<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission Number: 0-23751
SOUTHBANC SHARES, INC.
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(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C>
Delaware 58-2361245
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
907 N. Main Street, Anderson, South Carolina 29621-5526
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 225-0241
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
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(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained herein, and will not be
contained, to the best of registrant's knowledge, in any definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
As of December 18, 1998, there were issued and outstanding 3,619,051 shares
of the Registrant's Common Stock. The registrant's voting stock is traded over-
the-counter and is listed on the Nasdaq National Market under the symbol "SBAN."
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based on the closing sales price of the Registrant's common stock as
quoted on the Nasdaq National Market on December 18, 1998 of $18.75, was
approximately $67.9 million. For the purposes of this calculation, officers and
directors of the registrant are considered nonaffiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III).
3. Current Report on Form 8-K filed on May 26, 1998, as amended on June 3,
1998 (Part II, Item 8).
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This report contains certain "forward-looking statements" concerning the
future operations of SouthBanc Shares Inc. Forward-looking statements are used
to describe future plans and strategies, including expectations of future
financial results. Management's ability to predict results or the effect of
future plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in the
market area in which SouthBanc Shares Inc. operates, as well as nationwide,
Southbanc Shares Inc.'s ability to control costs and expenses, competitive
products and pricing, loan delinquency rates, changes in federal and state
legislation and regulation, and the impact of Year 2000 issues. These factors
should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements.
PART I
ITEM 1. BUSINESS
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GENERAL
SouthBanc Shares, Inc. ("Company"), a Delaware corporation, was organized
on November 6, 1997 for the purpose of becoming the holding company for
Perpetual Bank, A Federal Savings Bank ("Savings Bank") upon the Savings Bank's
reorganization as a wholly owned subsidiary of the Company resulting from the
conversion of SouthBanc Shares, M.H.C., Anderson, South Carolina ("MHC"), from a
federal mutual holding company to a stock holding company ("Conversion and
Reorganization"). The Conversion and Reorganization was completed on April 14,
1998. In connection with the Conversion and Reorganization, the Company issued
2,281,312 shares of its common stock at $20.00 per share and each share of
common stock of the Savings Bank issued and outstanding at September 30, 1997
and held by persons other than the MHC ("Savings Bank Public Stockholders") were
exchanged for 2.85164 shares of common stock of the Company (with cash issued in
lieu of fractional shares at the rate of $20.00 per share). The Company has not
engaged in any significant activity other than holding the stock of the Savings
Bank. Accordingly, the information set forth in this report, including
financial statement and related data, relates primarily to the Savings Bank.
The Savings Bank is primarily engaged in the business of attracting
deposits from the general public and originating mortgage loans, which are
secured by one- to four-family residential properties, or investing in mortgage-
backed securities. To a lesser extent, the Savings Bank originates loans
secured by commercial real estate as well as commercial business and consumer
loans. The Savings Bank's savings accounts are insured up to the applicable
limits by the Federal Deposit Insurance Corporation ("FDIC") through the Savings
Association Insurance Fund ("SAIF"). The Savings Bank is a member of the
Federal Home Loan Bank ("FHLB") System. The Savings Bank conducts its
operations through its main office located at 907 N. Main Street, Anderson,
South Carolina, and four branch offices located in Anderson. The telephone
number of the main office is (864) 225-0241.
MARKET AREA
The Savings Bank considers Anderson and Oconee Counties, South Carolina, as
its primary market area. Additional loan origination demand is generated from
customers living in contiguous counties. The Savings Bank also purchases loans
secured by properties in South Carolina located outside its primary market area.
Anderson County is included in the Greenville/Spartanburg metropolitan
statistical area. The Cities of Greenville and Spartanburg are located 30 and
60 miles northeast of Anderson, respectively, and Atlanta, the closest major
city, is 120 miles to the southwest. Much of Anderson County is rural and
roughly half of the land area is used for agricultural purposes. Anderson
County has benefitted from the growth of the Greenville metropolitan area and
is experiencing significant residential and commercial development along
Interstate 85, a major transportation route that crosses through Anderson
County. Major area employers include BMW Manufacturing Corp., Hoechst
Celenese Corporation, Owens Corning and Michelin Tire. Oconee is a smaller
but rapidly growing county located west of Anderson County.
LENDING ACTIVITIES
GENERAL. Historically, the Savings Bank's principal lending activity has
been the origination of residential real estate loans for the purpose of
constructing or financing one- to four-family residential properties. In recent
periods, the Savings Bank has increased its investment in commercial real estate
loans, commercial business loans and construction loans.
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LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Savings Bank's loan portfolio at the dates indicated.
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<CAPTION>
At September 30,
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1998 1997 1996 1995 1994
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family(1)......... $131,117 59.63% $118,279 66.16% $ 91,186 64.78% $ 81,226 69.70% $ 77,624 74.03%
Multi-family................... 1,290 0.59 1,245 0.70 1,010 0.72 630 0.54 -- --
Commercial real estate......... 33,779 15.36 26,976 15.09 17,009 12.08 7,355 6.31 5,158 4.92
Construction................... 33,747 15.35 17,145 9.59 19,509 13.86 11,523 9.89 7,159 6.83
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans...... 199,933 90.93 163,645 91.54 128,714 91.44 100,734 86.44 89,941 85.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business loans...... 11,155 5.06 7,182 4.02 5,529 3.93 3,657 3.13 1,222 1.17
Consumer loans:
Home equity and second
mortgage..................... 2,122 0.97 3,405 1.90 5,036 3.58 7,535 6.47 10,071 9.60
Lines of credit............... 11,538 5.25 9,156 5.12 6,713 4.77 6,279 5.39 6,045 5.77
Automobile loans.............. 5,366 2.44 3,540 1.98 2,677 1.90 1,438 1.23 735 0.70
Other......................... 3,815 1.73 3,072 1.72 2,490 1.77 2,293 1.97 1,837 1.75
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans...... 22,841 10.39 19,173 10.72 16,916 12.02 17,545 15.06 18,688 17.82
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............... 233,929 106.38 190,000 106.28 151,159 107.39 121,936 104.63 109,851 104.77
-------- ------
Less:
Undisbursed proceeds for loans
in process.................... 11,886 (5.18) 8,985 (5.03) 8,866 (6.30) 4,119 (3.53) 4,037 (3.85)
Unearned discounts............. 273 (0.12) 357 -- -- -- -- -- -- --
Allowance for loan losses...... 2,374 (1.08) 1,886 (1.05) 1,535 (1.09) 1,278 (1.10) 962 (0.92)
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable...... $219,896 100.00% $178,772 100.00% $140,758 100.00% $116,539 100.00% $104,852 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
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</TABLE>
(1) Includes construction loans converted to permanent loans and
participation loans.
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ONE- TO FOUR-FAMILY AND MULTI-FAMILY MORTGAGE LOANS. The Savings Bank
originates permanent conventional mortgage loans secured by one- to four-family
residential properties with original loan-to-value ratios up to 90% of the
appraised value or the purchase price of the property, whichever is less. At
September 30, 1998, the Savings Bank had $131.1 million, or 59.63% of total
loans, in one- to four-family mortgage loans. The Savings Bank requires hazard
insurance on the property securing the loan. All one- to four-family mortgage
loans require a title examination or abstract of title. Title insurance is
required on all fixed-rate mortgage loans so that they may be sold in the
secondary market. One- to four-family mortgage loans are generally underwritten
to conform to Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. Loan
to value ratios are limited to 80% but may be increased to 95%, provided that
private mortgage insurance coverage is obtained for amounts over 80%.
The Savings Bank offers both fixed-rate mortgages and adjustable rate
mortgage ("ARM") loans with terms of 15 to 30 years. At September 30, 1998, ARM
loans totaled $64.9 million, or 49.5% of the one- to four-family loan portfolio.
The Savings Bank offers four conventional ARM loans: a one year ARM loan with
annual adjustment periods indexed to the One Year Treasury Bill; a three year
ARM loan with annual adjustment periods indexed to the Three Year Treasury Bill;
a five year ARM loan with annual adjustment periods indexed to the One Year
Treasury Bill; and a ten year ARM loan with annual adjustment periods indexed to
the One Year Treasury Bill. The one year ARM loan and the three year ARM loan
provide that the amount of any increase or decrease in the interest rate is
limited to two percentage points (upward or downward) per adjustment period and
generally contain a 6% maximum adjustment over the life of the loan. The five
year ARM loan and the ten year ARM loan provide that the amount of any increase
or decrease in the interest rate is limited to two percentage points (upward or
downward) per adjustment period and generally contain a 5% maximum adjustment
over the life of the loan. At September 30, 1998, the majority of the ARM loans
in the Savings Bank's portfolio, that were originated by the Savings Bank, were
the three year and five year varieties. If market interest rates increase,
these rate adjustment limitations may prevent such ARM loans from repricing to
market interest rates, which would have an adverse effect on net interest
income. Borrower demand for ARMs versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the interest rates and loan fees for
fixed-rate mortgage loans and interest rates and loan fees for ARMs. Fixed-rate
loans are originated for sale in the secondary market, though loans with terms
of 15 years occasionally are retained in the Savings Bank's portfolio. The
relative amount of fixed-rate and ARM loans that can be originated at any time
is largely determined by the demand for each in the prevailing competitive
environment.
In recent periods, the Savings Bank has purchased one- to four-family
mortgage loans from a mortgage banking company located in Hilton Head Island,
South Carolina, and a mortgage banking company located in Greenville, South
Carolina. These purchases account for a substantial portion of the growth in
the one- to four-family loan portfolio in recent periods. During the year ended
September 30, 1998, the Savings Bank purchased $47.8 million of one- to four-
family mortgage loans. Substantially all of these purchases were from the
Greenville mortgage company. In future periods, the Savings Bank expects that a
substantial portion of purchased loan volume will come from that company,
rather than the Hilton Head Island mortgage company, because of the increasing
competition in the Hilton Head Island market.
At September 30, 1998, the Savings Bank had $2.7 million of purchased
loans secured by residential properties on Hilton Head Island, South Carolina,
all of which were one year ARM loans. These loans were all purchased from the
same mortgage company, located on Hilton Head Island. Prior to purchase, the
Savings Bank reviews each loan for conformance to the Savings Bank's
underwriting criteria. At September 30, 1998, the average size of such loans
was approximately $224,000 and the largest loan had an outstanding balance of
$662,000. Although all such loans were performing according to their terms at
September 30, 1998, they do possess certain risks due to the average size of
such loans and the location of the properties outside the Savings Bank's primary
market area. Subject to market conditions, the Savings Bank expects to purchase
additional such loans.
At September 30, 1998, the Savings Bank had $27.8 million of purchased
one- to four-family mortgage loans secured by residential properties located
primarily in Greenville, South Carolina. These loans were all purchased from
the mortgage company in which a service corporation subsidiary of the Savings
Bank has an equity
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investment. See "-- Subsidiary Activities." Prior to purchase, the Savings
Bank reviews each loan for conformity with the Savings Bank's underwriting
criteria. At September 30, 1998, the average size of such loans was
approximately $125,000. Subject to market conditions, the Savings Bank
expects to purchase additional such loans.
The Savings Bank does not actively solicit multi-family loans but
extends them as an accommodation to existing customers. At September 30, 1998,
multi-family loans totaled $1.3 million, or 0.59% of net loans receivable, and
consisted of eight loans, the largest of which had an outstanding balance of
$272,000. All such loans are secured by properties located in the Savings
Bank's primary market area. At September 30, 1998, all multi-family loans were
performing according to their terms.
CONSTRUCTION LOANS. The construction loan portfolio was $33.7
million, or 15.35% of the total loan portfolio at September 30, 1998. The
Savings Bank intends to continue emphasizing and expanding this type of lending.
Such loans are primarily combined construction and permanent mortgage loans.
The construction portion of the loan is for a period of up to 12 months on an
interest only basis and at a maximum loan to value ratio of 95%. The permanent
mortgage is made for up to 30 years. Construction-permanent loans are made at
the same fixed- or adjustable-rates of interest that are offered for permanent
residential mortgage loans made by the Savings Bank. The majority of
construction loans are made against binding sales contracts for the home being
built. The Savings Bank also originates speculative construction loans to a
small number of residential builders in its primary market area well known to
the Savings Bank. At September 30, 1998, the Savings Bank had $33.7 million, or
15.35% of total loans, in construction loans, of which $15.5 million were
speculative constructive loans and of which $1.3 million are purchased
speculative construction loans secured by one- to four-family properties located
on Hilton Head Island, South Carolina. The purchased Hilton Head construction
loans were purchased in prior years. The Savings Bank did not purchase any
Hilton Head construction loans during the fiscal year ended September 30, 1998.
