shall participate in an --------------------- equitable manner with all other senior management employees of the Association in discretionary bonuses that the Board may award from time to time to the Association's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4. (a) Participation in Retirement, Medical and Other Plans. During ---------------------------------------------------- the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans: group hospitalization, disability, health, dental, sick leave, life insurance, travel and/or accident insurance, auto allowance/auto lease, retirement, pension, and/or other present or future qualified plans provided by the Association, generally which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date. The Employee shall also be entitled at no expense to himself, to family medical insurance provided by the Association throughout the term of this Agreement and for a 3-year period beginning upon the termination of this Agreement, regardless of his employment status. This 3-year coverage period may be reconsidered and extended by the Board, in its sole discretion. (b) Employee Benefits; Expenses. The Employee shall be eligible to --------------------------- participate in any fringe benefits which are or may become available to the Association's senior management employees, including for example: any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with the policies of the Association. -1- 5. Term. The Association hereby employs the Employee, and the Employee ---- hereby accepts such employment under this Agreement, for the period commencing on the Effective Date and ending thirty-six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, this Agreement shall be automatically extended to a date thirty-six months after any "Change in Control" (as defined in Section 11 hereof), and on each annual anniversary date from the Effective Date, the Board shall duly consider and determine whether to extend the Employee's term of employment under this Agreement, and the Employee's term of employment under this Agreement may be extended to a date up to thirty-six months thereafter provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards and that this Agreement shall be extended. 6. Loyalty; Noncompetition. ----------------------- (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Association or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his or her employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Association. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Association, or, solely as a passive or minority investor, in any business. 7. Standards. The Employee shall perform his duties under this --------- Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Association will provide Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 8. Vacation and Sick Leave. At such reasonable times as the Board shall ----------------------- in its discretion permit, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time; provided that: (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically establishes for senior management employees of the Association. (b) The Employee shall not receive any additional compensation from the Association on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment with the Association for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. -2- 9. Termination and Termination Pay. Subject to Section 11 hereof, the ------------------------------- Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall ----- terminate upon his death during the term of this Agreement, in which event the Employee's designated beneficiary, or if none, the Employee's estate, shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. (b) Disability. ---------- (1) The Association may terminate the Employee's employment after having established the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Employee's ability to substantially perform his duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Association's long-term disability plan (or, if the Association has no such plan in effect, which impairs the Employee's ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (i) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, or (ii) any period of Disability which is prior to the Executive's termination of employment pursuant to this Section 9(b); provided that any benefits paid pursuant to the Association's long term disability plan will continue as provided in such plan. (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Association and, if able, shall make himself available to the Association to undertake reasonable assignments consistent with his prior position and his physical and mental health. The Association shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. (c) Just Cause. The Board may, by written notice to the Employee, ---------- immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. No act, or failure to act, on the Employee's part shall be considered "willful" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Association. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Just Cause unless there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Employee was guilty of conduct set forth above in the second sentence of this subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause; Constructive Discharge. ------------------------------------------ (1) The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs within the time period that begins on the date six months before a "Change in Control" (as defined in Section 11 hereof) and ends on the later of the second annual -3- anniversary of the Change in Control or the expiration date of this Agreement (the "Protected Period"), in which event the benefits and compensation provided for in Section 11 shall apply): (i) the salary provided pursuant to Section 2 hereof, up to the date of termination of the term as provided in Section 5 hereof (including any renewal term) of this Agreement (the "Expiration Date"), plus said salary for an additional 12-month period, and (ii) at the Employee's election either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate in through the Expiration Date based upon the benefit levels substantially equal to those that the Association provided for the Employee at the date of termination of employment or (B) continued participation under such Association benefit plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. (2) The Employee may voluntarily terminate his employment under this Agreement, and the Employee shall thereupon be entitled to receive the compensation and benefits payable under Section 9(d)(1) hereof, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing (unless such voluntary termination occurs during the Protected Period, in which event the benefits and compensation provided for in Section 11 shall apply): (i) a material reduction in the Employee's base compensation; (ii) the failure by the Association to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Association which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him; (iii) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; or (iv) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Association. Said sum shall be paid in lieu of the payment of any benefits under Section 9 hereof. (3) Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under clause (d)(1)(i) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the present value of the benefits payable under clauses (d)(1)(i) and (ii) hereof exceeds the limitation on severance benefits that is set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective Date. In the event that Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") becomes applicable to payments made under this Section 9(d), and the payments exceed the "Maximum Amount" as defined in Section 11(a)(1) hereof, the payments shall be reduced as provided by Section 11(a)(2) of this Agreement. (e) Termination or Suspension Under Federal Law. ------------------------------------------- (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Association's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Association is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (3) All obligations under this Agreement shall terminate, except to the extent that continuation of this Agreement is necessary for the continued operation of the Association: (i) by the Director of the Office of Thrift Supervision ("Director of the OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance -4- to or on behalf of the Association under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director of the OTS to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. (4) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Association's affairs, the Association's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (f) Voluntary Termination by Employee. Subject to Section 11 --------------------------------- hereof, the Employee may voluntarily terminate employment with the Association during the term of this Agreement, upon at least ninety (90) days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination (unless such termination occurs pursuant to Section 9(d)(2) hereof or within the Protected Period, in which event the benefits and compensation provided for in Sections 9(d) or 11, as applicable, shall apply). 10. No Mitigation. The Employee shall not be required to mitigate the ------------- amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control. ----------------- (a) Change in Control; Involuntary Termination. ------------------------------------------ (1) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Association, without the Employee's prior written consent and for a reason other than Just Cause during the Protected Period, the Employee shall, subject to paragraph (2) of this Section 11(a), be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Code and regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the Change in Control. The amount payable under this Section 11(a)(2) shall be paid either (i) in one lump sum within ten days of the later of the date of the Change in Control and the Employee's last day of employment, or (ii) if prior to the date which is 90 days before the date on which a Change in Control occurs, the Employee filed a duly executed irrevocable written election in the form attached hereto as Exhibit "A", payment of such amount shall be made according to the elected schedule. Deferred amounts shall bear interest from the date on which they would otherwise be payable until the date paid at a rate equal to 120% of the applicable federal rate, compounded semiannually, as determined under Code Section 1274(d) and the regulations thereunder. (2) In the event that the Employee and the Association jointly determine and agree that the total parachute payments receivable under clauses (i) and (ii) of Section 11(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment procedure set forth in Section 11(a)(1) hereof, the Employee shall determine which and how much, if any, of the parachute payments to which he is entitled shall be eliminated or reduced so that the total parachute payments to be received by the Employee do not exceed the Maximum Amount. If the Employee does not make his determination within ten business days after receiving a written request from the Association, the Association may make such determination, and shall notify the Employee promptly thereof. Within five business days -5- of the earlier of the Association's receipt of the Employee's determination pursuant to this paragraph or the Association's determination in lieu of a determination by the Employee, the Association shall pay to, or distribute for the benefit of, the Employee such amounts as are then due the Employee under this Agreement. (3) As a result of uncertainty in application of Section 280G of the Code at the time of payment hereunder, it is possible that such payments will have been made by the Association which should not have been made ("Overpayment") or that additional payments will not have been made by the Association which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made under Section 11(a)(1) hereof. In the event that the Employee, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Employee believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Association to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which -- ------ the Employee shall repay to the Association together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Association if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Employee and the Association determine, based upon controlling precedent or other substantial authority, that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Association to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. The term "Change in Control" shall mean any one of the following events: (1) the acquisition of ownership, holding or power to vote more than 25% of the Association's or the Company's voting stock, (2) the acquisition of the ability to control the election of a majority of the Association's or the Company's directors, (3) the acquisition of a controlling influence over the management or policies of the Association or the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934) (provided that in the case of (1), (2) and (3) hereof, ownership or control of the Association by the Company itself shall not constitute a "Change in Control") or (4) during any period of two consecutive years, individuals who at the beginning of such period constitute the board of directors of the Company or the Association (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the board of directors of the Company or the Association was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. For purposes of this subparagraph only, the term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding. (b) Change in Control; Voluntary Termination. Notwithstanding any ---------------------------------------- other provision of this Agreement to the contrary, but subject to Section 11(a)(2) hereof, the Employee shall be entitled to collect the severance benefits set forth in Section 11(a)(1) hereof in the event that either (i) the Employee voluntarily terminates his employment under this Agreement for any reason within the 30-day period beginning on the date of a Change in Control, or (ii) the Employee voluntarily terminates his employment within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing and occur within the --- Protected Period: (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty (30) miles from his primary office as of the date of the change in control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the change in control or as the same may be increased from time to time; (iii) the failure by the Association to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Association which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed -6- by him at the time of the change in control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or reelect the Employee to the Board of Directors of the Association, if the Employee is serving on the Board on the date of the change in control; (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Association; or (vii) a material reduction in the secretarial or other administrative support of the Employee. Said sum shall be paid in lieu of the payment of any benefits under Section 9 hereof. (c) Compliance with 12 U.S.C. Section 1828(k). Any payments made ----------------------------------------- to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) Trust. ----- (1) Within five business days before or after a change in control as defined in Section 11(a) of this Agreement, the Association shall (i) deposit, or cause to be deposited, in a grantor trust substantially in the form of the trust (the "Trust) that the Association's Board of Directors approved on May 18, 1995, an amount equal to 2.99 times the Employee's "base amount" as defined in Section 280G(b)(3) of the Code, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. (2) During the twenty-seven (27) consecutive month period following the date on which the Association makes the deposit referred to in the preceding paragraph, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to Section 11(a) or (b). Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Association via overnight and registered mail return receipt requested. On the tenth (10th) business day after mailing said notice to the Association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Association provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to Section 11(a) or (b) hereof, and the costs of such arbitration (including any legal fees and expenses incurred by the Employee) shall be paid by the Association. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Association, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. (3) Upon the earlier of (i) any payment from the Trust to the Employee, or (ii) the date twelve (12) months after the date on which the Association makes the deposit referred to in the first paragraph of this subsection (d)(1), the trustee of the Trust shall pay to the Association the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust pursuant to this Agreement. (e) In the event that any dispute arises between the Employee and the Association as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Association, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgement by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within -7- ten (10) days of Employee's furnishing to the Association written evidence, which may be in the form, among other things, of a cancelled check or receipt, of any costs or expenses incurred by the Employee. 12. Federal Income Tax Withholding. The Association may withhold all ------------------------------ Federal and State income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. 13. Successors and Assigns. ---------------------- (a) Association. This Agreement shall not be assignable by the ----------- Association, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Association which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Association. (b) Employee. Since the Association is contracting for the unique -------- and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Association; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. Except as required by law, no right to receive ---------- payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 14. Amendments. No amendments or additions to this Agreement shall be ---------- binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 15. Applicable Law. Except to the extent preempted by Federal law, the -------------- laws of the State of Alabama shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 16. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Entire Agreement. This Agreement, together with any understanding or ---------------- modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. -8- IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION ________________________ By: ______________________________________ Secretary ______________________________________ Authorized Member of the Board of Directors WITNESS: _______________________ __________________________________________ Gates B. Little -9- EXHIBIT "A" FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION EMPLOYMENT AGREEMENT _______________________________ DEFERRED PAYMENT ELECTION FORM _______________________________ AGREEMENT, made this ____ day of ________, 19__, by and between _________ (the "Employee") and First Federal Savings and Loan Association (the "Association") with respect to payment of severance compensation to the Employee pursuant to Section 12(b) of his employment agreement ("Agreement") with the Association, dated _______, 199__. NOW THEREFORE, it is mutually agreed as follows: 1. Form of Payment. The Employee, by the execution hereof, in accordance --------------- with Section 12(b) of the Agreement, elects to have his change in control severance benefits (plus earnings thereon) distributed in cash as follows: [_] in one lump sum payment. [_] in substantially equal annual payments over a period of _____ years (no more than 10). 2. In the event of the Employee's death, his benefits shall be distributed - -- [_] in one lump sum payment. [_] in accordance with the payment schedule selected in paragraph 1 hereof (with payments made as though the Employee survived to collect all benefits, and as though the Employee terminated service on the date of his death, if payments had not already begun). 