Construction lending generally is considered to involve a higher
degree of credit risk than long-term financing of residential properties. The
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction cost and the marketability of the property upon
completion of the project prove to be inaccurate, the Savings Bank may be
compelled to advance additional funds to complete the development. If the
borrower is unable to sell the completed project in a timely manner or obtain
adequate proceeds to repay the loan, the loan may become non-performing.
Furthermore, if the estimate of value proves to be inaccurate, the Savings Bank
may be confronted with, at or prior to the maturity of the loan, a project with
a value which is insufficient to assure full repayment. The ability of the
developer or builder to sell developed lots or completed dwelling units will
depend on, among other things, demand, pricing and availability of comparable
properties, and economic conditions.
The Savings Bank's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Among other things, the Savings
Bank considers evidence of the availability of permanent financing for the
borrower, the reputation of the borrower, the amount of the borrower's equity in
the project, the independent appraisal and review of cost estimates, the pre-
construction sale and leasing information, and the cash flow projections of the
borrower. In addition, except for the purchased construction loans on Hilton
Head Island, South Carolina, the majority of the construction loans granted by
the Savings Bank are secured by property in the Savings Bank's primary market
area. The Savings Bank reviews such purchased construction loans for conformity
with the Savings Bank's underwriting criteria before purchase.
COMMERCIAL REAL ESTATE LOANS. The Savings Bank originates and
purchases commercial real estate loans. Commercial real estate loans totaled
$33.8 million, or 15.4% of the total loan portfolio, at September 30, 1998.
Currently, the Savings Bank originates commercial real estate loans only to
select borrowers known to the Savings Bank and secured by properties in its
primary market area and generally in amounts between $100,000 and $500,000. The
commercial real estate loan portfolio has increased in recent periods from $27.0
million, or 15% of the total loan portfolio at September 30, 1997, to $33.8
million, or 15.36%, at September 30, 1998. The Savings Bank intends to continue
emphasizing and expanding this type of lending. At September 30, 1998, the
largest commercial real
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estate loan originated by the Savings Bank had an outstanding balance of
$1.9 million and was secured by multiple units of one- to- four family
dwellings and land located in Anderson. The loan was performing according to
its terms at that date. At September 30, 1998, the largest purchased
commercial real estate loan had an outstanding balance of $418,000 and was
secured by a commercial real estate located in Hilton Head Island, South
Carolina. The loan was performing according to its terms at that date.
Of primary concern in commercial real estate lending is the borrower's
creditworthiness and the feasibility and cash flow potential of the project.
The Savings Bank's income property collateral is not concentrated in any one
industry or area. Examples of the types of collateral securing the income
property loans include office buildings and residential rental properties.
Loans secured by income properties are generally larger and involve greater
risks than residential mortgage loans because payments on loans secured by
income properties are often dependent on successful operation or management of
the properties. As a result, repayment of such loans may be subject, to a
greater extent than residential real estate loans, to supply and demand in the
market in the type of property securing the loan and, therefore, may be subject
to adverse conditions in the real estate market or the economy. If the cash
flow from the project is reduced, the borrowers ability to repay the loan may be
impaired.
COMMERCIAL BUSINESS LOANS. At September 30, 1998, the Savings Bank
had $11.1 million of commercial business loans, which represented 5.06% of total
loans. Commercial business loans generally include equipment loans with terms
of up to five years and lines of credit secured by savings accounts and
unsecured line of credit. Such loans are generally made in amounts up to
$100,000 and carry adjustable rates of interest. The Savings Bank generally
requires annual financial statements from its commercial business borrowers and
personal guarantees if the borrower is a corporation. At September 30, 1998,
the largest outstanding commercial business loan was a $4.0 million line of
credit that was secured by residential mortgage loans. At September 30, 1998,
there was not an outstanding balance on the line of credit.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
CONSUMER LOANS. The Savings Bank originates a wide variety of
consumer loans, which are made primarily on a secured basis to existing
customers. Consumer loans include savings account loans, direct automobile
loans, direct boat loans, renewable lines of credit and unsecured loans. These
loans are made at both fixed- and variable-rates of interest, adjustable
annually, and with varying terms depending on the type of loan. In addition,
the Savings Bank offers unsecured consumer loans. Consumer loans totaled $22.8
million at September 30, 1998, or 10.39% of the Savings Bank's total loan
portfolio.
At September 30, 1998, the largest components of the consumer loan
portfolio were home equity and second mortgage loans and lines of credit. At
September 30, 1998, such loans totaled $13.7 million, or 6.2% of the total loan
portfolio. At September 30, 1998, commitments to extend credit under lines of
credit totaled $16.0 million.
Home equity and second mortgage loans are generally for the
improvement of residential properties. The majority of these loans are made to
existing loan customers and are secured by a first or second mortgage on
residential property. The Savings Bank actively solicits these types of loans
by contacting their borrowing customers directly. The loan-to-value ratio on
these properties is typically below 80%, including the first mortgage and home
equity or second mortgage loan. Home equity and second mortgage loans are
typically variable rate loans with a
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fixed payment that matures over 15 years. Rates adjust monthly; however, the
payment remains constant over the loan term and any rate adjustment is
reflected in an increase in the loan term. The interest rate is tied to the
prime lending rate.
Lines of credit are generally secured by a second mortgage on
residential property and are generally made to existing customers. Credit lines
are generally 80% of the appraised value of the collateral property. Terms
range from five to 15 years and the interest rate is generally tied to the prime
lending rate.
The Savings Bank views consumer lending as an important component of
its business operations because consumer loans generally have shorter-terms and
higher yields, thus reducing exposure to changes in interest rates. In
addition, the Savings Bank believes that offering consumer loans helps to expand
and create stronger ties to its customer base. The Savings Bank intends to
continue emphasizing this type of lending.
The Savings Bank employs strict underwriting standards for consumer
loans. These procedures include an assessment of the applicant's payment
history on other debts and ability to meet existing obligations and payments on
the proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, to the proposed loan amount. The Savings Bank
underwrites and originates all of its consumer loans internally, which
management believes limits exposure to credit risks relating to loans
underwritten or purchased from brokers or other outside sources.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower.
In addition, consumer 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. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by the
borrower against the Savings Bank as the holder of the loan, and a borrower
may be able to assert claims and defenses which it has against the seller of
the underlying collateral.
LOAN MATURITY
The following table sets forth certain information at September 30,
1998 regarding the dollar amount of loans maturing in the Savings Bank's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
<TABLE>
<CAPTION>
Within One Year After 3 Years After 5 Years
One Year Through 3 Years Through 5 Years Through 10 Years Beyond 10 Years Total
-------- --------------- --------------- ---------------- --------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage(1).. $ 7,840 $ 7,855 $13,754 $10,933 $90,735 $131,117
Commercial real estate... 11,546 7,017 14,766 580 1,160 35,069
Commercial business...... 6,211 863 3,162 919 -- 11,155
Construction............. 19,985 2,376 -- -- -- 22,361
Automobile............... 371 2,145 2,759 91 -- 5,366
Savings account loans.... 1,267 211 69 22 14 1,583
Other.................... 12,412 1,010 983 1,412 75 15,892
------- ------- ------- ------- ------- --------
Total loans......... $59,632 $21,477 $35,493 $13,957 $91,984 $222,543
======= ======= ======= ======= ======= ========
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</TABLE>
(1) Includes one- to four-family and multi-family loans.
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
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<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
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(In Thousands)
<S> <C> <C>
Residential mortgage(1).............. $58,417 $64,860
Commercial real estate............... 18,570 4,953
Commercial business.................. 2,914 2,030
Construction......................... 2,376 --
Automobile........................... 4,995 --
Savings account loans................ 316 --
Other................................ 1,484 1,996
------- -------
Total........................... $89,072 $73,839
======= =======
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</TABLE>
(1) Includes one- to four-family and multi-family loans.
LOAN SOLICITING AND PROCESSING. Loan originations come from a number of
sources. The Savings Bank's customary sources of loans are from realtors, walk-
in customers, referrals and existing customers. A formal business development
program has been implemented where loan officers and sales personnel make
regular sales calls on building contractors and realtors.
The Savings Banks' Loan Committee approves loan applications up to and
including $500,000. Loan applications in excess of $500,000 must be approved by
the full Board of Directors.
LOAN PURCHASES AND SALES AND SERVICING. The Savings Bank is an active
purchaser of loans. In recent periods, the Savings Bank has purchased ARM
loans, construction loans and lot loans secured by properties on Hilton Head
Island, South Carolina. See "-- Lending Activities -- One- to Four-Family and
Multi-Family Mortgage Loans" and "-- Lending Activities -- Construction Loans."
In addition, the Savings Bank purchases one- to four-family, commercial real
estate and construction loans from a mortgage company in which a service
corporation subsidiary of the Savings Bank has an equity investment.
Furthermore, the Savings Bank purchases periodically participation interests in
permanent real estate loans and construction loans. Any participation interest
purchased must meet the Savings Bank's own underwriting standards. The Savings
Bank purchases loans from institutions in the State of South Carolina.
The Savings Bank periodically sells one- to four-family mortgage loans to
the FHLMC in order to comply with the regulations limiting the amount of loans
to one borrower or to reduce the amount of fixed-rate loans in the Savings
Bank's portfolio. The Savings Bank generally sells all fixed-rate, 30-year
residential mortgage loans.
The Savings Bank participates in loan servicing activities both directly
and indirectly. Direct servicing activities arise in connection with loans that
the Savings Bank originates but sells with servicing rights retained. The
Savings Bank generally receives a fee payable monthly of 1/4% to 3/8% per annum
of the unpaid balance of each loan for which it retains servicing rights. At
September 30, 1998, the Savings Bank was servicing loans for others aggregating
$74.9 million. During the year ended September 30, 1998, the Savings Bank
earned servicing fee income of $208,000.
The Savings Bank participates indirectly in loan servicing activities
through its equity investment, through a service corporation subsidiary, in a
mortgage banking company (see "-- Subsidiary Activities") and through an
investment in a limited partnership. At September 30, 1998, the mortgage
banking company was servicing 420 loans for others aggregating $52.2 million.
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The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Total loans at beginning of period.. $190,000 $151,159 $121,936
-------- -------- --------
Loans originated:
One- to four-family................ 50,582 18,783 30,065
Multi-family....................... 119 240 1,312
Commercial real estate............. 12,604 11,912 7,113
Construction loans................. 17,140 10,934 12,816
Commercial business................ 7,481 10,731 6,302
Consumer........................... 20,134 24,739 10,696
-------- -------- --------
Total loans originated........... 108,060 77,339 68,304
-------- -------- --------
Loans purchased:
One- to four-family................ 47,829 23,581 18,242
Commercial real estate............. 6,226 3,146 --
-------- -------- --------
Total loans purchased............ 54,055 26,727 18,242
-------- -------- --------
Loans sold:
Total whole loans sold............. (33,684) (5,747) (9,556)
-------- -------- --------
Total loans sold................ (33,684) (5,747) (9,556)
Mortgage loan principal
repayments......................... (98,535) (59,478) (47,767)
Net loan activity................... 29,896 38,841 29,223
-------- -------- --------
Total loans at end of period........ $219,896 $190,000 $151,159
======== ======== ========
</TABLE>
EQUITY INVESTMENT IN LIMITED PARTNERSHIP. In December 1996, the
Savings Bank purchased for approximately $5.0 million a 20.625% equity interest
in a limited partnership that invests in mortgage servicing rights. Through
this limited partnership, the Savings Bank invests in servicing rights tied to a
national portfolio of residential mortgage loans. For the year ended September
30, 1998, the Savings Bank recorded a loss of $4.4 million on its investment of
the limited partnership due to recent declines in market interest rates which
impaired the value of the mortgage servicing rights in the limited partnership.
As a result, the Savings bank established an additional loss reserve of $4.5
million as of September 30, 1998 related to this limited partnership investment.
After the reserve, the book value of the investment was $825,000 at September
30, 1998. See Part IV, Item 13 of this report for further information and Note
3 of Notes to Consolidated Financial Statements. The value of the Savings
Bank's investment in the limited partnership would be adversely affected by
credit quality deterioration of the underlying mortgage loans. The value of the
investment would also be adversely affected by a change in market interest
rates. Under either circumstance, the Savings Bank may be required to
accelerate its amortization of this investment, or even write-off the full value
of the investment in a given period, which would have a material adverse effect
on the Savings Bank.