3. Designation of Beneficiary. In the event of the Employee's death -------------------------- before he has collected all of the benefits payable pursuant to the Agreement and this election, any such benefits payable shall be distributed to the beneficiary or beneficiaries designated under subparagraphs a and b of this paragraph 3 in the manner elected pursuant to paragraph 2 above: a. Primary Beneficiary. The Employee hereby designates the person(s) ------------------- named below to be his primary beneficiary and to receive the balance of any unpaid benefits under the Agreement: =========================================================================== Name of Mailing Address Percentage of Primary Beneficiary Death Benefit --------------------------------------------------------------------------- % --------------------------------------------------------------------------- % =========================================================================== -1- b. Contingent Beneficiary. In the event that the primary beneficiary or ---------------------- beneficiaries named above are not living at the time of the Employee's death, the Employee hereby designates the following person(s) to be his contingent beneficiary for purposes of the Agreement: =========================================================================== Name of Mailing Address Percentage of Contingent Beneficiary Death Benefit --------------------------------------------------------------------------- % --------------------------------------------------------------------------- % =========================================================================== 4. Effect of Election. The elections made in paragraph 1 hereof shall ------------------ become irrevocable 90 days prior to the change in control. The Employee may, by submitting an effective superseding Deferred Payment Election Form at any time and from time to time, prospectively change the beneficiary designation and the manner of payment to a beneficiary. Such elections shall, however, become irrevocable upon the Employee's death. 5. Commitments. The Association agrees to make payment of all amounts ----------- due the Employee in accordance with the terms of the Agreement and the elections made by the Employee herein. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above-written. WITNESS: EMPLOYEE ______________________ ____________________________________ Gates B. Little ATTEST: ASSOCIATION ______________________ FIRST FEDERAL SAVING AND LOAN ASSOCIATION Secretary By _________________________________ Its Chairman of the Board -2- EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is entered into this 15th day of October 1997 (the "Effective Date"), by and between The Southern Banc Company, Inc. (the "Company") and Gates B. Little (the "Employee"). WHEREAS, the Employee has heretofore been employed by the Association as Vice President and is experienced in all phases of the business of the Association; and WHEREAS, the parties desire by this writing to establish and to set forth the employment relationship between the Company and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is employed as Vice President of the Company. ---------- The Employee shall render such administrative and management services for the Company as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Company. The Employee's other duties shall be such as the Board of Directors of the Company ("Board") may from time to time reasonably direct, including normal duties as an officer of the Company. 2. Consideration from Company: Joint and Several Liability. In lieu of ------------------------------------------------------- paying the Employee a base salary during the term of this Agreement, the Company hereby agrees that to the extent permitted by law, it shall be jointly and severally liable with the Association for the payment of all amounts due under the employment agreement of even date herewith between the Association and the Employee. Nevertheless, the Board may in its discretion at any time during the term of this Agreement agree to pay the Employee a base salary for the remaining term of this Agreement. If the Board agrees to pay such salary, the Board shall thereafter review, not less often than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his salary. 3. Discretionary Bonuses. The Employee shall participate in an equitable --------------------- manner with all other senior management employees of the Company in discretionary bonuses that the Board may award from time to time to the Company's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4. (a) Participation in Retirement, Medical and Other Plans. The ---------------------------------------------------- Employee shall participate in any plan that the Company maintains for the benefit of its employees if the plan relates to (i) pension, profit-sharing, or other retirement benefits, (ii) medical insurance or the reimbursement of medical or dependent care expenses, or (iii) other group benefits, including disability and life insurance plans. The Employee shall also be entitled at no expense to himself, to family medical insurance throughout the term of this Agreement and for a 3-year period beginning upon the termination of this Agreement, regardless of his employment status. This 3-year coverage period may be reconsidered and extended by the Board, in its sole discretion. (b) Employee Benefits; Expenses. The Employee shall participate in any --------------------------- fringe benefits which are or may become available to the Company's senior management employees, including for example: any stock option or incentive compensation plans, club memberships, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with the policies of the Company. 5. Term. The Company hereby employs the Employee, and the Employee hereby ---- accepts such employment under this Agreement, for the period commencing on the Effective Date and ending thirty-six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, this Agreement shall be automatically extended to a date thirty-six months after any "Change in Control" (as defined in Section 11 hereof), and on each -1- annual anniversary date from the Effective Date, the Board shall duly consider and determine whether to extend the Employee's term of employment under this Agreement, and the Employee's term of employment under this Agreement may be extended to a date up to thirty-six months thereafter provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards and that this Agreement shall be extended. 6. Loyalty; Noncompetition. ----------------------- (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Company or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his or her employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Company. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Company, or, solely as a passive or minority investor, in any business. 7. Standards. The Employee shall perform his duties under this Agreement --------- in accordance with such reasonable standards as the Board may establish from time to time. The Company will provide Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 8. Vacation and Sick Leave. At such reasonable times as the Board shall ----------------------- in its discretion permit, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time; provided that: (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically establishes for senior management employees of the Company. (b) The Employee shall not receive any additional compensation from the Company on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment with the Company for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. 9. Termination and Termination Pay. Subject to Section 11 hereof, the ------------------------------- Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall ----- terminate upon his death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. -2- (b) Disability. The Company may terminate the Employee's employment ---------- after having established the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Employee's ability to substantially perform his duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Company's long-term disability plan (or, if the Company has no such plan in effect, which impairs the Employee's ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (i) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, or (ii) any period of Disability which is prior to the Executive's termination of employment pursuant to this Section 9(b). (c) Just Cause. The Board may, by written notice to the Employee, ---------- immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. No act, or failure to act, on the Employee's part shall be considered "willful" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Association. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Just Cause unless there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee and an opportunity for the Employee to be heard before the Board), finding that in the good faith opinion of the Board, the Employee was guilty of conduct set forth above in the second sentence of this subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause. The Board may, by written notice to the ------------------ Employee, immediately terminate his employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs within the time period that begins on the date six months before a "Change in Control" (as defined in Section 11 hereof) and ends on the later of the second annual anniversary of the Change in Control or the expiration date of this Agreement (the "Protected Period"), in which event the benefits and compensation provided for in Section 11 shall apply): (i) any salary provided pursuant to Section 2 hereof, up to the date of termination of the term as provided in Section 5 hereof (including any renewal term) of this Agreement (the "Expiration Date"), plus said salary for an additional 12-month period, and (ii) at the Employee's election either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate in through the Expiration Date based upon the benefit levels substantially equal to those that the Company provided for the Employee at the date of termination of employment or (B) continued participation under such Company benefits plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. (e) Voluntary Termination by Employee. Subject to Section 11 hereof, --------------------------------- the Employee may voluntarily terminate employment with the Company during the term of this Agreement, upon at least 90 days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination. 10. No Mitigation. The Employee shall not be required to mitigate the ------------- amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control. ----------------- -3- (a) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Company, without the Employee's prior written consent and for a reason other than Just Cause during the Protected Period, the Employee shall be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the Change in Control. Said sum shall be paid in the manner set forth in the Employee's Employment Agreement with the Association. The term "Change in Control" shall mean any one of the following events: (1) the acquisition of ownership, holding or power to vote more than 25% of the Association's or the Company's voting stock, (2) the acquisition of the ability to control the election of a majority of the Association's or the Company's directors, (3) the acquisition of a controlling influence over the management or policies of the Association or the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934) (provided that in the case of (1), (2) and (3) hereof, ownership or control of the Association by the Company itself shall not constitute a "Change in Control") or (4) during any period of two consecutive years, individuals who at the beginning of such period constitute the board of directors of the Company or the Association (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the board of directors of the Company or the Association was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. For purposes of this subparagraph only, the term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding. (b) Notwithstanding any other provision of this Agreement to the contrary, the Employee shall be entitled to collect the severance benefits set forth in Section 11(a) hereof in the event that either (i) the Employee voluntarily terminates his employment under this Agreement for any reason within the 30-day period beginning on the date of a Change in Control, or (ii) the Employee voluntarily terminates his employment within ninety (90) days following the occurrence of any of the following events, which have not been consented to in advance by the Employee in writing and occur during the Protected Period: (i) --- the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty-five (35) miles from his primary office as of the date of the change in control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the change in control or as the same may be increased from time to time; (iii) the failure by the Company to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Company which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the change in control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or reelect the Employee to the Board, if the Employee is serving on the Board on the date of the change in control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Company. Said sum shall be paid in lieu of the payment of any benefits under Section 9 hereof. (c) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) In the event that any dispute arises between the Employee and the Company as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Company, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final -4- judgement by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Company written evidence, which may be in the form, among other things, of a cancelled check or receipt, of any costs or expenses incurred by the Employee. 12. Successors and Assigns. ---------------------- (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Company. (b) Since the Company is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company. 13. Amendments. No amendments or additions to this Agreement shall be ---------- binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 14. Applicable Law. Except to the extent preempted by Federal law, the -------------- laws of the State of Alabama shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 15. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. Entire Agreement. This Agreement, together with any understanding or ---------------- modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: THE SOUTHERN BANC COMPANY, INC. ____________________ By: ___________________________ ___________________________ Secretary Authorized Member of the Board of Directors WITNESS: ____________________ --------------------------- Gates B. Little -5- EX-13 4 EXHIBIT 13 ================================================================================ 1998 A N N U A L R E P O R T ================================================================================ THE SOUTHERN BANC COMPANY, INC. [LETTERHEAD OF THE SOUTHERN BANC COMPANY, INC.] To Our Stockholders: We are happy to present the third annual report of The Southern Banc Company, Inc. We invite you to review the report and the Company's performance during fiscal 1998. The year was a good one. We significantly increased our loan production and increased net income in a period of declining interest rates. This was done while maintaining the Association's traditionally high asset quality, preserving the integrity of your investment and the safety of the depositors funds. We continue to carefully monitor our investments in an environment where the combination of optimism and competition might draw some into more treacherous areas. We appreciate your investment in The Southern Banc Company, Inc., and invite your continued support of First Federal, our core holding. We are confident of our sound financial condition and look to the future with great anticipation. Sincerely, /s/ James B. Little, Jr. James B. Little, Jr. THE SOUTHERN BANC COMPANY, INC. The Southern Banc Company, Inc. (the "Company") was incorporated at the direction of management of First Federal Savings and Loan Association of Gadsden (the "Association") for the purpose of serving as a savings institution holding company of the Association upon the acquisition of all of the capital stock issued by the Association upon its conversion from mutual to stock form (the "Conversion") effective October 5, 1995. The Company is classified as a unitary savings institution holding company and is subject to regulation by the Office of Thrift Supervision ("OTS"). At June 30, 1998, the Company had total assets of $105.1 million, deposits of $85.9 million and stockholders' equity of $18.6 million, or 17.67% of total assets. The Association was organized in 1936 as a federally chartered mutual savings and loan association, at which time it also became a member of the Federal Home Loan Bank ("FHLB") System and obtained federal deposit insurance. The Association currently operates through four banking offices located in Gadsden, Albertville, Guntersville and Centre, Alabama. The Association's business strategy has been to operate as a profitable and independent community-oriented savings institution dedicated to providing quality customer service. Generally, the Association has sought to implement this strategy by using retail deposits as its sources of funds and maintaining most of its assets in mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA"), loans secured by owner-occupied one- to four-family residential real estate located in the Association's market area, U.S. government and agency securities, interest- earning deposits, cash and equivalents and consumer loans. The Association's business strategy incorporates the following key elements: (1) remaining a community-oriented financial institution while maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a community-based institution can offer; (2) attracting a relatively strong retail deposit base from the communities served by the Association's four banking offices; (3) maintaining asset quality by emphasizing investment in local residential mortgage loans, mortgage-backed securities and other securities issued or guaranteed by the U.S. government or agencies thereof; and (4) maintaining liquidity and capital substantially in excess of regulatory requirements. As a federally chartered savings institution, the Association is subject to extensive regulation by the OTS. The lending activities and other investments of the Association must comply with various federal regulatory requirements, and the OTS periodically examines the Association for compliance with various regulatory requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the authority to conduct special examinations. The Association must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). 1 MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading on the American Stock Exchange on October 5, 1995, under the symbol "SRN." At June 30, 1998, there were 1,230,313 shares of the Common Stock outstanding and approximately 336 stockholders of record. The payment of dividends on the Common Stock is subject to determination and declaration by the Board of Directors of the Company. The Board of Directors has adopted a policy of paying quarterly cash dividends on the Common Stock. In addition, from time to time, the Board of Directors may determine to pay special cash dividends in addition to, or in lieu of, regular cash dividends. The payment of future dividends will be subject to the requirements of applicable law and the determination by the Board of Directors of the Company that the net income, capital and financial condition of the Company and the Association, thrift industry trends and general economic conditions justify the payment of dividends, and there can be no assurance that dividends will be paid or, if paid, will continue to be paid in the future. The following table sets forth information as to high and low sales prices of the Company's Common Stock and cash dividends declared per share of common stock for the calendar quarters indicated.