LOAN COMMITMENTS. The Savings Bank issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on specified
terms and conditions and are honored for up to 30 days from approval, depending
on the type of transaction. The Savings Bank had outstanding loan commitments
(including commitments to fund letters of credit) of approximately
$58.5 million at September 30, 1998. See Note 17 of Notes to Consolidated
Financial Statements.
-8-
<PAGE>
LOAN ORIGINATION AND OTHER FEES. The Savings Bank, in most instances,
receives loan origination fees and discount "points." Loan fees and points are
a percentage of the principal amount of the mortgage loan that are charged to
the borrower for funding the loan. The Savings Bank usually charges origination
fees of 0.5% to 1.0% on one- to four-family residential real estate loans and
1.0% to 2.0% on long-term commercial real estate loans. Current accounting
standards require fees received for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Deferred
fees associated with loans that are sold are recognized as income at the time of
sale.
The Savings Bank offsets all loan origination fees and certain related
direct loan origination costs against all fees and costs associated with loan
origination. The resulting net amount is deferred and amortized over the
contractual life of the related loans as an adjustment to the yield on such
loans, unless prepayments of a large group of similar loans are probable and the
timing and amount of prepayments can be reasonably estimated. The Savings Bank
offsets commitment fees against related direct costs and the resulting net
amount is recognized over the contractual life of the related loans as an
adjustment of yield if the commitment is exercised. If the commitment expires
unexercised, the fees collected are recognized as non-interest income upon
expiration of the commitment.
DELINQUENCIES. The Savings Bank's collection procedures provide for a
series of contacts with delinquent borrowers. After a delinquency of 15 days, a
late charge is assessed. If the delinquency continues, subsequent efforts will
be made to contact the delinquent borrower. The Savings Bank's collection
procedures provide that when a loan is 30 days overdue, and again on the 45th
day, the borrower will be contacted by mail and payment will be requested. If a
loan continues in a delinquent status for 90 days or more, the Savings Bank
generally initiates foreclosure proceedings. In certain instances, however, the
Board may decide to modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs.
The following table sets forth information with respect to the Savings
Bank's non-performing assets for the periods indicated. During the periods
shown, the Savings Bank had no restructured loans within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-
accrual basis:
Mortgage................................ $ 948 $ 220 $ 190 $ 348 $ 435
Consumer................................ 21 -- -- 124 163
Commercial.............................. 206 183 126 -- --
------ ------ ----- ----- ------
1,175 403 316 472 598
------ ------ ----- ----- ------
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential........................... -- 6 467 82 60
Consumer................................ -- 8 2 9 17
Commercial.............................. -- 465 10 -- --
------ ------ ----- ----- ------
-- 479 479 91 77
------ ------ ----- ----- ------
Total of non-accrual and
past due 90 days or more.............. 1,175 882 795 563 675
------ ------ ----- ----- ------
Real estate owned, net.................. 89 163 3 32 575
------ ------ ----- ----- ------
Total non-performing assets............. $1,264 $1,045 $ 798 $ 595 $1,250
====== ====== ===== ===== ======
Total loans delinquent 90 days
or more to net loans.................. 0.53% 0.49% 0.56% 0.48% 0.64%
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total loans delinquent 90 days
or more to total assets............... 0.32% 0.34% 0.38% 0.32% 0.39%
Total non-performing assets to
total assets.......................... 0.35% 0.41% 0.38% 0.33% 0.73%
</TABLE>
The increase in non-performing assets at September 30, 1998 resulted
primarily from an increase in non-accrual mortgage loans. At September 30,
1998, non-accrual mortgage loans consisted of three speculative residential
construction loans with an aggregate outstanding balance of $383,000, eleven
single-family residential mortgage loans with an aggregate outstanding balance
of $499,000, and two commercial real estate mortgage loans with an aggregate
outstanding balance of $66,000. All sixteen properties are located in the
Savings Bank's primary market area.
The Savings Bank does not accrue interest loans, including impaired loans
under SFAS No. 114, for which management deems the collection of additional
interest to be doubtful. If interest on these non-accrual loans had been
accrued, interest income of approximately $110,000 would have been recorded for
the year ended September 30, 1998.
ASSET CLASSIFICATION. OTS regulations require that each insured
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. "Substandard" assets must have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified "loss" is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations have also created a "special
mention" category, described as assets which do not currently expose an
insured 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 the institution to establish general allowances for loan losses. If
an asset or portion thereof is classified loss, the insured institution must
either establish specific allowances for loan losses in the amount of 100% of
the portion of the asset classified loss or charge-off such amount. A portion
of general loss allowances established to cover possible losses related to
assets classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
The aggregate amounts of the Savings Bank's classified assets and of the
Savings Bank's general and specific loss allowances and charge-offs for the
period then ended, were as follows:
<TABLE>
<CAPTION>
At or For the Years
Ended September 30,
-------------------------
1998 1997 1996
--------- ------ ------
(In Thousands)
<S> <C> <C> <C>
Loss...................... $ 56 $ 140 $ 125
Doubtful.................. 50 8 32
Substandard assets........ 1,254 1,227 598
Special mention........... -- 58 --
------ ------ ------
$1,360 $1,433 $ 755
====== ====== ======
General loss allowances... $2,318 $1,746 $1,410
Specific loss allowances.. 56 140 125
Net charge-offs........... 119 304 92
</TABLE>
REAL ESTATE OWNED. Real estate acquired by the Savings Bank as a result of
foreclosure or by deed-in- lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the fair
value
-10-
<PAGE>
of the property received. Subsequently, it is carried at the lower of its
new cost basis or fair value, less estimated selling costs. The Savings Bank
had $89,000 of real estate owned at September 30, 1998.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank's management evaluates the
need to establish allowances against losses on loans each year based on
estimated losses on specific loans when a decline in value has occurred. Such
evaluation includes a review of all loans for which full collectibility may not
be reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. The provision for loan
losses is charged against earnings in the year it is established. In recent
periods, the Savings Bank has increased the provision for loan losses in
recognition of the changing composition of the loan portfolio toward an
increased emphasis on commercial real estate loans, construction loans, and
other types of lending that carry a greater degree of credit risk than one- to
four-family mortgage lending. At September 30, 1998, the Savings Bank had an
allowance for loan losses of $2.4 million, or 1.07% of total loans. Based on
past experience and future expectations, management believes that the allowance
for loan losses is adequate at September 30, 1998.
While the Savings Bank believes it has established its existing allowance
for loan losses in accordance with generally accepted accounting principles
("GAAP"), the allowance is based on estimates which are subject to change
based upon changes in the loan portfolio and economic conditions, among other
things. Furthermore, there can be no assurance that the Savings Bank's
regulators, in reviewing the Savings Bank's loan portfolio, will not request
that the Savings Bank increase its allowance for loan losses, thereby negatively
affecting the Savings Bank's financial condition and earnings based upon
information available to the regulators at the time of their examination.
The following table sets forth an analysis of the Savings Bank's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to current
income.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period....... $1,886 $1,535 $1,278 $ 962 $ 884
------ ------ ------ ------ -----
Provision for loan losses.............. 607 655 349 362 120
Recoveries:
Residential mortgage................. -- 4 6 -- --
Consumer............................. 20 24 17 6 6
Commercial........................... 35 -- -- -- --
------ ------ ------ ------ -----
Total recoveries................... 55 28 23 6 6
------ ------ ------ ------ -----
Charge-offs:
Residential mortgage................. -- 4 18 -- 13
Consumer............................. 83 100 97 52 35
Commercial........................... 91 228 -- -- --
------ ------ ------ ------ -----
Total charge-offs.................. 174 332 115 52 48
------ ------ ------ ------ -----
Net charge-offs.................... 119 304 92 46 42
------ ------ ------ ------ -----
Allowance at end of period............. $2,374 $1,886 $1,535 $1,278 $ 962
====== ====== ====== ====== =====
Ratio of allowance to total loans
outstanding at the end of the period.. 1.07% 1.04% 1.08% 1.08% 0.92%
Ratio of net charge-offs to average
loans outstanding during the period.. 0.06% 0.18% 0.07% 0.04% 0.84%
</TABLE>
-11-
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- ------------------------------- ----------------------
AS A % % OF AS A % % OF AS A %
OF OUT- LOANS IN OF OUT- LOANS IN OF OUT-
STANDING CATEGORY STANDING CATEGORY STANDING
LOANS IN TO TOTAL LOANS IN TO TOTAL LOANS IN
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS AMOUNT CATEGORY
-------- ----------- ---------- -------- ---------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage.......... $ 851 0.50% 70% $ 766 0.60% 70% $ 726 0.71%
Commercial real estate 953 2.12 20 737 2.16 19 465 2.06
and commercial business....
Consumer...................... 570 2.50 10 383 2.00 11 344 2.03
Total allowance for
loan losses............... $2,374 1.07% 100% $1,886 1.04% 100% $1,535 1.08%
====== ==== === ====== ==== === ====== ====
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------------
1996 1995 1994
---------- ------------------------------- ----------------------------------
% OF AS A % % OF AS A % % OF
LOANS IN OF OUT- LOANS IN OF OUT- lOANS IN
CATEGORY STANDING CATEGORY STANDING CATEGORY
TO TOTAL LOANS IN TO TOTAL LOANS IN TO TOTAL
LOANS AMOUNT CATEGORY LOANS AMOUNT CATEGORY lOANS
---------- -------- ---------- --------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage.......... 72% $ 573 0.57% 83% $ 493 0.48% 51%
Commercial real estate
and commercial business.... 16 297 8.12 3 100 1.94 10
Consumer...................... 12 408 2.32 14 369 1.70 39
Total allowance for
loan losses............... 100% $1,278 1.08% 100% $ 962 0.92% 100%
=== ====== ==== === ====== ==== ===
</TABLE>
-12-
<PAGE>
INVESTMENT ACTIVITIES
The Company has made significant investments in mortgage-backed
securities, including collateralized mortgage obligations ("CMOs"). The Savings
Bank had mortgage-backed securities with an amortized cost of $73.7 million and
a market value of $73.9 million at September 30, 1998, all of which were
invested in U.S. Government agency securities, investment grade securities, and
securities guaranteed by the funding arm of the Resolution Trust Corporation
("RTC").
The Company increased its investment securities portfolio during the
fiscal year ended September 30, 1998 with the proceeds of the stock offering.
The Company purchased $6.1 million of a state municipal bond issue yielding
7.09%, callable in August 2001 and with a final maturity of February 2018, $3.2
million of bank preferred stock yielding 6.94% and $5.0 million of trust
preferred bonds yielding 8.44%.
At September 30, 1998, the Company had invested $41.8 million in CMOs
($26.8 million in U.S. Government agency issues and $15.0 million in investment
grade private issues) with an average estimated life varying from seven months
to 31 years and an average yield of 7.27%. At September 30, 1998, CMOs
consisted of Fannie Mae, Ginnie Mae and Freddie Mac issues, as well as
investment grade private issues. CMOs may be used as collateral for borrowings
and, through repayments, as a source of liquidity. Management considers CMOs to
be advantageous since they offer yields above those available for investments of
comparable credit quality and duration and qualify as thrift investments under
the qualified thrift lender ("QTL") test. See "REGULATION -- Federal Regulation
of Savings Associations -- Qualified Thrift Lender Test." At September 30,
1998, the CMO portfolio consisted of various tranches but no residuals. In
recent years, the Company has used the proceeds from the paydown of CMOs to
invest in one- to four-family and other types of lending, and expects to
continue to do so in the future, subject to market conditions.
CMOs are subject to repayment by the mortgagors of the underlying
collateral at any time. Such prepayment may subject the Savings Bank's CMOs to
yield and price volatility. To assess this volatility, the OTS requires the
Savings Bank to test annually its CMOs to determine whether they are high-risk
or non-high-risk securities. The policy established a three-part risk
measurement test for fixed-rate and a one-part test for floating-rate CMOs and
other mortgage derivative securities. Securities failing any one of the tests
are deemed to be high-risk securities. The OTS may require an institution to
dispose of one or all of the CMOs failing such tests. At September 30, 1998,
all of the Savings Bank's CMOs met the criteria established by the policy
designated as non-high-risk securities for continuing classification as suitable
investments. However, changes in interest rates may cause one or more of the
Savings Bank's CMOs to fail a stress test. The OTS may then require the Bank to
dispose of the CMOs failing the test. This may affect the classification of
such securities under SFAS No. 115.
Changes in the level of interest rates can have an adverse effect on
the mortgage-backed securities and CMO portfolio, thereby exposing the Savings
Bank to repayment risk and reinvestment risk.
-13-
<PAGE>
The following table sets forth the composition of the Savings
Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
------------ ----------- ------------ ----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. agency securities...... $ 5,706 6% $10,191 22% $ -- --%
Certificates of deposit..... -- -- -- -- 100 --
U.S. Treasury securities.... 500 1 998 2 2,395 5
Equity mutual fund.......... 994 1 -- -- -- --
Common stock - savings and
loans.................... 1,733 2 -- -- -- --
Municipal bonds............. 6,129 6 -- -- -- --
Bank preferred stock........ 3,152 3 -- -- -- --
Trust preferred bonds....... 5,028 5 -- -- -- --
Mortgage-backed securities
and CMOs................... 73,719 76 35,714 76 44,362 95
------- ---- ------- --- ------- ----------
Total....................... $96,961 100% $46,903 100% $46,857 100%
======= ==== ======= === ======= ==========
- ------------------
</TABLE>
(1) The market value of the Savings Bank's investment portfolio amounted to
$97.2 million, $47.2 million and $45.6 million at September 30, 1998, 1997,
and 1996, respectively.
The following table sets forth the maturities and weighted average yields
of the debt securities in the Savings Bank's investment securities portfolio at
September 30, 1998.
<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
--------------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- --------- -------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. agency securities...... $ -- --% $ -- --% $ -- --% $ 5,706 7.63%
U.S. Treasury securities.... 500 5.50 -- -- -- -- -- --
Equity mutual fund.......... -- -- -- -- -- -- 994 --
Common stock - savings and
loans.................... -- -- -- -- -- -- 1,733 --
Municipal bonds............. -- -- -- -- -- -- 6,129 7.09
Bank preferred stock........ -- -- -- -- -- -- 3,152 6.94
Trust preferred bonds....... -- -- -- -- -- -- 5,028 8.44
Mortgage-backed securities
and CMOs.................. -- -- -- -- -- -- 73,719 6.68
-------- -------- ------- -------
Total....................... $ 500 5.50% $ -- --% $ -- --% $96,461 6.67%
======== ======== ======= =======
</TABLE>
-14-
<PAGE>
The following table sets forth certain information with respect to
each security (other than U.S. Government and agency securities) which had an
aggregate amortized cost in excess of 10% of the Savings Bank's stockholders'
equity at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1998 1997 1996
----------------- ----------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- ------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
RTC mortgage-backed
securities.......... $ 795 $ 795 $ 889 $ 888 $ 1,447 $ 1,414
CMOs................. 41,098 41,047 21,138 21,211 34,836 33,804
------- ------- ------- ------- ------- -------
Total............. $41,893 $41,842 $22,027 $22,099 $36,283 $35,218
======= ======= ======= ======= ======= =======
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Savings Bank's funds
for lending and other investment purposes. In addition to deposits, the Savings
Bank derives funds from loan principal repayments. Loan repayments are a
relatively stable source of funds while deposit inflows and outflows may be
significantly influenced by general interest rates and money market conditions.
The Savings Bank also has access to advances from the FHLB-Atlanta. These
advances can be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or they may be used on a longer-term
basis for general business purposes. The Savings Bank has also on occasion
utilized repurchase agreements.
DEPOSIT ACCOUNTS. Local deposits are and traditionally have been the
primary source of the Savings Bank's funds for use in lending and other general
business purposes. The Savings Bank offers a number of deposit accounts,
including passbook, individual retirement accounts ("IRAs"), money market
deposits and certificate accounts currently ranging in maturity from three
months to five years. Deposit accounts vary as to terms, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit and the interest rate. From time to time, the Savings Bank
offers premiums to attract deposits. The Savings Bank is a member of an
automated teller machine network, which is available to the Savings Bank's
checking account depositors.
In recent years, the Savings Bank has offered newly authorized types
of short-term accounts and other savings alternatives that are more responsive
to changes in market rates of interest than passbook accounts and longer
maturity fixed-rate, fixed-term certificates that were the Savings Bank's
primary source of deposits prior to 1978. There has been some shifting of
deposit mix which has primarily resulted from the progressive elimination of
federally imposed rate ceilings on various types of deposits offered by
federally insured financial institutions such as the Savings Bank. The
deregulation of various federal controls on insured deposits has allowed the
Savings Bank to be more competitive in obtaining funds and has given it more
flexibility to meet the threat of net deposit outflows. The Savings Bank
reviews the interest rates offered on various savings accounts periodically so
as to remain competitive with other financial institutions in its market area.
Since early 1995, the Savings Bank has increased its core deposit base
by aggressively promoting checking accounts. At September 30, 1998, checking
account balances totaled $51.0 million.
At September 30, 1998, certificate of deposits scheduled to mature
within one year totaled $96.9 million. Although no assurances can be given,
based on past experience, the Savings Bank believes that a substantial portion
of these certificates of deposit will be renewed.
At September 30, 1998, the Savings Bank had no brokered deposits.
-15-
<PAGE>
The following table sets forth information concerning the Savings
Bank's deposits at September 30, 1998.
<TABLE>
<CAPTION>
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- ---- -------- ------ -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1.73% None Negotiable order of
withdrawal ("NOW") accounts $ 100 $ 35,796 17.23%
-- None Non-interest-bearing accounts 100 15,198 7.31
2.46 None Savings accounts 100 25,204 12.13
Certificates of Deposit
-----------------------
5.50 Within 6 months Fixed-term, fixed-rate 1,000 66,546 32.03
5.61 7 - 12 months Fixed-term, fixed-rate 1,000 30,320 14.59
5.74 13 - 36 months Fixed-term, fixed-rate 1,000 34,348 16.53
5.98 37 - 120 months Fixed-term, fixed-rate 1,000 379 0.18
-------- ------
$207,791 100.00%
======== ======
</TABLE>
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at September 30, 1998. Jumbo certificates of
deposit require minimum deposits of $100,000 and have negotiable interest rates.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
- --------------- -----------
(In Thousands)
<S> <C>
Three months or less................. $ 5,050
Over three through six months........ 3,466
Over six through twelve months....... 4,289
Over twelve months................... 4,608
-------
Total........................... $17,413
=======
</TABLE>
-16-
<PAGE>
DEPOSIT FLOW
The following table sets forth the balances of deposits in the various
types of accounts offered by the Savings Bank at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ -------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- -------- ---------- -------- -------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing................. $ 15,198 7.31% $ 3,386 $ 11,812 5.88% $ 3,464 $ 8,957 5.59%
NOW checking......................... 35,796 17.23 9,800 25,996 12.93 1,703 24,293 15.16
Regular savings accounts............. 25,204 12.13 844 24,360 12.12 1,249 23,111 14.42
Fixed-rate certificates which
mature in the year ending(1)(2):
Within 1 year...................... 96,866 46.62 (18,785) 115,651 57.53 31,881 83,770 52.28
After 1 year, but within 2 years... 32,666 15.72 15,667 16,999 8.46 1,148 15,851 9.89
After 2 years, but within 5 years.. 2,061 0.99 (4,123) 6,184 3.08 1,922 4,262 2.66
-------- ------ -------- -------- ------ ------- -------- ------
Total........................... $207,791 100.00% $ 6,789 $201,002 100.00% $41,367 $160,244 100.00%
======== ====== ======== ======== ====== ======= ======== ======
- -----------------------
</TABLE>
(1) At September 30, 1998, 1997 and 1996, jumbo certificates amounted to
$17.4 million, $18.5 million and $13.7 million, respectively.
(2) IRA accounts included in certificate balances are $19.7 million,
$18.8 million and $15.7 million at September 30, 1998, 1997 and
1996, respectively.
TIME DEPOSITS BY RATES AND MATURITIES
The following table sets forth the time deposits in the Savings Bank
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Below 3.00%.............................. $ 165 $ 194 $ --
3.00 - 5.00%............................ 1,392 2,012 4,119
5.01 - 7.00%............................ 129,629 136,400 99,182
7.01 - 9.00%............................ 407 228 582
-------- -------- --------
Total $131,593 $138,834 $103,883
======== ======== ========
</TABLE>
-17-
<PAGE>
The following table sets forth the amount and maturities of time
deposits at September 30, 1998.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------
Percent
One to Over Two Over Three Over Five of Total
Less Than Two to Three to Five to Ten Certificate
One Year Years Years Years Years Total Accounts
---------- ---------- -------- ---------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.50 - 5.00%...................... $ 1,557 $ -- $ -- $ -- $ -- $ 1,557 1.18%
5.01 - 7.00%...................... 95,248 32,600 1,532 249 -- 129,629 98.51
7.01 - 9.00%...................... 61 66 150 130 -- 407 0.31
------- ------- ------ ------ ----------- --------- --------
Total $96,866 $32,666 $1,682 $ 379 $ -- $131,593 100.00%
======= ======= ====== ====== =========== ========= ========
</TABLE>
DEPOSIT ACTIVITY
The following table sets forth the savings activities of the Savings
Bank for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1998 1997 1996
------- -------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance.......................... $201,002 $160,244 $148,709
-------- --------- ----------
Net increase (decrease) before
interest credited......................... (1,223) 32,599 4,724
Interest credited.......................... 8,012 8,159 6,811
Net increase in savings deposits........... 6,789 40,758 11,535
------- --------- ----------
Ending balance............................. $207,791 $201,002 $160,244
======== ========= =========
</TABLE>
BORROWINGS. Historically, the Savings Bank has relied on repurchase
agreements as a source of borrowings to finance the purchase of investment
securities. Funding for lending activities has been provided from deposits and
borrowings from the FHLB-Atlanta. Under repurchase agreements, the Savings Bank
"sells" securities (generally U.S. Treasury securities and federal agency
obligations and mortgage-backed securities) under an agreement to buy them back
at a specified price at a later date. Repurchase agreements are subject to
renewal, and are deemed to be borrowings collateralized by the securities sold.
The Savings Bank had no repurchase agreements outstanding at September 30, 1998.
The Savings Bank has issued retail and commercial repurchase agreements
and would consider issuing them again in the future in an appropriate interest
rate environment. Under commercial repurchase agreements, the Savings Bank
sells the investment security to broker dealers who may then loan the security
to other parties in the normal course of operations. Commercial repurchase
agreements generally mature within 90 days from the date of the transaction.
Advances from the FHLB are typically secured by the Savings Bank's
first mortgage loans. At September 30, 1998, the Savings Bank was eligible to
borrow up to $75.0 million from the FHLB-Atlanta. The Savings Bank had FHLB
advances of $56.0 million outstanding at September 30, 1998. See Note 9 of
Notes to Consolidated Financial Statements.
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The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Savings Bank is required to own capital stock in the FHLB and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the U.S. Government) provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate
and range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's net worth or
on the FHLB's assessment of the institution's creditworthiness. Under its
current credit policies, the FHLB generally limits advances to 20% of a member's
assets, and short-term borrowings of less than one year may not exceed 10% of
the institution's assets. The FHLB determines specific lines of credit for each
member institution.
The following table sets forth certain information regarding borrowings
by the Savings Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB-Atlanta advances...................................... 5.03% 6.24% 5.30%
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase.............. $20,185 $ -- $ --
FHLB-Atlanta advances....................................... 61,784 15,000 19,000
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase.............. 17,912 -- --
FHLB-Atlanta advances....................................... 40,241 23,951 12,531
Approximate weighted average rate paid on:
Securities sold under agreements to repurchase.............. 5.61% -- --
FHLB-Atlanta advances....................................... 5.54% 5.75% 5.24%
</TABLE>
COMPETITION
Anderson and Oconee Counties have a relatively large number of
financial institutions, many of which are branches of large southeast regional
financial institutions, and thus the Savings Bank faces strong competition in
the attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits and
loans has historically come from other thrift institutions, credit unions and
commercial banks located in its market area. Particularly in times of high
interest rates, the Savings Bank has faced additional significant competition
for investors' funds from short-term money market securities and other corporate
and government securities and mutual funds. The Savings Bank's competition for
loans comes principally from other thrift institutions, credit unions,
commercial banks, finance companies, mortgage banking companies and mortgage
brokers.