Price Per Share Dividends Per Share ------------------------ ------------------------- High Low Regular Special ---- --- ------- ------- FISCAL 1997 First Quarter $13.500 $12.000 $.0875 $.1750 Second Quarter $13.750 $12.250 $.0875 $ -- Third Quarter $14.625 $13.250 $.0875 $ -- Fourth Quarter $15.500 $14.250 $.0875 $ -- FISCAL 1998 First Quarter $16.375 $15.313 $.0875 $ -- Second Quarter $18.000 $16.125 $.0875 $ -- Third Quarter $19.125 $16.500 $.0875 $ -- Fourth Quarter $17.125 $15.500 $.0875 $ --
2 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
YEAR ENDED JUNE 30, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Interest income........................... $ 7,418 $ 7,513 $ 7,702 $ 7,016 $ 5,814 Interest expense.......................... 4,519 4,534 4,679 4,261 3,330 -------- -------- -------- -------- ------- Net interest income....................... 2,899 2,979 3,023 2,755 2,484 Provision for loan losses................. -- -- -- 40 -- -------- -------- -------- -------- ------- Net interest income after provision for loan losses.......................... 2,899 2,979 3,023 2,715 2,484 Noninterest income........................ 92 92 77 (638) 69 Noninterest expense....................... 2,171 2,849 2,231 1,843 1,499 -------- -------- -------- -------- ------- Income before provision for income taxes.. 820 222 869 234 1,054 Provision for income taxes................ 277 79 294 75 358 -------- -------- -------- -------- ------- Net income................................ $ 543 $ 143 $ 575 $ 159 $ 696 ======== ======== ======== ======== ======= Earnings per share (1) Basic.................................. $ 0.51 $ 0.13 $ 0.34 $ -- $ -- ======== ======== ======== ======== ======= Diluted................................ $ 0.49 $ 0.12 $ 0.34 $ -- $ -- ======== ======== ======== ======== ======= AT JUNE 30, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA Total assets.............................. $105,087 $105,434 $107,029 $101,773 $98,072 Loans receivable, net..................... 41,153 36,180 33,145 26,465 25,745 Securities: Available for sale...................... 22,239 17,621 13,504 11,449 15,588 Held to maturity........................ 34,077 44,158 52,822 53,126 39,911 Deposits.................................. 85,926 86,759 85,847 91,407 88,672 Stockholders' equity...................... 18,570 17,931 20,135 9,757 9,109 YEAR ENDED JUNE 30, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- -------- -------- -------- -------- KEY OPERATING DATA Return on average assets.................. 0.52% 0.14% 0.53% 0.16% 0.83% Return on average equity.................. 2.96 0.82 3.29 1.72 7.54 Average equity to average assets.......... 17.43 16.58 16.17 9.27 11.03 Dividend payout ratio..................... 68.63 424.07 127.53 -- -- Number of offices......................... 4 4 4 4 4
____________ (1) Earnings per share and dividend payout ratio are presented from the conversion date, October 5, 1995. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The principal business of the Association consists of accepting deposits from the general public through its main and branch offices and investing those funds in loans secured by one- to four-family residential properties located in the Association's primary market area. Due to the limited demand for one- to four-family mortgage loans in the Association's market area, the Association maintains a substantial portfolio of investment and mortgage- backed securities and originates a limited amount of consumer loans. The Association's mortgage-backed securities are all guaranteed as to principal and interest by GNMA, FHLMC or FNMA. The Association's securities portfolio consists primarily of U.S. Treasury notes and government agency securities, including agency notes. See "Business of the Association -- Investment Activities" for a description of these investments. The Association maintains a substantial amount in interest-bearing deposits in other banks, primarily an interest-bearing account with the FHLB of Atlanta. Although the Association has originated a limited amount of commercial real estate loans in the past, the Association is not currently seeking such loans. The Association's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities and securities portfolio and interest paid on customers' deposits. The Association's net income is also affected by the level of non-interest income, such as service charges on customers' deposit accounts, net gains or losses on the sale of securities and other fees. In addition, net income is affected by the level of non-interest expense primarily consisting of compensation and employee benefit expense, SAIF deposit insurance premiums and other expenses. The operations of the Association and the thrift industry as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by demand for and supply of housing and competition among lenders and the level of interest rates in the Association's market area. The Association's deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Association's market area. POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS A great deal of information has been disseminated about the global computer crash that may occur in the year 2000. Many computer programs that can only distinguish the final two digits of the year entered (a common programming practice in earlier years) are expected to read entries for the year 2000 as the year 1900. All of the significant data processing of the Association that could be affected by this problem is provided by a third party service bureau. The service bureau of the Association has advised the Association that it expects to resolve this potential problem before the year 2000. However, if the service bureau is unable to resolve this potential problem in time, the Association would likely experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have a material adverse impact on the financial condition and results of operations of the Association. Risks to the Company if its computer systems are not year 2000 compliant include the inability to process customer deposits or checks drawn on the Association, inaccurate interest accruals and maturity dates of loans and time deposits, and the inability to update accounts for daily transactions. Other risks to the Company exist if certain of its vendors', suppliers' and customers' computer systems are not Year 2000 compliant. These risks include the inability of the Association to communicate with its third party service bureau if phone systems are not working, the interruption of business in the event of power outages, the inability of loan customers to comply with repayment terms if their businesses are interrupted, the inability to make payment for checks drawn on the Association, receive payment for checks deposited by the Association's customers, or invest excess funds if the Federal Home Loan Bank or correspondent banks are not Year 2000 compliant. The Company's most important mission critical system is the 4 software and hardware responsible for maintaining and processing general ledger, deposits, and loan accounts. The Company's Year 2000 Compliance and Contingency Plans are structured in accordance with the OTS and the FFIEC guidelines. Remediation and testing efforts relating to the Year 2000 are on schedule and are expected to be completed by December 1998. The Company is in the process of contacting its key vendors, suppliers and customers to determine their Year 2000 compliance. The Company estimates that the cost of testing and updating its systems for Year 2000 compliance will not be material. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997 Total assets decreased approximately $346,000, or 0.33%, from $105.4 million at June 30, 1997 to $105.1 million at June 30, 1998. During the period ended June 30, 1998, net loans increased approximately $5.0 million, or 13.74%, securities available for sale increased approximately $4.6 million, or 26.20%, and securities held to maturity decreased approximately $10.1 million or 22.83%. The decrease in securities held to maturity was primarily attributable to principal payments received during the period ended June 30, 1998. Cash and cash equivalents increased approximately $614,000, or 10.58%, from $5.8 million to $6.4 million at June 30, 1998. The increase in cash and cash equivalents was primarily attributable to the proceeds from maturities and principal payments on securities available for sale and held to maturity. Accrued interest and dividends receivable decreased approximately $24,000, or 3.20%, from $747,000 at June 30, 1997 to $723,000 at June 30, 1998. Prepaid expenses and other assets decreased approximately $431,000 or 66.01% from $654,000 at June 30, 1997 to $222,000 at June 30, 1998. Total deposits decreased approximately $833,000, or 0.96%, from $86.8 million at June 30, 1997 to $85.9 million at June 30, 1998. Other liabilities during the period ended June 30, 1998 decreased approximately $152,000, 20.45%, from $744,000 at June 30, 1997 to $592,000 at June 30, 1998. This decrease was primarily attributable to a decrease in accrued federal and state income taxes. Total equity increased approximately $639,000, or 3.56%, from $17.9 million at June 30, 1997 to $18.6 million at June 30, 1998. This change was primarily attributable to an increase in retained earnings, additional paid-in capital, and amortization of unearned compensation, offset in part by the payment of dividends on the Common Stock. Treasury stock at June 30, 1998 was $3.0 million. COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 The Company reported net income for the fiscal years ended June 30, 1998 and 1997 of $543,000 and $143,000, respectively. The increase in net income for the fiscal year ended June 30, 1998 was primarily attributable to a reduction in deposit insurance expense, offset in part by an increase in income tax expense. Net income during the fiscal year ended June 30, 1997 included the recognition of the special assessment imposed upon all institutions with deposits insured by the SAIF. This amounted to approximately $591,000, offset in part by a $214,000 reduction in income tax expense. Net Interest Income. Net interest income for the fiscal years ended June 30, 1998 and 1997 was $2.9 million and $3.0 million, respectively. Total interest income decreased approximately $96,000, or 1.27%, for the fiscal year ended June 30, 1998. Total interest expense decreased approximately $15,000 or 0.34% for the fiscal year ended June 30, 1998 compared with the fiscal year ended June 30, 1997. Provision for Loan Losses. No provision for loan losses was deemed necessary in either of the fiscal years ended June 30, 1998 or 1997. The allowance for loan losses is based on management's evaluation of possible loan losses inherent in the Association's loan portfolio. Management considers, among other factors, past loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. 5 Non-interest Income. Non-interest income was approximately $92,000 for the fiscal years ended June 30, 1998 and June 30, 1997. Non-Interest Expense. Non-interest expense decreased approximately $678,000, or 23.81%, for the fiscal year ended June 30, 1998 from $2.8 million to $2.2 million. This decrease was primarily attributable to the reduction in deposit insurance expense related to the recognition of the special assessment imposed by the SAIF in the amount of $591,000 during the fiscal year ended June 30, 1997. Salaries and employee benefits remained level at approximately $1.4 million for the fiscal years ended June 30, 1998 and 1997. Other operating expenses decreased by approximately $25,000 or 4.12% for the fiscal year ended June 30, 1998. Provision for Income Taxes. During the fiscal year ended June 30, 1998, the provision for income tax expense increased approximately $198,000 or 248.96%. This increase was primarily attributable to a reduction in deposit insurance expense related to the absence of any SAIF special assessment in the amount of $591,000 during the fiscal year June 30, 1998. Liquidity and Capital Resources. As a holding company, the Company conducts its business through its subsidiary, the Association. The Association is required to maintain minimum levels of liquid assets as defined by regulations of the OTS. The requirement, which varies from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 4.0%. The Association's average liquidity ratio well exceeded the required minimums at and during the fiscal year ended June 30, 1998. The Association adjusts its liquidity levels in order to meet funding needs of deposit outflows, repayment of borrowings and loan commitments. The Association also adjusts liquidity as appropriate to meet its asset and liability management objectives. The Association's primary sources of funds are deposits, payment of loans and mortgage-backed securities, maturities of investment securities and other investments. While scheduled principal repayments on loans and mortgage- backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Association invests in short-term interest- earning assets which provide liquidity to meet lending requirements. The Association is required to maintain certain levels of regulatory capital. At June 30, 1998, the Association exceeded all minimum regulatory capital requirements. COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND 1996 The Association reported net income for the fiscal years ended June 30, 1997 and 1996 of $143,000 and $575,000, respectively. The decrease in the net income during the year was primarily attributable to the recognition of the one-time special assessment of approximately $591,000 by the FDIC, offset in part by a $214,000 reduction in income tax expense. Net Interest Income. Net interest income decreased $43,000 or 1.42% for the fiscal year ended June 30, 1997. This decrease was primarily attributable to a decrease in total interest income of $188,000 which resulted primarily from volume decreases in securities held to maturity. This decrease was partially offset by a decrease in interest paid on deposits of $145,000. Provision for Loan Losses. No provision for loan losses was deemed necessary in either of the fiscal years ended June 30, 1997 or 1996. The allowance for loan losses is based on management's evaluation of possible loan losses inherent in the Association's loan portfolio. Management considers, among other factors, past loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. 6 Non-interest Income. Non-interest income increased $14,000 or 18.59%. This increase was primarily attributable to an increase in customer service fees. Non-interest Expense. Non-interest expense increased $618,000 or 27.70% for the fiscal year ended June 30, 1998 from $2.2 million to $2.8 million at June 30, 1996 and 1997, respectively. This increase was primarily attributable to the recognition of the one-time special assessment by the FDIC in the amount of $591,000. Salaries and employee benefits increased $102,000 or 7.68% for the fiscal year ended June 30, 1997 compared with the fiscal year ended June 30, 1996. This increase is primarily attributable to the expenses related to the establishment of certain employee benefit plans, subsequent to the conversion. Other operating expenses increased $29,000 or 5.06% for the fiscal year ended June 30, 1997. This increase was primarily attributable to operating expenses relating to the operation of the holding company and professional fees associated with back-office operational improvements. Provision for Income Taxes. During the fiscal year ended June 30, 1997, the provision for income taxes decreased $214,000 or 72.96%. This decrease was primarily attributable to reduced income related to the recognition of the one-time special assessment by the FDIC in the amount of $591,000. As a result, income before income taxes decreased $647,000 or 74.44%. ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of the Association's net income, is determined by the difference or "spread" between the yield earned on the Association's interest-earning assets and the rates paid on its interest- bearing liabilities and the relative amounts of such assets and liabilities. Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity on both the interest-earning assets and interest-bearing liabilities. The matching of the Association's assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on an institution's net portfolio value. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Association's assets mature or reprice more quickly or to a greater extent than its liabilities, the Association's net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Association's assets mature or reprice more slowly or to a lesser extent than its liabilities, the Association's net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. The Association's policy has been to mitigate the interest rate risk inherent in the historical savings institution business of originating long term loans funded by short term deposits by pursuing the following strategies: (i) the Association has historically maintained substantial liquidity and capital levels to sustain unfavorable movements in market interest rates; and (ii) in order to minimize the adverse effect of interest rate risk on future operations, the Association purchases adjustable- and fixed-rate securities with maturities of primarily one to five years and originates limited amounts of shorter term consumer loans. Historically, the Association measured its interest rate sensitivity by computing the "gap" between the assets and liabilities which were expected to mature or reprice within certain periods, based on assumptions regarding loan prepayment and deposit decay rates formerly provided by the OTS. However, the OTS now requires the Association to measure its interest rate risk by computing estimated changes in the net present value of its cash flows from assets, liabilities and off-balance sheet items ("NPV") in the event of a range of assumed changes in market interest rates. These computations estimate the effect on the Association's NPV of sudden and sustained 1% to 4% increases and decreases in market interest rates. The Association's Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the Association's estimated NPV of 25%, 50%, 77% and 93% and 25%, 35%, 50% and 50% in the event of 1%, 2%, 3% and 4% increases and decreases in market interest rates, respectively. At June 30, 1998, based on the most recent information provided by the OTS, it was estimated that the Association's NPV would decrease 9%, 19%, 30% and 41% and increase 6%, 11%, 16% and 21% in the event of 1%, 2%, 3% and 4% increases and decreases in market interest rates, respectively. These calculations indicate that the Association's net portfolio value 7 could be adversely affected by increases in interest rates. Changes in interest rates also may affect the Association's net interest income, with increases in rates expected to decrease income and decreases in rates expected to increase income, as the Association's interest-bearing liabilities would be expected to mature or reprice more quickly than the Association's interest-earning assets. While management cannot predict future interest rates or their on the Association's NPV or net interest income, management does not expect current interest rates to have a material adverse effect on the Association's NPV or net interest income in the future. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit run-offs and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in such computations. Although certain assets and liabilities may have similar maturity or periods of repricing they may react at different times and in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable rate mortgages, generally have features which restrict changes in interest rates on a short term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Finally, virtually all of the adjustable rate loans in the Association's portfolio contain conditions which restrict the periodic change in interest rate. The Association's Board of Directors is responsible for reviewing the Association's asset and liability policies. On at least a quarterly basis, the Board reviews interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Association's management is responsible for administering the policies and determinations of the Board of Directors with respect to the Association's asset and liability goals and strategies. Management expects that the Association's asset and liability policies and strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years. 8 AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to the Company's average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the periods and at the date indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods indicated. The table also presents information for the periods indicated and at June 30, 1998 with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net yield on interest- earning assets," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest- bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
Year Ended June 30, --------------------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------- ----------------------------- -------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost -------------------- -------- -------- --------- --------- ------- -------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable............. $ 38,751 $3,081 7.95% $ 34,149 $ 2,734 8.01% $ 30,183 $2,467 8.17% Securities................... 58,426 4,046 6.92 62,113 4,491 8.04 68,460 4,814 7.03 Other interest-earning assets 6,252 291 4.65 7,518 288 3.82 6,436 420 6.53 -------- ------ -------- ------- -------- ------ Total interest-earning assets.................... 103,429 7,418 7.17 103,780 7,513 7.24 105,079 7,701 7.33 Non-interest-earning assets.... 1,844 1,751 3,083 -------- -------- -------- Total assets............... $105,273 $105,531 $108,162 ======== ======== ======== Interest-bearing liabilities: Deposits..................... $ 85,262 4,519 5.30 $ 86,743 4,534 5.23 $ 88,785 4,679 5.27 -------- ------ -------- ------- -------- ------ Total interest-bearing liabilities.............. 85,262 4,519 5.30 86,743 4,534 5.23 88,785 4,679 5.27 ------ ------- ------ Non-interest-bearing liabilities................... 1,667 1,286 1,886 -------- -------- ------- Total liabilities.......... 88,029 90,671 Equity......................... 18,344 17,502 17,491 -------- -------- ------- Total liabilities and equity.................... $105,273 $105,531 $108,162 ======== ======== ======== Net interest income............ $ 2,899 $ 2,979 $3,022 ======= ======= ====== Interest rate spread........... 1.87% 2.01% 2.06% ====== ====== ====== Net interest margin............ 2.80% 2.87% 2.88% ====== ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities.................. 121.31% 119.64% 118.35% ====== ====== ======
9 RATE/VOLUME ANALYSIS The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate) and (ii) changes in rates (change in rate multiplied by old volume).
Year Ended June 30, --------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 --------------------------------- ------------------------------------ Increase (Decrease) Increase (Decrease) Due to Due to --------------------------------- ------------------------------------ Rate Volume Total Rate Volume Total ---- ------ ----- ---- ------ ----- (In thousands) Interest income: Loans................................. $ (19) $ 366 $ 347 $ (49) $ 316 $ 267 Securities............................ (185) (260) (445) 141 (464) (323) Other interest-earning assets......... 14 (11) 3 (223) 91 (132) ----- ----- ----- ----- ----- ----- Total interest-earning assets....... (190) 95 (95) (131) (57) (188) ----- ----- ----- ----- ----- ----- Interest expense: Deposits.............................. 68 (83) (15) (38) (107) (145) ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities.. 68 (83) (15) (38) (107) (145) ----- ----- ----- ----- ----- ----- Change in net interest income........... $(258) $ 178 $ (80) $ (93) $ 50 $ (43) ===== ===== ===== ===== ===== =====
LIQUIDITY AND CAPITAL RESOURCES The Association continues to maintain a high level of liquid assets in order to meet its funding requirements. At June 30, 1998 the Association had approximately $6.4 million in cash on hand and interest-bearing deposits in other banks which represented 6.11% of total assets. At June 30, 1998, the Association's level of liquid assets, as measured for regulatory compliance purposes was 26.02%, or $19.1 million, in excess of the minimum liquidity requirement of 4%. At June 30, 1998 the Association had $18.6 million of total equity or 17.67% of total assets. The Association continues to exceed its regulatory capital requirement ratios at June 30, 1998. Tangible capital and core capital were $15.8 million, which represented 14.9% of adjusted total assets and risk- based capital was $15.8 million which represented 56.9% of total risk-weighted assets at June 30, 1998. Such amounts exceeded the minimum required ratios of 1.5%, 3.0% and 8.0%, respectively by 13.4%, 11.9% and 48.9%, respectively. At June 30, 1998, the Association continued to meet the definition of a "well- capitalized" institution the highest of the five categories under the prompt corrective action standards adopted by the OTS. 10 [Letterhead of Arthur Andersen LLP] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Southern Banc Company, Inc.: We have audited the accompanying consolidated statements of financial condition of THE SOUTHERN BANC COMPANY, INC. (a Delaware corporation) AND SUBSIDIARY as of June 30, 1998 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Southern Banc Company, Inc. and Subsidiary as of June 30, 1998 and 1997 and the results of their operations and cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Birmingham, Alabama July 31, 1998 11
THE SOUTHERN BANC COMPANY, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 1998 AND 1997 ASSETS 1998 1997 - -------------------------------------------------- -------------- -------------- CASH AND EQUIVALENTS: Cash on hand and in other banks $ 1,171,354 $ 1,074,824 Interest-bearing deposits in other banks 5,250,164 4,732,376 ------------- ------------- 6,421,518 5,807,200 ------------- ------------- SECURITIES AVAILABLE FOR SALE 22,238,866 17,621,290 SECURITIES HELD TO MATURITY (fair values of $34,811,021 and $44,249,863, respectively) 34,077,096 44,157,426 LOANS RECEIVABLE, net 41,153,338 36,180,396 PREMISES AND EQUIPMENT, net 251,373 266,737 ACCRUED INTEREST AND DIVIDENDS RECEIVABLE 723,024 746,900 PREPAID EXPENSES AND OTHER ASSETS 222,142 653,577 ------------- ------------- Total assets $ 105,087,357 $ 105,433,526 ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ------------------------------------ ------------- ------------- DEPOSITS $ 85,925,834 $ 86,758,713 OTHER LIABILITIES: Accrued interest payable 59,106 45,029 Advance payments by borrowers for taxes and insurance 60,797 74,029 Taxes payable 213,504 506,814 Other 258,182 117,755 ------------- ------------ Total liabilities 86,517,423 87,502,340 ------------- ------------ COMMITMENTS AND CONTINGENCIES (Note 15) STOCKHOLDERS' EQUITY: Preferred stock, par value $.01 per share; 500,000 shares authorized; shares issued and outstanding--none 0 0 Common stock, par value $.01 per share; 3,500,000 shares authorized; 1,454,750 shares issued 14,548 14,548 Additional paid-in capital 13,676,507 13,642,623 Retained earnings 9,433,341 9,253,350 Unearned compensation (1,601,861) (1,917,094) Treasury stock at cost, 224,437 shares in 1998 and 1997 (3,000,128) (3,000,128) Unrealized gain (loss) on securities available for sale, net 47,527 (62,113) ------------- ------------ Total stockholders' equity 18,569,934 17,931,186 ------------- ------------ Total liabilities and stockholders' equity $105,087,357 $105,433,526 ============= ============
The accompanying notes are an integral part of these consolidated statements. 12 THE SOUTHERN BANC COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1998 1997 1996 ---------- ---------- ---------- INTEREST INCOME: Interest and fees on loans $3,080,942 $2,734,183 $2,466,817 Interest and dividends on securities available for sale 1,253,456 1,005,783 790,809 Interest and dividends on securities held to maturity 2,792,400 3,485,439 4,023,246 Other interest income 290,785 287,880 420,827 ---------- ---------- ---------- Total interest income 7,417,583 7,513,285 7,701,699 INTEREST EXPENSE ON DEPOSITS 4,518,576 4,533,837 4,679,246 ---------- ---------- ---------- Net interest income 2,899,007 2,979,448 3,022,453 PROVISION FOR LOAN LOSSES 0 0 0 ---------- ---------- ---------- Net interest income after provision for loan losses 2,899,007 2,979,448 3,022,453 ---------- ---------- ---------- NONINTEREST INCOME: Customer service fees 88,523 90,643 77,420 Miscellaneous income, net 3,277 1,171 0 ---------- ---------- ---------- Total noninterest income (expense) 91,800 91,814 77,420 ---------- ---------- ---------- NONINTEREST EXPENSE: Salaries and employee benefits 1,400,837 1,429,250 1,327,274 Office building and equipment expense 91,264 101,256 120,975 Deposit insurance expense 55,657 712,962 213,229 Loss on sale of REO 0 7,288 0 Other expense 623,121 598,484 569,664 ---------- ---------- ---------- Total noninterest expense 2,170,879 2,849,240 2,231,142 ---------- ---------- ---------- Income before provision for income taxes 819,928 222,022 868,731 PROVISION FOR INCOME TAXES 277,043 79,391 293,658 ---------- ---------- ---------- Net income $ 542,885 $ 142,631 $ 575,073 ========== ========== ========== EARNINGS PER SHARE Basic $.51 $.13 $.34 ========== ========== ========== Diluted $.49 $.12 $.34 ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. 13 THE SOUTHERN BANC COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