SUBSIDIARY ACTIVITIES
The Savings Bank had an ownership interest in three service
corporations at September 30, 1998. Under OTS regulations, the Savings Bank is
authorized to invest up to 3% of its assets in service corporations, with
amounts in excess of 2% only if used primarily for community purposes. At
September 30, 1998, the Savings Bank's net investment of approximately $2.8
million in its service corporations did not exceed this investment authority.
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<PAGE>
The Savings Bank has three service corporations: United Service
Corporation of Anderson, Inc. ("United Service"), United Investments Services,
Inc. ("United Investments") and Mortgage First Service Corporation ("Mortgage
First").
United Service is a wholly-owned subsidiary of the Savings Bank. At
September 30, 1998, United Service had assets of $2.3 million. United Service is
involved in the following residential and commercial real estate development
projects:
Perpetual Square. A 33-acre commercial development in Anderson County
purchased in January 1996 for a purchase price of $970,000. The purchase price
and infrastructure improvement costs (i.e., installation of roads, utilities,
etc.) were financed by a loan from the Savings Bank that had an outstanding
balance of $210,000 at September 30, 1998. As of September 30, 1998,
approximately fourteen acres have been sold and the Savings Bank had one loan of
$227,000 outstanding to one purchaser. In October 1997, the Savings Bank
established a branch office at this location. See "-- Properties." At
September 30, 1998, the Savings Bank's net investment in this project was
approximately $601,000.
The Meadows Development. A 99-acre residential subdivision consisting
of approximately 108 lots located in Anderson County purchased in October 1996
for a purchase price of $600,000. The purchase price and infrastructure
improvement costs were financed by a loan from the Savings Bank that had an
outstanding balance of $976,000 at September 30, 1998. The Savings Bank has
entered into a contractual agreement with the local office of a national realtor
to market the subdivision lots, and marketing began in September 1997. The
realtor has no investment in the project. As of September 30, 1998, 30 lots
were sold and the Savings Bank had outstanding loans to purchasers totaling
$403,000. At September 30, 1998, the Savings Bank's net investment in this
project was approximately $856,000.
Ashton Place Subdivision. A 24-acre multi-family housing development
consisting of 44 lots located in Anderson County purchased in January 1996 for a
purchase price of $164,000. The purchase price and infrastructure improvement
costs were financed by a loan from the Savings Bank that had been paid off as of
September 30, 1998. The lots are being developed in four phases of 11 lots
each. As of September 30, 1998, 38 lots have been sold and six lots remain
unsold in phase IV. At September 30, 1998, the Savings Bank had loans
outstanding to purchasers totaling $127,000. At September 30, 1998, the
Savings Bank's net investment in this project was approximately $123,000.
North Park. A 57-acre industrial park located in Anderson County
purchased in June 1996 at a purchase price of $248,000. The purchase price and
infrastructure improvement costs were financed by a loan from the Savings Bank
that had an outstanding balance of $94,000 as of September 30, 1998. As of
September 30, 1998, 13 acres had been sold and the Savings Bank had outstanding
loans to purchasers totaling $754,000, all of which were permanent mortgage
loans. At September 30, 1998, the Savings Bank's net investment in this project
was approximately $330,000.
United Investments, a wholly-owned subsidiary of United Service, offers
full service brokerage services. On a consolidated basis United Service and
United Investments had net income of $183,000 for the year ended September 30,
1998.
Mortgage First is a wholly-owned subsidiary of the Savings Bank. In
August 1996, Mortgage First made a $400,000 equity investment in a start-up
regional mortgage banking company known as "First Trust Mortgage Corporation of
the South" ("First Trust"), with offices in Rock Hill, Columbia, Clemson and
Greenville, South Carolina. During the year ended September 30, 1998, First
Trust closed 1,285 loans totaling $172.9 million.
The Savings Bank has purchased loans from First Trust in recent
periods. See "-- Lending Activities -- Loan Purchases and Sales and Servicing."
All loans are purchased from First Trust subject to the Savings Bank's
underwriting standards. The Savings Bank intends to purchase at least $1.8
million of loans from First Trust monthly. At September 30, 1998, the Savings
Bank's financial commitment to First Trust and its maximum exposure to share in
any losses incurred by First Trust were limited solely to the amount of its
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<PAGE>
equity investment through Mortgage First. The Savings Bank, either directly or
through Mortgage First, may undertake future additional financial commitments
that would increase its loss exposure to First Trust's operations; however,
there are no such agreements, plans or understandings at present. The Savings
Bank recorded a gain of approximately $187,000 related to First Trust's
operations for the year ended September 30, 1998. Robert W. Orr, President and
Chief Executive Officer of the Company and the Savings Bank, and Barry C.
Visioli, Senior Vice President of the Company and the Savings Bank, are
directors of First Trust.
PERSONNEL
As of September 30, 1998, the Savings Bank had 93 full-time employees
and 18 part-time employees. The employees are not represented by a collective
bargaining unit. The Savings Bank believes its relationship with its employees
are good.
REGULATION
GENERAL
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Savings Bank's mortgage documents. The Savings Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and
the FDIC to review the Bank's compliance with various regulatory requirements.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Bank and its operations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department
of the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12
FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB").
The designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Savings Bank, as
a member of the FHLB-Atlanta, is required to acquire and hold shares of capital
stock in the FHLB-Atlanta in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Atlanta. The Bank is
in compliance with this requirement with an investment in FHLB-Atlanta stock of
$3.3 million at September 30, 1998. Among other benefits, the FHLB-Atlanta
provides a central credit facility primarily for member institutions. 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 FHFB and the Board of Directors of the FHLB-
Atlanta.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
the Bank.
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<PAGE>
The Savings Bank's accounts are insured by the SAIF to the maximum
extent permitted by law. The Savings Bank pays deposit insurance premiums based
on a risk-based assessment system established by the FDIC. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the SAIF
achieving its designated reserve ratio. In connection therewith, the FDIC
reduced the assessment schedule for SAIF members, effective January 1, 1997, to
a range of 0% to 0.27%, with most institutions, including the Savings Bank,
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since January 1,
1997, SAIF members are charged an assessment of .065% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013% until the earlier
of December 31, 1999 or the date upon which the last savings association
ceases to exist, after which time the assessment will be the same for all
insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings
institution is required to maintain an average daily balance of liquid assets
(cash, certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain other
investments) equal to a monthly average of not less than a specified percentage
(currently 4.0%) of its net withdrawable accounts plus short-term borrowings.
Monetary penalties may be imposed for failure to meet liquidity requirements.
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency
is required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, has a Tier I risk-based capital ratio that
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<PAGE>
is less than 3.0% or has a leverage ratio that is less than 3.0%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At September 30, 1998, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the Savings Bank may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the Savings Bank may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the Savings Bank shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
Savings Bank shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also, beginning
three years after the date on which the savings institution ceases to be a QTL,
the savings institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB. In addition, within one
year of the date on which a savings association controlled by a company ceases
to be a QTL, the company must register as a bank holding company and become
subject to the rules applicable to such companies. A savings institution may
requalify as a QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as
a domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of
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total assets minus the sum of (i) goodwill and other intangible assets,
(ii) property used by the savings institution to conduct its business, and
(iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1998, the Savings Bank was in compliance with the QTL test.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions
that fail to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less
than 1.5% of adjusted total assets. "Tangible capital" is defined, generally, as
core capital minus any "intangible assets" other than purchased mortgage
servicing rights.
Savings associations must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
Savings Bank's assets, as
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<PAGE>
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate risk component in calculating its total capital under the risk-
based capital rule. The interest rate risk component is an amount equal to one-
half of the difference between the institution's measured interest rate risk and
2%, multiplied by the estimated economic value of the Savings Bank's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise. The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the OTS-calculated
amount. The OTS has postponed the date that the component will first be
deducted from an institution's total capital.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its capital
requirement (both before and after the proposed capital distribution). A Tier 1
savings association may make (without application but upon prior notice to, and
no objection made by, the OTS) capital distributions during a calendar year up
to 100% of its net income to date during the calendar year plus one-half its
surplus capital ratio (i.e., the amount of capital in excess of its requirement)
at the beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its requirement (both before
and after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of its
net income during the previous four quarters depending on how close the Savings
Bank is to meeting its capital requirement. Capital distributions exceeding
this amount require prior OTS approval. Tier 3 associations are savings
associations with capital below the minimum capital requirement (either before
or after the proposed capital distribution). Tier 3 associations may not make
any capital distributions without prior approval from the OTS.
The Savings Bank currently meets the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At September 30, 1998, the Savings
Bank's regulatory limit on loans to one borrower was $7.4 million. At September
30, 1998, the Savings Bank's largest aggregate amount of loans to one borrower
was $4.0 million.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings
association may establish operating subsidiaries to engage in any activity that
the savings association may conduct directly and may establish service
corporation subsidiaries to engage in certain preapproved activities or, with
approval of the OTS, other activities reasonably related to the activities of
financial institutions. When a savings association establishes or acquires a
subsidiary or elects to
-25-
<PAGE>
conduct any new activity through a subsidiary that the Savings Bank controls,
the savings association must notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
The OTS may determine that the continuation by a savings association
of its ownership control of, or its relationship to, the subsidiary constitutes
a serious risk to the safety, soundness or stability of the Savings Bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital 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, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the Savings Bank to an affiliate must be secured by
collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Savings Bank may make to such persons based, in part, on the
Savings Bank's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
COMMUNITY REINVESTMENT ACT. Savings associations are also subject to
the provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the saving association's record
in meeting the credit needs of the community serviced by the savings
association, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, such assessment is required of any savings association which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit,
-26-
<PAGE>
among other things, any director or officer of a savings and loan holding
company, or any individual who owns or controls more than 25% of the voting
shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under the
HOLA. If the Company acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which the
Bank ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Savings Bank or the Company. For additional information
regarding income taxes, see Note 11 of Notes to Consolidated Financial
Statements.
BAD DEBT RESERVE. Historically, savings institutions such as the
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings Bank's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Savings Bank's actual loss experience, or a percentage equal
to 8% of the Savings Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience, the Savings Bank generally
recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the percentage of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). For taxable years beginning
after December 31, 1995, the Savings Bank's bad debt deduction must be
determined under the experience method using a formula based on actual bad debt
experience over a period of years or, if the Savings Bank is a "large" Savings
Bank (assets in excess of $500 million) on the basis of net charge-offs during
the taxable year. The new rules allowed an institution to suspend bad debt
reserve recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal
-27-
<PAGE>
to or greater than the institutions average mortgage lending activity for the
six taxable years preceding 1996 adjusted for inflation. For this purpose, only
home purchase or home improvement loans are included and the institution can
elect to have the tax years with the highest and lowest lending activity removed
from the average calculation. If an institution is permitted to postpone the
reserve recapture, it must begin its six year recapture no later than the 1998
tax year. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be subject
to provisions of present law referred to below that require recapture of the
pre-1988 bad debt reserve in the case of certain excess distributions to
shareholders.
DISTRIBUTIONS. To the extent that the Savings Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Savings Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Savings Bank's current and accumulated earnings
and profits, distributions in redemption of stock and distributions in partial
or complete liquidation. However, dividends paid out of the Savings Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Savings Bank's bad debt reserve. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by the Savings Bank. The
Savings Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Savings Bank, whether or not an
Alternative Minimum Tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
the Company and the Savings Bank will not file a consolidated tax return, except
that if the Company or the Savings Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
STATE TAXATION
DELAWARE. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
AUDITS
There have not been any Internal Revenue Service audits of the Bank's
Federal income tax returns or audits of the Bank's state income tax returns
during the past five years.
-28-
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
The following table sets forth certain information relating to the
Savings Bank's offices as of September 30, 1998. All offices are owned by the
Savings Bank except as noted in the table.
<TABLE>
<CAPTION>
Lease
Year Owned or Square Expiration
Location Opened Leased Footage Date
- -------- -------- ------ ------- -------
<S> <C> <C> <C> <C>
Main Office:
907 N. Main Street 1979 Owned 50,000 --
Anderson, South Carolina
</TABLE>
<TABLE>
<CAPTION>
Lease
Year Owned or Square Expiration
Location Opened Leased Footage Date
- -------------------------- -------- ------ ------- -------
<S> <C> <C> <C> <C>
Branch Offices:
104 Whitehall Road 1975 Building owned 2,000 December 31, 2004, with
Anderson, South Carolina Land leased two renewal options for ten
years each
2821 South Main Street 1976 Building owned 2,500 April 30, 2000, with five
Anderson, South Carolina Land leased renewal options for five years
each
Perpetual Square 1997 Owned 2,700 --
SC Highway 81
Anderson, South Carolina
Northtowne 1994 Owned 2,800 --
3898 Liberty Highway
Anderson, South Carolina
1007 By-Pass 123 1996 Owned 2,900 --
Seneca, South Carolina
</TABLE>
The Savings Bank has an in-house computer system to process customer
records and monetary transactions, post deposit and general ledger entries and
record activity in installment lending, loan servicing and loan originations.
See the information under the caption entitled "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year 2000 Issues"
in the 1998 Annual Report to Stockholders for information regarding the
Company's Year 2000 program.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
-29-
<PAGE>
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 the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- -----------------------------------------------------------------
MATTERS
- -------
The information contained under the section captioned "Common Stock
Information" in the 1998 Annual Report to Stockholders is incorporated herein by
reference.
-30-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The information contained under the section captioned "Selected
Consolidated Financial Data" in the 1998 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The information contained in the section captioned "Market Risk and
Asset and Liability Management" in the 1998 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
(a) Financial Statements
Independent Auditors' Report*
Consolidated Statements of Financial Condition as of
September 30, 1998 and 1997
Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
The information contained in the Company's Current Report on Form 8-K
filed on May 26, 1998, as amended on June 3, 1998, is incorporated herein by
reference.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- -----------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company.
-31-
<PAGE>
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Harold A. Pickens, Jr. 65 Chairman of the Board
Robert W. "Lujack" Orr 50 President, Managing Officer and a Director
Thomas C. Hall 51 Treasurer and Chief Financial Officer
Barry C. Visioli 50 Senior Vice President
Sylvia B. Reed 58 Corporate Secretary
</TABLE>
The following table sets forth certain information regarding the executive
officers of the Savings Bank.
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Thomas C. Hall 51 Senior Vice President and Treasurer
Barry C. Visioli 50 Senior Vice President
Sylvia B. Reed 58 Corporate Secretary
- ---------------------------
</TABLE>
(1) As of September 30, 1998.
Harold A. "Drew" Pickens, Jr. is the owner of Harold A. Pickens and Sons,
Inc., with which he has been affiliated since 1956.
Robert W. "Lujack" Orr has been employed by the Savings Bank since 1974 and
has held a variety of positions, such as Senior Vice President/Funds Acquisition
and Executive Vice President, prior to assuming his current position as
President and Managing Officer on January 1, 1991. Mr. Orr is a director of
First Trust, the mortgage banking company in which a service corporation
subsidiary of the Savings Bank has an equity investment.
Thomas C. Hall has been employed by the Savings Bank since 1975 and
currently serves as Senior Vice President, Treasurer and Chief Financial Officer
responsible for areas of accounting, investments, data processing and deposits.
Barry C. Visioli has been affiliated with the Savings Bank since 1973.
Mr. Visioli serves as Senior Vice President and is responsible for Lending
Operations. Mr. Visioli is a director of First Trust, the mortgage banking
company in which a service corporation subsidiary of the Savings Bank has an
equity investment.
Sylvia B. Reed joined the Savings Bank in 1986 and currently serves as
Corporate Secretary.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
-32-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information set forth under the section captioned "Transactions with
Management" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of SouthBanc Shares, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-42517))
3.2 Bylaws of SouthBanc Shares, Inc. (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 333-42517))
10.1 Employment Agreement with Robert W. Orr (incorporated by
reference to the Company's Form 10-Q for the quarter ended
March 31, 1998)
10.2 Employment Agreement with Thomas C. Hall (incorporated by
reference to the Company's Form 10-Q for the quarter ended
March 31, 1998)
10.3 Employment Agreement with Barry C. Visioli (incorporated by
reference to the Company's Form 10-Q for the quarter ended
March 31, 1998)
10.4 1998 Stock Option Plan (incorporated by reference to the
Company's Annual Meeting Proxy Statement dated December 18, 1998)
10.5 1998 Management Development and Recognition Plan (incorporated by
reference to the Company's Annual Meeting Proxy Statement dated
December 18, 1998)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99.1 Independent Auditor's Report of KPMG Peat Marwick, LLP
(b) The Company filed a Current Report on Form 8-K on September 28, 1998 to
report the establishment of an additional loss reserve, as of September 30,
1998, with respect to an equity investment in a limited partnership that invests
in mortgage servicing rights.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHBANC SHARES, INC.
<TABLE>
<CAPTION>
<S> <C>
Date: December 29, 1998 By: /s/ Robert W. Orr
--------------------------------------
Robert W. Orr
President and Managing Officer
(Duly Authorized Representative)
</TABLE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Robert W. Orr By: /s/ Thomas C. Hall
------------------------------- ---------------------------------------
Robert W. Orr Thomas C. Hall
President and Managing Officer Senior Vice President and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: December 29, 1998 Date: December 29, 1998
By: /s/ Harold A. Pickens, Jr. By: /s/ Cordes G. Seabrook, Jr.
------------------------------- --------------------------------------
Harold A. Pickens, Jr. Cordes G. Seabrook, Jr.
Chairman of the Board Director
Date: December 29, 1998 Date: December 29, 1998
By: /s/ Martha S. Clamp By: /s/ Jim Gray Watson
------------------------------- --------------------------------------
Martha S. Clamp Jim Gray Watson
Director Director
Date: December 29, 1998 Date: December 29, 1998
By: /s/ Jack F. McIntosh By: /s/ Richard C. Ballenger
------------------------------- ---------------------------------------
Jack F. McIntosh Richard C. Ballenger
Director Director
Date: December 29, 1998 Date: December 29, 1998
By: /s/ F. Stevon Kay
-------------------------------
F. Stevon Kay
Director
Date: December 29, 1998
</TABLE>
-34-
<PAGE>
EXHIBIT 13
SOUTHBANC SHARES, INC.
1998 ANNUAL REPORT
<PAGE>
SOUTHBANC SHARES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SELECTED FINANCIAL INFORMATION............................................ 3
KEY OPERATING RATIOS...................................................... 5
LETTER TO SHAREHOLDERS.................................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 7
INDEPENDENT AUDITOR'S REPORT.............................................. 26
CONSOLIDATED BALANCE SHEETS............................................... 27
CONSOLIDATED STATEMENTS OF INCOME......................................... 28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY........................... 29
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................... 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 32
CORPORATE INFORMATION..................................................... 60
</TABLE>
1
<PAGE>
SOUTHBANC SHARES, INC.
907 NORTH MAIN STREET
ANDERSON, SOUTH CAROLINA 29621
SouthBanc Shares, Inc. ("Company"), a Delaware corporation, was organized on
November 6, 1997, for the purpose of becoming the holding company for Perpetual
Bank, A Federal Savings Bank ("Savings Bank") upon the Savings Bank's
reorganization as a wholly owned subsidiary of the Company resulting from the
conversion of SouthBanc Shares, M.H.C., Anderson, South Carolina ("MHC"), from a
federal mutual holding company to a stock holding company ("Conversion and
Reorganization"). The Conversion and Reorganization was completed on April 14,
1998. In connection with the Conversion and Reorganization, the Company issued
2,281,312 shares of its common stock at $20.00 per share and each share of
common stock of the Savings Bank issued and outstanding, and held by persons
other than the MHC were exchanged for 2.85164 shares of common stock of the
Company (with cash issued in lieu of fractional shares at the rate of $20.00 per
share).
The Company's primary business is coordinating and directing the affairs and
operations of the Savings Bank. The Savings Bank is primarily engaged in the
business of attracting deposits from the general public and originating and
purchasing mortgage loans, which are secured by one-to-four-family residential
properties, or investing in mortgage-backed securities. To a lesser but growing
extent, the Savings Bank originates loans secured by commercial real estate as
well as commercial business and consumer loans. The Savings Bank's savings
accounts are insured up to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF"). The Savings Bank is a member of the Federal Home Loan Bank ("FHLB")
System. The Savings Bank conducts its operations through its Main Office located
at 907 North Main Street, Anderson, South Carolina, four branch offices located
in Anderson, South Carolina, and one office located in Seneca, South Carolina.
The telephone number of the Main Office is 864-225-0241.
2
<PAGE>
SELECTED FINANCIAL INFORMATION
------------------------------
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Company at the dates and for
the periods indicated. This information is qualified in its entirety by
reference to the detailed information contained in the Consolidated Financial
Statements and noted thereto presented elsewhere in this report.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets $362,529 $256,993 $209,827 $178,304 $171,533
Cash and interest-bearing deposits 21,197 13,499 13,585 6,630 8,700
Investment in limited partnership (1) 825 5,004
Investment securities available for sale 23,301 11,326 2,494 800 299
Mortgage-backed securities available
for sale 73,933 35,863 43,125 46,344 50,064
Loans receivable, net 219,896 178,772 140,758 116,539 104,852
Deposits 207,791 201,002 160,244 148,709 143,380
Borrowings 76,174 15,000 16,000 8,000 10,500
Stockholders equity 74,407 30,602 29,091 18,232 14,637
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income $ 23,937 $ 18,396 $ 14,921 $ 13,543 $ 12,075
Interest expense 12,256 9,496 7,425 8,761 5,624
-------- -------- -------- -------- --------
Net interest income 11,681 8,900 7,496 4,782 6,451
Provision for loan losses 606 655 349 362 120
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 11,075 8,245 7,147 4,420 6,331
Other income 3,761 1,855 1,927 3,231 1,565
Loss reserve on limited partnership 4,500 0 0 0 0
General and administrative expenses 8,525 7,446 6,894 5,540 4,749
-------- -------- -------- -------- --------
Income before income taxes, change
in accounting method, and
extraordinary item 1,811 2,654 2,180 2,111 3,147
Income taxes 549 926 756 194 1,064
-------- -------- -------- -------- --------
Income before change in method of
accounting for income taxes 1,262 1,728 1,424 1,917 2,083
Cumulative effect of change in method
of accounting for income taxes - - - - 350
-------- -------- -------- -------- --------
Net income $ 1,262 $ 1,728 $ 1,424 $ 1,917 $ 2,433
======== ======== ======== ======== ========
</TABLE>
FOOTNOTES ON SECOND FOLLOWING PAGE
3
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on average assets (net income
divided by average assets) (4) 0.39% 0.72% 0.75% 0.92% 1.20%
Return on average assets (net income
divided by average equity) (4) 2.41 5.78 7.40 11.88 13.84
Average equity to average assets 16.04 12.54 10.16 7.7. 8.61
</TABLE>
SELECTED FINANCIAL INFORMATION (CONTINUED)
- ------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
PER SHARE DATA (2):
<S> <C> <C> <C> <C> <C>
Basic earnings per share $ 0.29 $ 0.40 $ 0.33 $ 0.45 $ 0.57
Diluted earnings per share $ 0.29 $ 0.40 0.33 0.45 0.57
Weighted average shares outstanding
Basic 4,304,591 4,293,643 4,290,580 4,289,035 4,284,355
Diluted 4,406,381 4,322,815 4,315,880 4,296,081 4,289,790
Dividends per share (3) $ 0.48 $ 0.47 $ 0.42 $ 0.37 $ 0.27
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding 3,121 2,645 2,653 2,846 2,889
Deposit accounts 32,361 31,504 26,135 21,490 16,676
Full-service offices 6 6 5 5 4
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
4
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on average assets (net income
divided by average assets) (4) 0.39% 0.72% 0.75% 0.92% 1.20%
Return on average equity (net income
divided by average equity) (4) 2.41 5.78 7.40 11.88 13.84
Average equity to average assets 16.04 12.54 10.16 7.77 8.61
Interest rate spread (difference
between yield on interest-earning
assets and average cost of
interest-
bearing liabilities for the
period (5) 3.35 3.57 3.85 3.61 3.54
Net interest margin (net interest
income as a percentage of average
interest-earning assets for the
period (5) 3.85 3.96 4.16 2.90 3.86
Dividend Payout Ratio (3) 165.58 117.39 126.32 82.68 46.91
Non-interest expense to average
assets 2.61 3.20 3.72 2.74 2.74
Average interest-earning assets to
average interest-bearing liabilities 112.57 109.36 107.69 86.56 109.36
ASSET QUALITY RATIOS:
Allowance for loan losses to total
loans at end of period 1.07 1.04 1.08 1.08 0.92
Net charge-offs to average outstanding
loans during the period 0.05 0.18 0.07 0.04 0.04
Ratio of non-performing assets to
total assets 0.34 0.20 0.38 0.33 0.73
CAPITAL RATIOS:
Average equity to average assets 16.04 12.54 10.16 7.77 8.61
</TABLE>
_____________________
(1) Represents a 20.625% equity investment in a limited partnership that
invests in mortgage servicing rights. See " --Lending Activities -- Loan
Purchases and Sales and Servicing" and Note 3 of Notes to Consolidated
Financial Statements.