ADDITIONAL COMMON PAID-IN RETAINED UNEARNED STOCK CAPITAL EARNINGS COMPENSATION ------- ----------- ---------- ------------ BALANCE, JUNE 30, 1995 $ 0 $ 0 $9,706,101 $ 0 Net income 0 0 575,073 0 Issuance of common stock 14,548 13,653,822 0 (1,163,800) Change in unrealized gain (loss) on securities available for sale, net 0 0 0 0 Purchase of treasury stock, at cost 0 0 0 0 Repurchase of stock for stock plan trusts 0 (105,790) 0 (1,117,665) Amortization of unearned compensation 0 27,084 0 168,097 Valuation adjustment on unallocated stock plan shares 0 (2,310) 0 2,310 Contributions to stock plans 0 0 0 (6,335) Dividends declared ($.4375 per share) 0 0 (579,203) 0 ------ ----------- ---------- ----------- BALANCE, JUNE 30, 1996 14,548 13,572,806 9,701,971 (2,117,393) Net income 0 0 142,631 0 Purchase of treasury stock, at cost 0 0 0 0 Amortization of unearned compensation 0 34,045 0 275,135 Dividends declared ($.525 per share) 0 0 (591,252) 0 Valuation adjustment on unallocated stock plan shares 0 35,772 0 (35,772) Contributions to stock plan trusts 0 0 0 (45,434) Exercise of stock options (545 shares) 0 0 0 6,370 Change in unrealized gain (loss) on securities available for sale, net 0 0 0 0 ------- ----------- ---------- ----------- BALANCE, JUNE 30, 1997 14,548 13,642,623 9,253,350 (1,917,094) Net income 0 0 542,885 0 Amortization of unearned compensation 0 32,470 0 237,758 Dividends declared ($.35 per share) 0 0 (362,894) 0 Valuation adjustment on unallocated stock plan shares 0 1,414 0 (1,414) Exercise of stock options (8,599 shares) 0 0 0 100,489 Contributions to stock plan trusts 0 0 0 (21,600) Change in unrealized gain (loss) on securities available for sale, net 0 0 0 0 ------- ----------- ---------- ----------- BALANCE, JUNE 30, 1998 $14,548 $13,676,507 $9,433,341 $(1,601,861) ======= =========== ========== =========== TREASURY UNREALIZED STOCK GAIN (LOSS) TOTAL ----------- ---------- ----------- BALANCE, JUNE 30, 1995 $ 0 $ 51,316 $ 9,757,417 Net income 0 0 575,073 Issuance of common stock 0 0 12,504,570 Change in unrealized gain (loss) on securities available for sale, net 0 (130,903) (130,903) Purchase of treasury stock, at cost (957,590) 0 (957,590) Repurchase of stock for stock plan trusts 0 0 (1,223,455) Amortization of unearned compensation 0 0 195,181 Valuation adjustment on unallocated stock plan shares 0 0 0 Contributions to stock plans 0 0 (6,335) Dividends declared ($.4375 per share) 0 0 (579,203) ----------- ---------- ----------- BALANCE, JUNE 30, 1996 (957,590) (79,587) 20,134,755 Net income 0 0 142,631 Purchase of treasury stock, at cost (2,042,538) 0 (2,042,538) Amortization of unearned compensation 0 0 309,180 Dividends declared ($.525 per share) 0 0 (591,252) Valuation adjustment on unallocated stock plan shares 0 0 0 Contributions to stock plan trusts 0 0 (45,434) Exercise of stock options (545 shares) 0 0 6,370 Change in unrealized gain (loss) on securities available for sale, net 0 17,474 17,474 ----------- ---------- ----------- BALANCE, JUNE 30, 1997 (3,000,128) (62,113) 17,931,186 Net Income 0 0 542,885 Amortization of unearned compensation 0 0 270,228 Dividends declared ($.35 per share) 0 0 (362,894) Valuation adjustment on unallocated stock plan shares 0 0 0 Exercise of stock options (8,599 shares) 0 0 100,489 Contributions to stock plan trusts 0 0 (21,600) Change in unrealized gain (loss) on securities available for sale, net 0 109,640 109,640 ----------- ---------- ----------- BALANCE, JUNE 30, 1998 $(3,000,128) $ 47,527 $18,569,934 =========== ========== ===========
The accompanying notes are an integral part of these consolidated statements. 14 THE SOUTHERN BANC COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 542,885 $ 142,631 $ 575,073 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 46,176 48,391 62,568 Amortization (accretion), net (15,581) 56,293 7,884 Amortization of intangible asset 38,847 46,356 49,706 Amortization of unearned compensation 270,228 309,180 195,181 Loss on sale of real estate owned, net 0 7,288 0 Provision for loan losses 0 0 0 Deferred income tax provision (benefit) 31,167 (105,788) 44,747 Change in assets and liabilities: (Increase) decrease in accrued interest and dividends receivable 23,876 109,481 (108,950) (Increase) decrease in prepaid expenses and other assets 392,588 1,188,958 221,929 Increase (decrease) in accrued interest payable 14,077 (14,136) (6,751) Increase (decrease) in income taxes payable (346,299) 461,363 (123,645) Increase (decrease) in other liabilities 140,427 (633,797) 645,507 ------------ ----------- ------------ Net cash provided by operating activities 1,138,391 1,616,220 1,563,249 ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities available for sale (12,304,906) (6,728,677) (7,714,153) Proceeds from sale of real estate owned 0 13,808 0 Proceeds from maturities and principal payments on securities available for sale 7,808,031 2,641,104 3,962,049 Purchases of securities held to maturity (5,004,063) (728,320) (13,600,221) Proceeds from maturities and principal payments on securities held to maturity 15,110,735 9,368,961 13,891,264 Purchase of loans (685,400) (291,151) (4,178,768) Net increase in loans (4,287,542) (2,796,725) (2,501,051) Capital expenditures (30,812) (36,040) (8,292) ------------ ----------- ------------ Net cash provided by (used in) investing activities 606,043 1,442,960 (10,149,172) ------------ ----------- ------------
15
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock $ 0 $ 0 $12,504,570 Contributions to stock plan trusts (21,600) (45,434) (6,335) Repurchase of common stock for stock plans 0 0 (1,223,455) Purchase of treasury stock 0 (2,042,538) (957,590) Dividends paid (362,894) (591,252) (579,203) Increase (decrease) in deposits, net (832,879) 912,113 (5,560,200) Increase (decrease) in advance payments by borrowers for taxes and insurance (13,232) (25,787) (48,462) Proceeds from exercise of stock options 100,489 6,370 0 ----------- ----------- ----------- Net cash provided by (used in) financing activities (1,130,116) (1,786,528) 4,129,325 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 614,318 1,272,652 (4,456,598) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,807,200 4,534,548 8,991,146 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,421,518 $ 5,807,200 $ 4,534,548 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Income taxes, net of refund received $ 224,222 $ 104,679 $ 427,767 =========== =========== =========== Interest $ 4,504,499 $ 4,547,973 $ 4,685,997 =========== =========== =========== Noncash transactions: Transfer of matured securities to prepaid expenses and other assets $ 0 $ 0 $ 1,500,000 Real estate owned, obtained through foreclosure 0 21,096 0 Change in unrealized net gain (loss) on securities available for sale, net of deferred taxes (benefit) 109,640 17,474 (130,903) =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 16 THE SOUTHERN BANC COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, NATURE OF OPERATIONS, AND PRINCIPLES OF CONSOLIDATION The Southern Banc Company, Inc. (the "Company") was incorporated in the State of Delaware in May 1995, for the purpose of becoming a holding company to own all of the outstanding capital stock of First Federal Savings and Loan Association of Gadsden (the "Association") upon the Association's conversion from a federally chartered mutual savings association to a federally chartered stock savings association (the "Conversion"). The accounting for the conversion is in a manner similar to that utilized in a pooling of interests. The Association received its federal charter in 1936 and was converted to a federally chartered stock organization on October 5, 1995 through the sale of all of its common stock to the Company. The Association is primarily engaged in the business of obtaining funds in the form of various savings deposit products and investing those funds in mortgage loans or single family real estate and, to a lesser extent, in consumer loans. The Association operates from its four offices in the northeast portion of Alabama, and originates the majority of its loans in this market area. The accompanying consolidated financial statements include the accounts of the Company, the Association, and the Association's wholly owned subsidiary, First Service Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SECURITIES Securities have been classified as either trading, available for sale, or held to maturity based on Management's intentions at the time of purchase. Securities classified as available for sale are carried at fair value. The unrealized difference between amortized cost and fair value on securities available for sale is excluded from earnings and is reported net of deferred taxes as a separate component of stockholders' equity. The available for sale classification includes securities that Management intends to use as part of its asset/liability management strategy or that may be sold in response to changes in interest rates, liquidity needs, or for other purposes. 17 Securities designated as held to maturity are carried at amortized cost, as the Company has both the ability and management has the positive intent to hold these securities to maturity. The Company had no securities classified as trading at June 30, 1998 and 1997. Amortization of premiums and accretion of discounts on mortgage-backed securities and other investments are computed using the level yield method and the straight-line method, respectively. The adjusted cost of the specific security sold is used to compute gain or loss on the sale of securities. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, discounts/rebates on loans, unearned interest income, and net deferred loan fees/costs. Unearned interest income on consumer loans is amortized to income by use of a method which approximates level yield over the lives of the related loans. The Company ceases accrual of interest on a loan when payment on the loan is in excess of 90 days past due. Income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has been reestablished, in which case the loan is returned to accrual status. The allowance for loan losses is maintained at a level which management considers adequate to absorb losses inherent in the loan portfolio at each reporting date. To serve as a basis for making this provision each quarter, the Association maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Association's customers, the payment performance of individual large loans and pools of homogeneous small loans, distribution of loans by risk class, portfolio seasoning, changes in collateral values, and detailed reviews of specific large loan relationships. Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from their estimates; however, estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for loan losses increases the allowance for loan losses, a valuation account which is netted against loans on the statement of financial condition. As the amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is written down, reducing the allowance for loan losses. If, subsequent to a writedown, the Association is able to collect additional amounts from the customer or obtain control of collateral worth more than earlier estimated, a recovery is recorded, increasing the allowance for loan losses. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures, as of July 1, 1995. SFAS No. 114 requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at each loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment of the loan, the impairment is recorded through a valuation allowance. The Company had previously measured the allowance for loan losses using methods similar to those prescribed in SFAS No. 114. Accordingly, as a result of adopting these statements, no additional provision to the allowance for loan losses was required as of July 1, 1995. Because the Company's loan portfolio consists primarily of one-to-four family residential mortgages and consumer installment loans, which are exempt from SFAS No. 114 when evaluated collectively for 18 impairment, as is done by the Company, the Company had no loans designated as impaired under the provisions of SFAS No. 114 at June 30, 1998. LOAN ORIGINATION FEES AND RELATED COSTS AND DISCOUNTS Loan fees and certain direct costs of loan origination are deferred, and the net fee or cost is recognized as an adjustment to Interest and fees on loans in the accompanying consolidated statements of income using the level yield method over the contractual life of the loans. Discounts associated with loans purchased are deferred and accreted to income using the level yield method. PREMISES AND EQUIPMENT Land is carried at cost. Property and equipment are stated at cost, less accumulated depreciation. Depreciation methods and estimated service lives are as follows:
Building and improvements 10-40 years Accelerated/Straight-line Leasehold improvements 10 years Straight-line Furniture and equipment 5-20 years Accelerated/Straight-line Automobile 3 years Straight-line
REAL ESTATE OWNED Real estate owned is recorded at the fair value of the property, less estimated costs of disposition. Any excess of the recorded investment over fair value of the property is charged to the allowance for loan losses at the time of foreclosure. Costs relating to improvement of property incurred subsequent to acquisition are capitalized, whereas costs relating to the holding of property are expensed. The amounts expensed in 1998 and 1997 were $0 and $808, respectively. There were no amounts capitalized in either year. Subsequent to foreclosure, real estate owned is evaluated on an individual basis for changes in fair value. Future declines in fair value of the asset, less cost of disposition, below its carrying amount increases the valuation allowance account. Future increases in fair value of the asset, less costs of disposition, above its carrying amount reduce the valuation allowance account, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income. The Association had no real estate owned at June 30, 1998 and 1997. The recognition of gains and losses on the sale of real estate owned is dependent upon whether the nature and terms of the sale and future involvement of the Company in the property meet certain requirements. If the transaction does not meet these requirements, sale or income recognition is deferred and recognized under an alternative method in accordance with SFAS No. 66, Accounting for Sales of Real Estate. INCOME TAXES Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of nontaxable income) and deferred income taxes on temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes in the period of enactment. 19 CORE DEPOSIT PREMIUM The premium paid to acquire the deposits of another financial institution has been shown as an intangible asset and is included in Prepaid expenses and other assets in the accompanying consolidated statements of financial condition. This net core deposit premium ($137,235 and $176,082 at June 30, 1998 and 1997, respectively) is being amortized using an accelerated method over a ten year period which approximates the expected lives of the purchased deposit relationships (amortization expense of $38,847, $46,356, and $49,706 in fiscal years 1998, 1997, and 1996, respectively). STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Company considers Cash on hand and in other banks and Interest-bearing deposits in other banks to be cash and cash equivalents. PENDING ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting of Comprehensive Income. This Statement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of financial statements. This Statement also requires that all items that are required to be recognized under accounting standards as components of comprehensive income, be reported in financial statements and be displayed with the same prominence as other financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. Reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. This Statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. This Statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application comparative information for earlier years is to be restated. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits. This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful and suggests combined formats for presentation of pension and other postretirement benefit disclosures. This Statement is effective for fiscal years beginning after December 15, 1997. Earlier application is encouraged. Restatement of disclosures for earlier periods provided for comparative purposes is required unless the information is not readily available, in which case the notes to the financial statements should include all available information and a description of the information not available. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as 20 derivatives), and for hedging activities. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of this Statement is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this Statement. This Statement should not be applied retroactively to financial statements of prior periods. Management believes there will be no material effect on the consolidated financial statements from the adoption of these pronouncements. PRIOR YEAR CLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year presentation. 2. STOCK CONVERSION On October 5, 1995, the Conversion of the Association from a Federally- chartered mutual institution to a Federally-chartered stock savings association through amendment of its charter and issuance of common stock to the Company was completed. Related thereto, the Company sold 1,454,750 shares of common stock, par value $.01 per share, at an initial price of $10 per share in subscription and community offerings. Costs associated with the Conversion were approximately $880,000, including underwriting fees. These conversion costs were deducted from the gross proceeds of the sale of the common stock. In connection with the Offering, the Association established a liquidation account in an amount equal to its regulatory capital as of the latest practicable date prior to consummation of the Offering. 21 The Company's ability to pay dividends will be largely dependent upon dividends to the Company from the Association. Pursuant to the Office of Thrift Supervision ("OTS") regulations, the Association will not be permitted to pay dividends on its capital stock or repurchase shares of its stock if its stockholders' equity would be reduced below the amount required for the liquidation account or if stockholders' equity would be reduced below the amount required by the OTS. (See Note 4). 3. INTEREST-RATE SENSITIVITY Fixed-rate mortgage loans and mortgage-backed securities comprise a substantial portion of the Association's interest-earning assets (approximately 70% at June 30, 1998), while its principal source of funds consists of savings deposits with maturities of three years or less (79%). Because of the short-term nature of the savings deposits, their cost generally reflects returns currently available in the market. Accordingly, the Association's savings deposits have a high degree of interest-rate sensitivity while its earning assets are relatively fixed and are much less sensitive to changes in current market rates. Therefore, changes in market interest rates tend to directly affect the level of net interest income related to such earning assets. At June 30, 1998, based on information provided by the OTS it was estimated that the Association's net portfolio value ("NPV") (the net present value of the Association's cash flows from assets, liabilities, and off-balance sheet items) would decrease 9%, 19%, 30%, and 41%, and increase 6%, 11%, 16%, and 21% in the event of 1%, 2%, 3%, and 4% increases and decreases in market interest rates, respectively. These calculations indicate that the Association's NPV could be adversely affected by increases in interest rates but could be favorably affected by decreases in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in such computations. In order to mitigate its interest rate risk, the Association maintains substantial liquidity and capital levels that management believes are sufficient to sustain unfavorable movements in market interest rates. Capital requirements continue to be under study by the OTS. Management continues to monitor these requirements and contemplated changes and believes that the Association will continue to exceed its regulatory minimum requirements. As a result of the Association's exposure to interest rate risk, the OTS will continue to monitor the Association's interest rate risk management strategy and activities. 22 4. REGULATORY MATTERS The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the table which follows) of Total and Tier 1 capital (as defined in the regulations) to Risk-weighted assets (as defined), and of Tier 1 capital (as defined) to Average assets (as defined). Management believes, as of June 30, 1998 and 1997, that the Association meets all capital adequacy requirements to which it is subject. As of June 30, 1998 and 1997, the most recent notification from the regulatory authorities categorized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Association must maintain minimum Total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table which follows. Actual capital amounts and ratios are presented in the table below for the Association:
FOR CAPITAL ADEQUACY ACTUAL PURPOSES ----------------- ------------------------- AMOUNT RATIO AMOUNT RATIO ------- ------- ----------- --------- (Dollars in thousands) JUNE 30, 1998: Total capital (to risk weighted assets) $15,845 56.9% $2,228 8.0% Tier 1 (core) capital (to risk weighted assets) 15,769 56.6 N/A N/A Tier 1 (core) capital (to adjusted total assets) 15,769 14.9 3,165 3.0 Tangible capital (to adjusted total assets) 15,769 14.9 1,583 1.5 JUNE 30, 1997: Total capital (to risk weighted assets) $14,857 60.7% $1,956 8.0% Tier 1 (core) capital (to risk weighted assets) 14,781 60.4 N/A N/A Tier 1 (core) capital (to adjusted total assets) 14,781 14.0 3,165 3.0 Tangible capital (to adjusted total assets) 14,781 14.0 1,580 1.5 TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS ----------------- AMOUNT RATIO -------- ------- (Dollars in thousands) JUNE 30, 1998: Total capital (to risk weighted assets) $2,785 10.0 Tier 1 (core) capital (to risk weighted assets) 1,671 6.0 Tier 1 (core) capital (to adjusted total assets) 5,276 5.0 Tangible capital (to adjusted total assets) N/A N/A JUNE 30, 1997: Total capital (to risk weighted assets) $2,446 10.0 Tier 1 (core) capital (to risk weighted assets) 1,467 6.0 Tier 1 (core) capital (to adjusted total assets) 5,275 5.0 Tangible capital (to adjusted total assets) N/A N/A
23 The following table is a reconcilitation of the Association's stockholder's equity to Tangible, Tier 1, and Risk-based capital as required by the OTS:
1998 1997 ---------- --------- (In thousands) Stockholder's equity $ 15,953 $ 14,895 Intangible assets (137) (176) Unrealized (gain) loss on securities available for sale (47) 62 ---------- --------- Tangible and Tier 1 capital 15,769 14,781 Allowance for loan losses 76 76 ---------- --------- Total risk based capital $ 15,845 $ 14,857 ========== ========= Total assets $105,105 $105,451 Adjusted total assets 105,511 105,337 Total risk weighted assets 27,845 24,456
Pursuant to OTS regulations, an institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution and has not been advised by the OTS that it is in need of more than the normal supervision can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four-quarter period. Any additional capital distributions require prior regulatory approval. The Company's principal source of funds for dividend payments is dividends from the Association. Certain restrictions exist regarding the ability of the Association to pay dividends to the Company. At July 1, 1998, dividend payments by the Association were subject to regulatory approval. 5. EARNINGS PER SHARE In 1998, the Company adopted SFAS No. 128, Earnings Per Share, effective December 15, 1997. Basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the years ended June 30, 1998, 1997, and 1996. Diluted earnings per share for the years ended June 30, 1998, 1997, and 1996, were computed by dividing net income by the weighted average number of shares of common stock outstanding and the dilutive effects of the shares awarded under the Management Recognition Plan ("MRP") and the Stock Option Plan, based on the treasury stock method using an average fair market value of the stock during the respective periods. As a result, the Company's reported earnings per share for 1997 and 1996 were restated. Earnings per share for the period from October 5, 1995, the date of Conversion, to June 30, 1996, have been computed based on the earnings during that period and on the weighted average number of shares of common stock and common stock equivalents outstanding during that period. The weighted average number of shares used for the period from October 5, 1995 through June 30, 1996, was 1,340,743. The following table represents the earnings per share calculations for the years ended June 30, 1998, 1997, and 1996 accompanied by the effect of this accounting change on previously reported earnings per share: 24
PER SHARE INCOME SHARES AMOUNT --------- ---------- ------------ 1998: Net income $542,885 Basic earnings per share: Income available to common shareholders 542,885 1,061,133 $.51 ============ Diluted securities: Management recognition plan shares 0 24,449 Incentive stock option plan shares 0 33,031 --------- ---------- Dilued earnings per share: Income available to common shareholders plus assumed conversions $542,885 1,118,613 $.49 ========= ========== ============ Per Share Income Shares Amount --------- ---------- ------------ 1997: Net income $142,631 Basic earnings per share: Income available to common shareholders 142,631 1,095,959 $.13 ============ Diluted securities: Management recognition plan shares 0 32,590 Incentive stock option plan shares 0 23,974 --------- ---------- Diluted earnings per share: Income available to common shareholders plus assumed conversions $142,631 1,152,523 $.12 ========= ========== ============ Per Share Income Shares Amount --------- ---------- ------------ 1996: Net income from October 5, 1995 (date of conversion) $455,853 Basic earnings per share: Income available to common shareholders 455,853 1,326,039 $.34 ============ Diluted securities: Management recognition plan shares 0 14,236 Incentive stock option plan shares 0 469 --------- ---------- Diluted earnings per share: Income available to common shareholders plus assumed conversions $455,853 1,340,744 $.34 ========= ========== ============
25 Changes in previously reported earnings per share were as follows for the years ended June 30, 1997 and 1996: 1997 1996 ----- ----- Earnings per share, as reported $ .12 $ .34 Earnings per share, as amended: Basic .13 .34 Diluted .12 .34 6. EMPLOYEE RETIREMENT AND SAVINGS PLANS EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Conversion, the Association established an ESOP for eligible employees. The ESOP purchased 116,380 shares of the Company's common stock with the proceeds of a $1,163,800 note payable from the Association and secured by the Common Stock owned by the ESOP. Principal payments under the note are due in equal and annual installments through December 2005; interest is payable annually at a variable rate which is adjusted each January 1. Impact of this financing is eliminated in the consolidated financial statement presentation. Expense related to the ESOP was approximately $166,000 and $170,000 for 1998 and 1997, respectively, a significant portion of which was to provide for individuals' service prior to Conversion. Unearned compensation related to the ESOP was approximately $757,000 and $891,000 at June 30, 1998 and 1997, respectively, and is shown as a reduction of stockholders' equity in the accompanying consolidated statements of financial condition. Unearned compensation is amortized into compensation expense based on employee services rendered in relation to shares which are committed to be released. MANAGEMENT RECOGNITION PLAN During fiscal 1996, the Association established a MRP which purchased 58,190 shares of the Company's common stock on the open market subsequent to the Conversion. The MRP provides for awards of common stock to directors and officers of the Association. The aggregate fair market value of the shares purchased by the MRP is considered unearned compensation at the time of purchase and compensation is earned ratably over the stipulated vesting period. The expense related to the MRP was approximately $104,000 and $142,000 for 1998 and 1997, respectively. Unearned compensation related to the MRP was approximately $492,000 and $587,000 for 1998 and 1997, respectively, and is shown as a reduction to stockholders' equity in the accompanying consolidated statements of financial condition. SIMPLIFIED EMPLOYEE PENSION PLAN The Company established a Simplified Employee Pension Plan ("SEP") for all employees who have completed one year of service, pursuant to Section 408(k) of the Internal Revenue Code of 1986. The Company makes a discretionary contribution to the SEP each year. The cost to the Company under the SEP was $94,996, $111,190, and $88,095 for fiscal years 1998, 1997, and 1996, respectively. 26 SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT During fiscal 1996, the Company entered into a Supplemental Executive Retirement Agreement ("SERA") with an executive of the Company. Under the provisions of the SERA, the Company will establish an account for the executive and will credit to the executive's account an amount equal to the difference between 25% of his compensation for the plan year and the annual additions credited to him under any tax-qualified plans sponsored by the Company (including the ESOP and the SEP). For each plan year, the amount credited to the executive's account shall appreciate at a rate equal to the highest rate paid by the Association on certificates of deposit (regardless of their term). Said account shall be paid to the executive in five substantially equal annual installments, with the first installment due on the first day of the second month after he leaves employment. In the event that the Executive retires before the Company and the Association fully repay the loan by which the ESOP purchased common stock in the initial public offering, the Company will pay the executive an amount having a fair market value equal to (i) the benefits he would have accrued under the ESOP if the loan had been discharged on the date of his retirement through a contribution, on said date, by the Company to the ESOP, and if all assets of the ESOP were thereupon allocated to the accounts of participants, plus (ii) a tax bonus equal to 40% of the amount he recognizes as ordinary income pursuant to clause (i) hereof. The executive will forfeit the right to receive any benefits under this Article if he is discharged from employment for just cause. In the event that the executive dies before he has received all benefit payments provided under this plan (calculated as if the executive retired on the date of his death), the Company shall pay to the executive's beneficiary a lump sum payment, within 60 days following the executive's death, in an amount equal to the balance of the executive's account. The Company recognized approximately $60,000 in compensation expense for the years ended June 30, 1998 and 1997 related to the SERA. The projected benefit obligation, accumulated benefit obligation, and vested benefit obligation were all $189,040 and $157,810 at June 30, 1998 and 1997, respectively. The components of the net periodic cost as of 1998 and 1997, respectively, are service costs of $4,444 and $5,103, interest cost of $11,047 and $12,351, and net amortization and deferred cost of $28,482 and $33,900. In determining the actuarial present value of the projected benefit obligation, the discount rate was 7% and the increase in share value was 10%. EMPLOYMENT AGREEMENT The Company has a 36-month employment agreement with its President. This agreement provides that if his employment under the agreement is terminated by the Company in connection with or within 12 months after any change in control of the Company, he shall be paid approximately 3 times his salary. 