(2) Per share data has been restated for 1997, 1996, 1995, and 1994 to reflect
the stock exchange ratio of 2.85164 shares of common stock of the Company
for one share of Perpetual Bank common stock established in connection with
the Conversion and Reorganization.
(3) Takes into account dividends waived by the MHC, which owned 800,000 shares
of Savings Bank stock. See Note 19. The dividend payout ratio is based only
on dividends paid to public stockholders of the Savings Bank, excluding the
shares owned by the MHC. The dividend payout ratio was 143.4%, 55.19%,
22.40%, 6.53%, and 3.71% for the years ended September 30, 1998, 1997,
1996, 1995, and 1994, respectively.
(4) Excludes the effect of the one-time change in method of accounting for
income taxes in fiscal 1994. Return on assets and return on average equity
were 1.40% and 16.16%, respectively.
(5) Excludes income on mutual funds totaling approximately $1.7 million in
fiscal 1995, which was reported as gains on sale and included in other
income.
5
<PAGE>
SouthBanc Shares, Inc.
December 18, 1998
Dear Shareholders:
While our letterhead reflects our newly formed stock holding company, SouthBanc
Shares, Inc., Perpetual Bank remains the largest, locally owned bank in Anderson
County which has provided quality service to our customers and friends since
1906. Our successful stock offering in April of 1998 raised an additional $44
million in capital in conjunction with the conversion and reorganization from
the mutual holding company structure. This additional capital was used in
conjunction with leveraged borrowings to increase total assets by year-end 141%
to $363 million from $257 million at September 1997.
Net income before establishing a reserve for our investment in a limited
partnership was $4.4 million in 1998 versus $1.7 million for the year ended
September 30, 1997, an increase of $258%! Net income per share before
establishing a reserve for our investment in a limited partnership was $1.02 in
1998 versus $.40 in 1997.
As previously announced, we established a loss reserve of $4.5 million for our
$5 million investment in a limited partnership which invests in mortgage
servicing rights tied to a national portfolio. The establishment of this
reserve reduced our net income for 1998 to $1.2 million or $.29 per share.
Our 1998 return on assets before the reserve was 1.36% versus .72% in 1997.
Return on equity before the reserve was 8.4% in 1998 versus 2.41% in 1997.
In additional to opening our sixth full service branch at Perpetual Square in
Anderson, South Carolina, we continued to hire new talent to compliment our
existing staff whom you have had a chance to meet and have to assist you with
your banking needs.
We continue to make strategic changes in Perpetual Bank with the goal of
increasing our market share and ultimately enhance shareholder value. With your
continued support, we will service our communities with personalized, high-
quality financial services. We thank you for your investment and confidence and
look forward to the future.
Sincerely,
/s/ Robert W. "Lujack" Orr
Robert W. "Lujack" Orr
President/CEO
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
- -------
This discussion and analysis contains certain "forward-looking statements"
within the meaning of the federal securities laws. These forward-looking
statements include, but are not limited to, estimates and expectation of future
performance with respect to the financial condition and results of operations of
the Company and other factors. These forward-looking statements are not
guarantees of future performance and are subject to various factors that would
cause actual results to differ materially from these forward-looking statements.
These factors include, but are not limited to, changes in general economic and
market conditions and the legal and regulatory environment in which the Company
and the Savings Bank operate and the development of an interest rate environment
that adversely affects the Company's interest rate spread or other income
anticipated from the Company's operations.
MARKET AREA
- -----------
The Company considers Anderson and Oconee Counties, South Carolina, as its
primary market area. Additional loan origination demand is generated from
customers living in contiguous counties. The Company also purchases loans
secured by properties in South Carolina located outside its primary market area.
Anderson County is included in the Greenville/Spartanburg metropolitan
statistical area. The Cities of Greenville and Spartanburg are located 30 and
60 miles northeast of Anderson, respectively, and Atlanta, the closest major
city, is 120 miles to the southwest. Much of Anderson County is rural and
roughly half of the land area is used for agricultural purposes. Anderson
County has benefited from the growth of the Greenville metropolitan area and is
experiencing significant residential and commercial development along Interstate
85, a major transportation route that crosses through Anderson County. Major
area employers include Anderson Area Medical Center, Robert Bosch Corporation,
BASF Corporation, Owens-Corning Fiberglas, and Michelin Tire. Oconee is a
smaller but rapidly growing county located west of Anderson County.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------
General
- -------
In connection with the Company's stock offering as part of the Conversion and
Reorganization, 2,281,312 shares of common stock were sold at a price of $20.00
per share for gross proceeds of $45,626,240, less offering costs of $1,494,488,
resulting in net proceeds of $44,131,752. These proceeds were invested in loans,
mortgage-backed securities available for sale, and investment securities
available for sale.
7
<PAGE>
Total assets increased $105.5 million to $362.5 million at September 30, 1998,
from $257.0 million at September 30, 1997, as a result of an increase in loans
receivable, mortgage-backed securities available for sale, and investment
securities available for sale. Loans receivable increased $41.1 million to
$219.9 million at September 30, 1998, from $178.8 million at September 30, 1997.
The increase in loans receivable resulted from growth in first mortgage
residential, construction, commercial real estate, loan participations
purchased, and commercial and consumer loans. The Company purchased $34.9
million of first mortgage residential loans located primarily in Greenville
County, South Carolina, which is contiguous to Anderson County, South Carolina.
The Company also purchased $6 million of first mortgage residential loans in
Macon County, North Carolina. The Company also purchased $6.2 million of
commercial real estate loans located in Greenville, South Carolina.
Mortgage-backed securities available-for-sale increased $38.0 million or 105.8%
to $73.9 million from $35.9 million. The Company purchased $34.5 million of
collateralized mortgage obligations (CMO's), both fixed and adjustable rate,
during the year. At September 30, 1998, the Company owned $41.8 million of
CMO's with an average yield of 7.27% with maturity ranges from 1999 to 2029. At
September 30, 1998, the Company owned $32.1 million of fixed and adjustable rate
mortgage-backed securities with an average yield of 6.55%.
Investment securities available for sale increased $10.0 million or 88.5% to
$23.3 million from $11.3 million. The Company purchased $6.1 million of a state
municipal bond issue yielding 7.09%, $3.2 million of a bank preferred stock
yielding 6.94%, and $5.0 million of trust preferred bonds yielding 8.44%.
The Company's investment in a limited partnership decreased $4.2 million to
$825,000 at September 30, 1998, from $5.0 million at September 30, 1997. The
Company established a $4.5 million loss reserve in a limited partnership that
invests in mortgage servicing rights tied to a national portfolio of residential
mortgage loans. Recent declines in market interest rates have materially
impaired the value of the limited partnership. The loss reserve of $4.5 million
had a negative impact on earnings for 1998. No assurances can be given that the
establishment of future loss reserves will not be needed.
Cash and cash equivalents increased 57.0% or $7.7 million to $21.2 million at
September 30, 1998, from $13.5 million at September 30, 1997. At September 30,
1998, $14.0 million was invested in the FHLB Daily Interest Account yielding
5.75%.
Cash surrender value of life insurance increased $7.5 million at September 30,
1998. During 1998, the Company purchased life insurance policies as part of the
Supplemental Executive Retirement Agreements maintained on certain key officers
of the Company.
Deposits increased 3.4% or $6.8 million to $207.8 million at September 30, 1998,
from $201.0 million at September 30, 1997. Non-interest bearing checking
accounts increased 28.8% or $3.4 million to $15.2 million at September 30, 1998,
from $11.8 million at September 30, 1997. Interest bearing checking accounts
increased 37.7% or $9.8 million to $35.8 million at September
8
<PAGE>
30, 1998, from $26.0 million at September 30, 1997. The total increase of 34.9%
or $13.2 million in checking accounts had a positive impact on deposit fee
income.
The Company borrowed $20.2 million through reverse repurchase agreements in
1998. The Company pledged $22.9 million of mortgage-backed securities as
collateral for these borrowings. The Company has borrowed $10.0 million at a
rate of 5.49% with a maturity of November 6, 2000, and $10.0 million at a rate
of 5.59% with a maturity of November 13, 2002. The proceeds of the borrowings
were used to purchase fixed and adjustable rate mortgage-backed securities
available for sale.
Advances from the Federal Home Loan Bank increased $31.0 million to $56.0
million at September 30, 1998, from $15.0 million at September 30, 1997. The
advances were used to fund loans originated and loans purchased by the Company.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
Net Income
- ----------
Net income decreased $466,000 to $1,262,000 or $0.29 basic and diluted earnings
per share in 1998 from $1,728,000 or $0.40 basic and diluted earnings per share
in 1997.
Net income was adversely affected by the establishment of the $4.5 million
pre-tax loss reserve on the limited partnership.
Net Interest Income
- -------------------
Net interest income increased 31.5% or $2.8 million to $11.7 million in 1998
from $8.9 million. Interest income on loans increased 20.1% or $2.9 million to
$17.3 million from $14.4 million as the average loans receivable increased to
$198.4 million in 1998 from $165.0 in 1997, an increase of 20.2%. Interest
income on mortgage-backed securities increased 27.3% or $900,000 to $4.2 million
in 1998 from $3.3 million in 1997 as the average balance of mortgage-backed
securities increased 35.6% or $17.3 million to $65.9 million in 1998 from $48.6
million in 1997. Interest income on other investments increased $1.8 million to
$2.5 million in 1998 from $700,000 in 1997 as the average balance of investment
securities, interest-bearing deposits, and other earning assets increased $27.8
million to $38.9 million in 1998 from $11.1 million in 1997.
Interest Expense
- ----------------
Interest expense on deposits increased 9.9% or $800,000 to $8.9 million in 1998
from $8.1 million in 1997 as the average deposits increased 12.7% or $23.1
million to $204.6 million in 1998 from $181.5 million in 1997. The weighted
average cost of deposits decreased to 4.35% in 1998 from 4.47% in 1997.
9
<PAGE>
Interest expense on borrowings increased 142.9% or $2 million to $3.4 million in
1998 from $1.4 million in 1997 as the average borrowings increased to $64.7
million in 1998 from $23.9 million in 1997.
Provision For Loan Losses
- -------------------------
The provision for loan losses decreased 7.4% to $606,500 for the year ended
September 30, 1998, from $655,000 for the year ended September 30, 1997. Loan
charge-offs for 1998 were $174,000 compared to $332,000 in 1997 and recoveries
were $55,000 in 1998 compared to $29,000 in 1997. The reduced charge-offs in
1998, combined with the recoveries, allowed the Company to decrease the loan
loss provision in 1998. Despite the decrease in the provision for loan losses,
the allowance for loan losses to total loans increased to 1.07% at September 30,
1998, from 1.04% at September 30, 1997.
Other Income
- ------------
Other income increased $1.9 million or 102.7% to $3.8 million in 1998 from $1.9
million in 1997. Loan and deposit account service charges increased $770,000 to
$2,296,000 in 1998 from $1,526,000 in 1997 as a result of an increase in the
number of checking accounts and fees from the use of debit cards and ATM's.
Gain on sale of investments was $177,000 in 1998 compared to a loss of $308,000
in 1997. Gain of sale of real estate held for development decreased $184,000 to
$115,000 in 1998 from $299,000 in 1997 due to a decrease in sale of real estate
held for development. Other income increased $614,000 to $1,111,000 in 1998
compared to $497,000 in 1997, due to the increase in earnings from the Mortgage
First Service Corporation, increase in income from the United Service
Corporation of Anderson, Inc., and income earned on bank owned life insurance.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $1.0 million or 13.3% to $8.5
million in 1998 from $7.5 million in 1997. Salaries and employee benefits
increased $400,000 or 10.3% to $4.3 million in 1998 from $3.9 million in 1997
due to the opening of the Perpetual Square office in Anderson, South Carolina,
and the expense of the Management Recognition and Development Plan. Occupancy
expense increased $22,000 or 4.5% due primarily from the opening of the
Perpetual Square office. Furniture and equipment expense increased $265,000 or
35.5% to $1,011,000 in 1998 from $746,000 in 1997 due to the purchase of
additional equipment related to technology investments and equipping the
Perpetual Square office. The FDIC insurance premiums decreased $20,000 to
$132,000 in 1998 from $152,000 in 1997. Advertising decreased $105,000 or 29.8%
to $247,000 in 1998 to $352,000 in 1997, as a result of the elimination of the
Free Checking Campaign. Data processing increased $143,000 or 47.7% to $443,000
in 1998 from $300,000 in 1997 due to the new Perpetual Square office, expenses
associated with the increasing number of checks processed, and ATM and debit
card transactions. Office supplies decreased $58,000 or
<PAGE>
15.0% from $329,000 in 1998 from $387,000 in 1997 due to the elimination and
consolidation of data processing forms.