27 7. STOCK-BASED COMPENSATION PLANS The Company has a stockholder approved Option Plan. The Option Plan provides for the grant of incentive stock options ("ISO's") to employees and nonincentive stock options ("non-ISO's") to nonemployee directors. The Company utilizes the intrinsic value method of accounting for stock option grants. As the option price is considered to be equal to the fair value of the stock at the date of grant, no compensation cost is recognized. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Examples are stock purchase plans, stock options, restricted stock and stock appreciation rights. Under the Option Plan, the Company may grant options up to 145,475 shares and has granted options outstanding of 123,577 shares through June 30, 1998. Under the Option Plan, the options vest 20% per year and become exercisable upon the participant's completion of each of five years of service. Had compensation costs for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1998 1997 -------- -------- Net income: As reported $542,885 $142,631 Pro forma 494,676 66,438 Earnings per share: As reported: Basic $ .51 $ .13 Diluted .49 .12 Pro forma: Basic .47 .06 Diluted .44 .06
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 5, 1995, the resulting pro forma compensation costs may not be representative of that to be expected in future years. 28 Unearned compensation related to the Option Plan was approximately $352,000 and $446,000 at June 30, 1998 and 1997, respectively, and is shown as a reduction of stockholders' equity in the accompanying statements of financial condition. A summary of the status of the Company's stock option plan at June 30, 1998 and 1997 and the changes during the years then ended is as follows:
1998 ------------------------------------------- WEIGHTED AVERAGE OPTION EXERCISE PRICE SHARES PRICE PER SHARE ------- -------- --------- Outstanding at beginning of year 120,376 $11.69 $11.69 Forfeitures 0 0.00 0.00 Exercised (8,599) 11.69 11.69 ------- -------- --------- Outstanding at end of year 111,777 $11.69 $11.69 ======= ======== ========= Exercisable at end of year 43,402 $11.69 ======= ======== Weighted average fair value of the options granted $ 1.70 =======
1997 ------------------------------------------- Weighted Average Option Exercise Price Shares Price Per Share ------- ---------- ----------- Outstanding at beginning of year 126,376 $11.69 $11.69 Granted 0 0.00 0.00 Forfeitures (5,455) 11.69 11.69 Exercised (545) 11.69 11.69 -------- ---------- ----------- Outstanding at end of year 120,376 $11.69 $11.69 ======== ========== =========== Exercisable at end of year 23,639 $11.69 ======== ========== Weighted average fair value of the options granted $ 1.70 ========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997: risk-free interest rate of 6.22%; expected life of the options is 20% per year over the next five years and expected volatility and dividend yields of 17% and 2.99%, respectively. 8. SECURITIES AVAILABLE FOR SALE The amortized cost, gross unrealized gain and loss, and fair value of securities designated as available for sale are summarized as follows:
June 30, 1998 --------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAIN (LOSS) FAIR VALUE --------------- ---------- ----------- --------------- U.S. Treasury securities $ 7,879,031 $ 63,751 $ (5,094) $ 7,937,688 U.S. Government agency securities 13,487,978 46,077 (28,077) 13,505,978 Federal Home Loan Bank stock 795,200 0 0 795,200 --------------- ---------- ----------- --------------- $22,162,209 $109,828 $ (33,171) $ 22,238,866 =============== ========== =========== ===============
June 30, 1997 -------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gain (Loss) Fair Value --------------- -------------- -------------- ------------------- U.S. Treasury securities $ 6,620,331 $ 75,480 $ (34,749) $ 6,661,062 U.S. Government agency securities 10,260,565 11,231 (106,768) 10,165,028 Federal Home Loan Bank stock 795,200 0 0 795,200 ------------------ -------------- -------------- ------------------- $ 17,676,096 $ 86,711 $ (141,517) $17,621,290 ================== ============== ============== ===================
The amortized cost and fair value of debt securities available for sale by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 1998 ----------------------------------- AMORTIZED COST FAIR VALUE --------------- ---------------- Due in one year or less $ 6,071,900 $ 6,065,382 Due after one year through five years 7,071,544 7,128,571 Due after five years through ten years 5,847,255 5,862,491 Due after ten years 2,376,310 2,387,222 ---------------- ----------------- 21,367,009 21,443,666 Federal Home Loan Bank stock 795,200 795,200 ---------------- ----------------- $ 22,162,209 $ 22,238,866 ================ =================
There were no sales of securities during fiscal years 1998 and 1997. 30 A security designated as available for sale with a carrying value (fair value) of $1,595,500 has been pledged as collateral for certain large deposits (public funds) with an aggregate balance of $1,425,000 at June 30, 1998. 9. SECURITIES HELD TO MATURITY The amortized cost, gross unrealized gain and loss, and fair value of securities designated as held to maturity are summarized as follows:
June 30, 1998 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAIN (LOSS) FAIR VALUE ------------- ------------ ------------- ---------------- U.S. Government agency securities $34,077,096 780,511 $(46,586) $34,811,021 ------------- ------------ -------------- ---------------- $34,077,096 $780,511 $(46,586) $34,811,021 ============= ============ ============== ================
June 30, 1997 ------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gain (Loss) Fair Value ----------- ------------- ------------ --------------- U.S. Treasury securities $ 1,000,069 $ 6,181 $ 0 $ 1,006,250 U.S. Government agency securities 43,157,357 576,248 (489,992) 43,243,613 ------------- ------------- -------------- -------------- $44,157,426 $582,429 $(489,992) $44,249,863 ============== ============= ============== ==============
The amortized cost and fair value of debt securities held to maturity by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
JUNE 30, 1998 ------------------------------- AMORTIZED COST FAIR VALUE ------------- -------------- Due in one year or less $ 27,952 $ 29,435 Due after one year through five years 4,764,079 4,861,434 Due after five years through ten years 10,412,184 10,596,308 Due after ten years 18,872,881 19,323,844 ------------- -------------- $34,077,096 $34,811,021 ============= ==============
31 10. LOANS RECEIVABLE Loans receivable are summarized as follows:
June 30, -------------------------------- 1998 1997 ---------------- ------------- Mortgage loans: Secured by one to four family residential properties $36,528,215 $32,678,216 Secured by nonresidential properties 216,000 278,000 Consumer loans 3,748,379 2,617,095 Savings account loans 656,743 608,663 ----------- ----------- 41,149,337 36,181,974 Less: Unearned interest income 244,711 132,940 Discount (rebate) on loans 530 (57) Deferred loan fees (costs), net (324,915) (206,978) Allowance for loan losses 75,673 75,673 ----------- ----------- Loans receivable, net $41,153,338 $36,180,396 =========== ===========
Loans secured by one to four family residential properties include second mortgage loans on properties for which the Association holds the first mortgage. The proceeds on these second mortgage loans were used for improvements and consumer purposes. Second mortgage loan balances at June 30, 1998 and 1997 were approximately $974,000 and $1,065,000, respectively. As a savings and loan institution, the Association has a credit concentration in residential real estate mortgage loans. Substantially all of the Association's customers are located in its trade area of Etowah, Marshall, and Cherokee Counties in Alabama. Although the Association has generally conservative underwriting standards, including a collateral policy calling for low loan to collateral values, the ability of its borrowers to meet their residential mortgage obligations is dependent upon local economic conditions. In the normal course of business, loans are made to officers, directors, and employees of the Company and the Association. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others. As of June 30, 1998 and 1997, $395,768 and $442,792, respectively, of these loans were outstanding. During fiscal 1998, $441,859 of new loans were made and repayments totaled $488,883. 32 An analysis of the Company's allowance for loan losses is as follows:
For the Years Ended June 30, ----------------------------------------- 1998 1997 1996 ------------ ----------- ------------ Balance, beginning of year $75,673 $78,070 $80,000 Provision for loan losses 0 0 0 Charge-offs, net of recovery 0 (2,397) (1,930) --------- -------- --------- Balance, end of year $75,673 $75,673 $78,070 ========= ======== =========
At June 30, 1998, nonaccrual loans totaled approximately $11,000. The Association did not have any loans on nonaccrual status at June 30, 1997. Interest income foregone on nonaccrual loans was not significant for fiscal years 1998 and 1997. 11. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
June 30, ------------------------------- 1998 1997 -------------- ------------ Land $ 170,085 $ 170,085 Building and improvements 250,623 244,773 Leasehold improvements 57,050 50,652 Furniture, fixtures, and equipment 538,482 519,918 ---------- --------- 1,016,240 985,428 Less accumulated depreciation (764,867) (718,691) ---------- --------- $ 251,373 $ 266,737 ========== =========
Depreciation expense charged to office building and equipment expense in 1998, 1997, and 1996, totaled approximately $46,000, $48,000, and $63,000, respectively. 33 12. DEPOSITS Deposits are summarized as follows:
JUNE 30, 1998 June 30, 1997 --------------------------- ------------------------ AMOUNT PERCENT AMOUNT PERCENT ------------ ------------- ----------- ----------- Demand, NOW, and Money Market accounts, including noninterest bearing deposits of $171,064 and $217,814 at June 30, 1998 and June 30, 1997, respectively $ 8,277,383 9.63% $ 7,425,269 8.56% Passbook savings 5,198,093 6.05 5,213,413 6.01 ----------- ------ ----------- ------ 13,475,476 15.68 12,638,682 14.57 Certificates of deposit: 2.00- 4.00% 310,238 .36 326,059 .37 4.01- 6.00% 68,464,845 79.68 62,271,432 71.78 6.01- 8.00% 3,553,214 4.14 11,403,980 13.14 8.01- 10.00% 122,061 .14 118,560 .14 ----------- ------ ----------- ------ 72,450,358 84.32 74,120,031 85.43 ----------- ------ ----------- ------ $85,925,834 100.00% $86,758,713 100.00% ----------- ------ ----------- ------
The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was $10,659,343 and $8,026,770, at June 30, 1998 and 1997, respectively. Scheduled maturities of certificates of deposit at June 30, 1998 are as follows:
YEAR ENDING JUNE 30, ----------------------------------------------------------------------------------- 1999 2000 2001 2002 TOTAL ----------------- -------------- -------------- ------------- ------------- 2.00- 4.00% $ 200,291 $ 93,947 $ 16,000 $ 0 $ 310,238 4.01- 6.00 47,328,010 12,711,482 5,577,832 2,847,521 68,464,845 6.01- 8.00 2,544,358 517,224 44,316 447,316 3,553,214 8.01- 10.00 4,000 7,118 110,943 0 122,061 ------------- ------------- ------------ ------------ ------------- Total $50,076,659 $13,329,771 $5,749,091 $3,294,837 $72,450,358 ============= ============= ============ ============ =============
Interest expense on deposits consisted of the following:
For the Years Ended June 30, ------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------- Passbook savings $ 149,106 $ 228,747 $ 292,124 NOW accounts 240,356 158,914 255,133 Certificates of deposit 4,129,114 4,146,176 4,131,989 ---------- ---------- ---------- $4,518,576 $4,533,837 $4,679,246 ========== ========== ==========
34 13. INCOME TAXES The provision (benefit) for income taxes for the periods indicated is summarized as follows:
For the Years Ended June 30, ------------------------------------------------- 1998 1997 1996 ------------- ------------- -------------- Current Provision: Federal $216,746 $ 164,392 $222,637 State 29,130 20,787 26,274 ---------- ----------- ----------- 245,876 185,179 248,911 Deferred provision (benefit) 31,167 (105,788) 44,747 ---------- ----------- ----------- $277,043 $ 79,391 $293,658 ========== =========== ===========
The differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate of 34% to income before taxes were as follows:
For the Years Ended June 30, ------------------------------------------ 1998 1997 1996 ------------ ---------- ------------- Pretax income at statutory rates $273,142 $75,487 $295,369 Add (deduct): State income tax, net of federal tax benefit 21,494 6,022 20,599 Other, net (17,593) (2,118) (22,310) ---------- --------- ------------ $277,043 $79,391 $293,658 ========== ========= ============ Effective income tax rate 35% 36% 34% ========== ========= ============
The net deferred tax liability was included in Taxes payable in the accompanying consolidated statements of financial condition at June 30, 1998 and 1997. The components of the net deferred tax asset or liability at June 30, 1998 and 1997 were as follows:
June 30, ----------------------------- 1998 1997 ------------- ------------- Unrealized net loss on securities available for sale $ 0 $ 35,980 Amortization of intangible 53,291 36,854 Employee benefit plans 119,612 80,511 Depreciation 1,715 3,044 Other 11,200 13,252 ---------- ---------- Deferred tax asset 185,818 169,641 ---------- ---------- Unrealized net gain on securities available for sale (29,129) 0 FHLB stock dividend (57,869) (57,869) Bad debt reserve, net (41,648) (80,637) Accretion of discount on securities (139,800) (92,657) Deferred loan fees and costs, net (123,468) (45,561) Other (6,921) (9,658) ---------- ---------- Deferred tax liability (398,835) (286,382) ---------- ---------- Net deferred tax liability $(213,017) $(116,741) ========== ==========
35 Thrift institutions, in determining taxable income, were historically allowed special bad debt deductions based on specified experience formulae or on a percentage of taxable income before such deductions. The bad debt deduction based on the latter was gradually reduced to 8%, when in August 1996, Congress passed the Small Business Job Protection Act that, among other things, repealed the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. As a result, thrifts began recapturing into taxable income the amount of their post-1987 tax bad debt reserves over a six-year period beginning after 1995. At June 30, 1998, the Association's post-1987 tax bad debt reserve, subject to recapture, was approximately $185,000. The Association recaptured approximately $103,000 of this reserve into taxable income in the current year. The recapture did not have any effect on the Association's net income because the related tax expense has already been accrued. Because of such repeal, thrifts such as the Association may only use the same tax bad debt reserve that is allowed for banks. Accordingly, a thrift with assets of $500 million or less may only add to its tax bad debt reserves based upon its moving six-year average experience of actual loan losses (i.e., the experience method). The portion of a thrift's tax bad debt reserve that is not recaptured under the provisions above is only subject to recapture at a later date under certain circumstances. These include stock repurchases redemptions by the thrift or if the thrift converts to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Association does not anticipate engaging in any transactions at this time that would require the recapture of its pre-1988 tax bad debt reserves of approximately $2.8 million. 14. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE Accrued interest and dividends receivable is summarized as follows:
June 30, ------------------------------ 1998 1997 ------------- ------------- Securities available for sale $299,919 $273,696 Securities held to maturity 241,546 303,524 Loans receivable 176,980 166,425 Interest-bearing deposits in other banks 4,579 3,255 ---------- ---------- $723,024 $746,900 ========== ==========
36 15. COMMITMENTS AND CONTINGENCIES LEASES The Company has lease agreements for its branch offices. Rental expense under these leases aggregated $16,694, $16,889, and $16,064, for fiscal years 1998, 1997, and 1996, respectively. The aggregate annual minimum rental commitments under the terms of all noncancelable leases at June 30, 1998 are as follows:
FISCAL YEAR AMOUNT --------------------- --------- 1999 $17,764 2000 8,664 2001 6,164 2002 514 2003 0 --------- $33,106 =========
OFF-BALANCE-SHEET ITEMS The Company's policies as to collateral and assumption of credit risk for off-balance sheet items are essentially the same as those for extension of credit to its customers. Generally, the only off-balance sheet exposure the Association has is its commitments to originate loans; at June 30, 1998, the Company had $729,164 in outstanding commitments to originate residential real estate loans at fixed rates between 6.75% and 10%. Additionally, at June 30, 1998, the Association had provided approximately $361,000 in unused lines of credit. LITIGATION Though Management, after consultation with legal counsel, is not aware of any litigation or claims against the Company, in the normal course of business the Company may become subject to such litigation or claims. FDIC ASSESSMENT The deposits of the Association are currently insured by the Savings Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund that covers the deposits of state and national banks and certain state savings banks, are required by law to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved the required reserve rate, and, as discussed below, during the prior year the FDIC reduced the average deposit insurance premium paid by BIF-insured banks to a level substantially below the average premium paid by savings institutions. 37 Banking legislation was enacted September 30, 1996 to eliminate the premium differential between SAIF-insured institutions and BIF-insured institutions. The FDIC Board of Directors established a special assessment necessary to recapitalize the SAIF at 65.7 basis points of SAIF assessable deposits held by affected institutions as of March 31, 1995. Based upon its level of SAIF deposits as of March 31, 1995, the Association paid a special assessment of approximately $591,000 during the year ended June 30, 1997. Upon recapitalization of the SAIF, premiums paid by SAIF-insured institutions were reduced. The legislation also provides for the merger of the BIF and the SAIF, with such merger being conditioned upon the prior elimination of the thrift charter. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the FASB issued SFAS No. 107, Disclosures About Fair Value of Financial Instruments. SFAS No. 107 requires all entities to disclose the fair value of financial instruments (both assets and liabilities recognized and not recognized in the statements of financial condition) for which it is practicable to estimate the fair value, except those financial instruments specifically excluded by the Statement. Financial instruments are defined as cash, evidence of ownership in an entity, contracts that convey either a right to receive cash or other financial instrument or an obligation to deliver cash or other financial instruments, or contracts that convey the right or obligation to exchange financial instruments on potentially favorable or unfavorable terms. This disclosure should include the methods and assumptions used to estimate the fair value of a financial instrument or a class of financial instruments as well as why it is not practicable to estimate the fair value. This statement was adopted by the Company for fiscal year 1997 as was required for entities with assets of less than $150 million. The Company has a variety of financial instruments which include items recorded on the consolidated statement of financial condition and items which, by their nature, are not recorded on the consolidated statement of financial condition. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. In cases where quoted market prices are not available, fair values have been estimated using present value or other valuation techniques. These methods are highly sensitive to the assumptions used by management, such as those concerning appropriate discount rates and estimates of future cash flows. Different assumptions could significantly affect the estimated fair value amounts presented below. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instrument. Further, assets that are not financial instruments are not included in the following table. Accordingly, the aggregated estimated fair value amounts presented do not represent the underlying value of the Company. 38 This table summarizes the Company's disclosure of fair values of financial instruments made in accordance with the requirements of SFAS No. 107:
AT JUNE 30, 1998 At June 30, 1997 ----------------------------- ---------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value ------------ -------------- ----------- --------------- (Dollars in thousands) ASSETS: Cash on hand and in banks $ 6,422 $ 6,422 $ 5,807 $ 5,807 Securities--AFS 22,239 22,239 17,621 17,621 Securities--HTM 34,077 34,811 44,157 44,250 Loans receivable, net 41,153 42,033 36,180 36,006 LIABILITIES: Deposits 85,926 86,338 86,759 87,069 Other liabilities and borrowed funds 120 120 119 119
The following methods and assumptions were used by the Company in estimating the fair values provided above: CASH AND CASH EQUIVALENTS The carrying value of highly liquid instruments, such as cash on hand and cash equivalents are considered to approximate their fair value. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Substantially all of the Company's securities available for sale have a readily determinable fair value. Fair values for these securities are based on quoted market prices, where available. If not available, fair values are based on market prices of comparable instruments. The carrying value of accrued interest on these instruments approximates fair value. LOANS RECEIVABLE, NET For loans with rates which are repriced in coordination with movements in market rates and with no significant change in credit risk, fair value estimates are based on carrying values. The fair values for certain mortgage loans are based on quoted market prices of similar loans sold in conjunction with securitizing transactions, adjusted for differences in loan characteristics. The fair values of other loans are estimated by discounting future cash flows using current rates at which loans with similar terms would be made to borrowers of similar credit ratings. The carrying amount of accrued interest on loans approximates fair values. 39 DEPOSITS The fair value of deposits with no stated maturity, such as interest and non-interest demand deposits, NOW accounts, savings accounts, and money market accounts, is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow analysis that applies rates currently offered for certificates of similar remaining maturities. The carrying amount of accrued interest payable on deposits approximates its fair value. OTHER LIABILITIES AND BORROWED FUNDS The carrying amount of accrued interest payable and advance payments by borrowers approximates its fair value. OFF-BALANCE-SHEET INSTRUMENTS Off-balance-sheet financial instruments include commitments to extend credit. The fair value of such commitments is negligible since the arrangements are at current rates, are for short periods, and there is no known credit exposure. 40 17. PARENT COMPANY FINANCIAL STATEMENTS Separate condensed financial statements of The Southern Banc Company, Inc. (the "Parent Company") as of and for the years ended June 30, 1998 and 1997 are presented below: STATEMENT OF FINANCIAL CONDITION JUNE 30, 1998 AND 1997 (DOLLAR AMOUNTS IN THOUSANDS)
1998 1997 ----------- ---------- ASSETS: Cash and cash equivalents $ 1,860 $ 2,128 Investment in subsidiary 15,953 14,895 ESOP loan receivable 826 932 Other assets 44 50 --------- --------- Total assets $18,683 $18,005 ========= ========= LIABILITIES: Other liabilities $ 113 $ 74 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock 0 0 Common stock 15 15 Paid-in capital 13,676 13,642 Retained earnings 9,433 9,253 Unearned compensation (1,602) (1,917) Treasury stock (3,000) (3,000) Unrealized gain (loss) on securities available for sale, net 48 (62) --------- --------- Total stockholders' equity 18,570 17,931 --------- --------- Total liabilities and stockholders' equity $18,683 $18,005 ========= =========
41 STATEMENT OF INCOME FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 (DOLLAR AMOUNTS IN THOUSANDS)
1998 1997 ---------- --------- INCOME FROM SUBSIDIARY: Dividends $ 0 $1,000 Interest 142 165 -------- -------- Total income 142 1,165 OPERATING EXPENSE 128 110 -------- -------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS 14 1,055 INCOME TAXES 3 14 -------- -------- INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS 11 1,041 DISTRIBUTIONS (OVER) UNDER CURRENT YEAR SUBSIDIARY EARNINGS 532 (899) -------- -------- Net income $ 543 $ 142 ======== ========
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 (DOLLAR AMOUNTS IN THOUSANDS)
1998 1997 ---------- --------- OPERATING ACTIVITIES: Net income $ 543 $ 142 Distributions over (under) current year subsidiary earnings (532) 899 -------- -------- 11 1,041 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in other assets 6 1 Increase (decrease) in other liabilities 39 (631) -------- -------- Net cash provided (used in) operating activities 56 411 -------- -------- INVESTING ACTIVITIES: Net cash provided by investing activities 0 0 -------- -------- FINANCING ACTIVITIES: Capital contributions to subsidiary (145) (68) Capital contributions to plan trust (22) (46) Payments received on ESOP loan 106 95 Proceeds from exercise of stock options 100 6 Purchase of treasury stock 0 (2,042) Dividends paid (363) (591) -------- -------- Net cash used in financing activities (324) (2,646) -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (268) (2,235) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,128 4,363 -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $1,860 $ 2,128 ======== ========
42 CORPORATE INFORMATION Directors: James B. Little, Jr. Chairman of the Board, President and Chief Executive Officer of the Company and the Association Craig G. Cantrell Retired Thomas F. Dowling Dentist Gadsden, Alabama Grady Gillam Retired W. Roscoe Johnson, III Partner in law firm of Inzer, Haney, Johnson & McWhorter, P.A. Gadsden, Alabama Rex G. Keeling, Jr. Property/Casualty Salesman with Insurance Facilities Gates Little Executive Vice President of the Company and the Association Fred Taylor Owner of Taylor Realty Albertville, Alabama Officers: James B. Little, Jr. President and Chief Executive Officer of the Company and the Association Gates Little Executive Vice President of the Company and the Association Rodney Rich Vice President of the Association Martha Stewart Secretary of the Association Janice Stephens Comptroller of the Association Teresa Elkins Vice President of the Association Officers (continued): Peggy Smith Secretary of the Company and Treasurer of the Association Martha Garrett Vice President of the Association Main Office: 221 S. 6th Street Gadsden, Alabama Branch Offices: 202 Sand Mountain Drive Albertville, Alabama 395 Gunter Avenue Guntersville, Alabama 390 W. Main Street Centre, Alabama Independent Auditor: Arthur Andersen LLP Birmingham, Alabama General Counsel: Inzer, Haney, Johnson & McWhorter, P.A. Gadsden, Alabama Securities and Regulatory Counsel: Housley Kantarian & Bronstein, P.C. 1220 19th Street, NW, Suite 700 Washington, D.C. Annual Stockholders Meeting: November 12, 1998 - 5:00 p.m. First Federal Savings and Loan Association of Gadsden 221 S. 6th Street Gadsden, Alabama Record Date - September 25, 1998 ================================================================================ ================================================================================ THE SOUTHERN BANC COMPANY, INC. 221 SOUTH 6TH STREET . GADSDEN, ALABAMA 35901 . (205) 543-3860 EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent - ------ The Southern Banc Company, Inc. State or Other Percentage Subsidiaries (1) Jurisdiction of Incorporation Ownership - ---------------- ----------------------------- --------- First Federal Savings and Loan United States 100% Association of Gadsden First Service Corporation (2) Alabama 100% - ------------------------- (1) The assets, liabilities and operations of the subsidiaries are included in the consolidated financial statements contained in the financial statements attached hereto as an exhibit. (2) Prior to July 1998, First Service Corporation had been a wholly owned subsidiary of the Association EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-KSB, into Southern Banc Company's previously filed Registration Statement File No. 333-3546. /s/ Arthur Andersen LLP Birmingham, Alabama September 23, 1998 EX-27 7 EXHIBIT 27
9 YEAR JUN-30-1998 JUN-30-1998 1,171 5,250 0 0 22,239 34,077 34,811 41,229 76 105,087 85,926 0 592 0 0 0 15 18,555 105,087 3,081 4,046 291 7,418 4,519 4,519 2,899 0 0 2,171 820 820 0 0 543 0.51 0.49 2.80 11 0 0 0 76 0 0 76 76 0 0
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