Other operating expenses increased $462,000 or 42.2% to $1,558,000 in 1998 to
$1,096,000 in 1997 due to the opening of the Perpetual Square office and
consultant fees for sales training, staff realignment, and product fee
enhancements.
Income Taxes
- ------------
Income taxes decreased 40.7% or $377,000 to $549,000 or an effective tax rate of
30.3% for 1998 from $926,000, or an effective tax rate of 35% in 1997 due to a
decrease in income before taxes of $843,000 or 31.8% to $1,811,000 in 1998 from
$2,654,000 in 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
Net Income
- ----------
Net income increased to $1.7 million or $0.40 basic and diluted earnings per
share in 1997 from $1.4 million or $0.33 basic and diluted earnings per share in
1996. Net income for 1996 was adversely affected by the one-time SAIF
recapitalization assessment. Without this one-time assessment, 1996 net income
would have been $2 million or $0.47 basic and diluted earnings per share.
Net Interest Income
- -------------------
Net interest income increased 18.7% or $1.4 million to $8.9 million in 1997 from
$7.5 million in 1996. Interest income on loans increased 25.2% to $14.4 million
in 1997 from $11.5 million in 1996 as the average loans receivable increased to
$165.0 million in 1997, an increase of 28.3%, from $128.6 million in 1996.
Interest income on mortgage-backed securities increased 6.5% or $200,000 to $3.3
million in 1997 from $3.1 million in 1996 as the average balance of mortgage-
backed securities increased 8.5% or $3.8 million to $48.6 million in 1997 from
$44.8 million in 1996. Interest income on other investments increased 102.9% or
$349,000 to $688,000 in 1997 from $339,000 in 1996 as the average balance of
other interest earning assets increased 68.2% or $4.5 million to $11.1 million
in 1997 from $6.6 million in 1996.
Interest Expense
- ----------------
Interest expense on deposits increased 19.1% or $1.3 million to $8.1 million in
1997 from $6.8 million in 1996 as the average deposits increased 17.4% or $26.9
million to $181.5 million in 1997 from $154.6 million in 1996. The weighted
average cost of deposits increased to 4.47% in 1997 from 4.38% in 1996. The
increase in the average balance of deposits and the increase in the
11
<PAGE>
weighted average cost of deposits resulted primarily from the promotion of short
term certificates of deposit.
Interest expense on borrowings increased 110.1% or $722,000 to $1,378,000 in
1997 from $656,000 in 1996 as the average borrowings increased to $24.9 million
in 1997 from $12.5 million in 1996 in order to fund loan originations and
purchases.
Provision For Loan Losses
- -------------------------
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan losses, management evaluates various factors,
including the market value of the underlying collateral, growth and composition
of the loan portfolio, the relationship of the allowance for loan losses to
outstanding loans, loss experience, delinquency trends and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
for loan losses is adjusted accordingly.
The provision for loan losses increased 87.7% to $655,000 in 1997 from $349,000
in 1996 due to an increase of net charge-offs in 1997 of $304,000 from $92,000
in 1996. Management deemed the increase necessary in light of the increase in
non-performing assets to $1.0 million at September 30, 1997, from $798,000 at
September 30, 1996, as well as the growth in the loan portfolio during 1997,
particularly and inherently riskier commercial real estate loans (which
increased to $27.0 million at September 30, 1997, from $17.0 million at
September 30, 1996), commercial loans (which increased to $7.2 million at
September 30, 1997, from $5.5 million at September 30, 1996) and consumer loans
(which increased to $19.2 million at September 30, 1997, from $16.9 million at
September 30, 1996). At September 30, 1997, the allowance for loan losses was
deemed adequate by management at that date.
Other Income
- ------------
Total other income decreased $72,000 to $1,855,000 in 1997 from $1,927,000 in
1996. Loan and deposit service charges increased $257,000 to $1,526,000 from
$1,269,000 in 1996 as a result of an increase in the number of checking
accounts. The gain on sale of real estate held for development increased to
$299,000 in 1997 as the first sales of real estate held for development were
recorded. These increases were offset by losses on sales of investments of
$308,000 in connection with the restructuring of the investment securities'
portfolio and the write-off of $192,000 of computer hardware and software as a
result of upgrading of the computer system.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $552,000 to $7.4 million in 1997
from $6.9 million in 1996. Salaries and employee benefits increased $870,000 or
28.5% to $3.9 million in 1997 from
12
<PAGE>
$3.0 million in 1996 due to the opening of a full service office in Seneca,
South Carolina, staffing a call center in Anderson, South Carolina, the expense
of the Employee Stock Ownership Plan and the Management Recognition and
Development Plan. Occupancy expense increased $100,000 or 25.8% due primarily
from the opening of the office in Seneca, South Carolina. Furniture and
equipment expense increased 37.6% to $746,000 in 1997 from $542,000 in 1996 due
to the purchase of additional equipment related to technology investments,
equipping the office in Seneca, South Carolina, and the call center. The FDIC
insurance premiums decreased $1.1 million to $152,000 in 1997 from $1.3 million
in 1996 due to the one time charge of $946,000 incurred in September 1996 for
the assessment to recapitalize the Savings Association Insurance Fund (SAIF)
required by the Deposit Insurance Funds Act of 1996. Prior to SAIF
recapitalization, the Company's total annual deposit insurance premiums amounted
to 0.23% of assessable deposits. Effective January 1, 1997, the rate decreased
to 0.065% of assessable deposits. Advertising decreased $39,000 or 10.0% to
$352,000 in 1997 from $391,000 in 1996 as a result of the winding down of the
free checking advertising campaign that began in October 1994. Data processing
increased $62,000 or 26.1% to $300,000 in 1997 from $238,000 in 1996 due to the
new office in Seneca and the new call center. Office supplies increased $54,000
or 16.2% to $387,000 in 1997 from $333,000 in 1996 primarily as a result of the
opening of the Seneca branch office.
Other operating expenses increased 68.2% to $1.1 million in 1997 from $654,000
in 1996 as a result of acquiring the telephone system for the call center and
sales training for the call center staff ($159,000), closing costs paid by the
Company as part of a home equity loan promotion ($40,000), increased
professional fees related to regular regulatory and securities compliance
matters ($39,000), the replacement of the Company's in-house courier with an
armored car courier service in conjunction with the opening of the Seneca branch
office, which is located approximately thirty miles outside of Anderson
($34,000), and increased postage expense associated with the increased number of
checking accounts ($26,000).
Income Taxes
- ------------
Income taxes increased 22.5% to $926,000 in 1997 from $756,000 in 1996 as income
before taxes increased 22.7% to $2.7 million in 1997 from $2.2 million in 1996.
The effective tax rate was 35% for both 1997 and 1996.
13
<PAGE>
Average Balance Sheets
The following table sets forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
ratio of interest-earning assets to interest-bearing liabilities and net
interest margin. Average balances for 1998 and 1997 have been calculated using
daily balances, while the average balance for 1996 has been calculated using
monthly balances. Management does not believe that the use of monthly balances
rather than daily balances for 1996 has caused any material inconsistencies in
the information presented.
<TABLE>
<CAPTION>
1998 1997
---- ----
Average Interest and Average Interest and
Balance Dividends Yield/Cost Balance Dividends Yield/Cost
--------- ------------ ---------- ---------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans $139,497 $11,401 8.17% $118,030 $9,790 8.29%
Commercial real estate loans 28,943 2,961 10.23% 23,098 2,102 9.10
Commercial other 9,400 857 9.12% 6,114 592 9.68
Consumer loans 20,525 2,056 10.02% 17,755 1,922 10.82
------ ----- ------ -----
Total loans 198,365 17,275 8.71% 164,997 14,406 8.73
Mortgage-backed securities and CMO's 65,866 4,205 6.38% 48,638 3,303 6.79
Investment securities 20,013 1,383 6.91% 5,271 339 6.43
Interest-bearing deposits 16,546 899 5.43% 4,485 251 5.60
Other earning assets 2,375 175 7.37% 1,311 97 7.40
----- --- ----- --
Total interest-earning assets 303,165 23,937 7.90% 224,702 18,396 8.19
Non-interest-earning assets:
Office properties and equipment,
Net 6,555 5,645
Real estate, Net 135 56
Other non-interest-earning assets 16,369 8,072
------ -----
Total assets $326,224 $238,475
======== ========
Interest-bearing liabilities:
Savings 25,569 637 2.49% 22,923 590 2.57
Negotiable order of withdrawal
("NOW") accounts 44,420 643 1.45% 35,196 548 1.56
Certificates of deposit 134,574 7,622 5.66% 123,407 6,980 5.56
------- ----- ------- -----
Total deposits 204,563 8,902 4.35% 181,526 8,118 4.47
Other interest-bearing liabilities 64,739 3,354 5.18% 23,951 1,378 5.75
------ ----- ------ -----
Total interest-bearing liabilities 269,302 12,256 4.55% 205,477 9,496 4.62
-------- --------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 247 397
Other liabilities 4,345 2,693
----- -----
Total liabilities 273,894 3,090
Stockholders' equity 52,330 29,908
------ ------
Total liabilities and stock-
holders' equity $326,224 $238,475
======== ========
<CAPTION>
1996
----
Average Interest and
Balance Dividends Yield/Cost
------- ----------- ----------
<S> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans $ 91,535 $ 7,984 8.72%
Commercial real estate loans 14,045 1,338 9.52
Commercial other 4,468 395 8.84
Consumer loans 18,563 1,793 9.66
------ -----
Total loans 128,611 11,510 8.95
Mortgage-backed securities and CMO's 44,793 3,072 6.86
Investment securities 896 65 7.25
Interest-bearing deposits 4,593 193 4.20
Other earning assets 1,102 81 7.35
----- --
Total interest-earning assets 179,995 14,921 8.29
Non-interest-earning assets:
Office properties and equipment,
Net 4,048
Real estate, Net 20
Other non-interest-earning assets 5,339
-----
Total assets $189,402
========
Interest-bearing liabilities:
Savings 23,482 622 2.65
Negotiable order of withdrawal
("NOW") accounts 28,412 468 1.65
Certificates of deposit 102,721 5,679 5.53
------- ----- ----
Total deposits 154,615 6,769 4.38
Other interest-bearing liabilities 12,531 656 5.24
------ ---
Total interest-bearing liabilities 167,146 7,425 4.44
--------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 1,186
Other liabilities 1,827
-----
Total liabilities 170,159
Stockholders' equity 19,243
------
Total liabilities and stock-
holders' equity $189,402
========
</TABLE>
14
<PAGE>
Average Balance Sheets Continued
<TABLE>
<CAPTION>
1998 1997
---- ----
Average Interest and Average Interest and
Balance Dividends Yield/Cost Balance Dividends Yield/Cost
--------- ------------ ---------- ---------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $11,681 $8,900
============ ============
Interest rate spread 3.35% 3.57%
========== ==========
Net interest margin 3.85% 3.96%
========== ==========
Ratio of average interest-earning
assets to average interest-
bearing liabilities 112.57% 109.36%
========== ==========
<CAPTION>
1996
----
Average Interest and
Balance Dividends Yield/Cost
-------- ----------- ----------
<S> <C> <C> <C>
Net interest income $7,496
===========
Interest rate spread 3.85%
==========
Net interest margin 4.16%
==========
Ratio of average interest-earning
assets to average interest-
bearing liabilities 107.69%
==========
</TABLE>
(1) Excludes interest on loans 90 days or more past due.
15
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); (iii) changes in
rate/volume (change in rate by change in volume); and (iv) the net change (the
sum of the prior columns).
<TABLE>
<CAPTION>
Years Ended September 30, 1998 Years Ended September 30, 1997,
Compared to September 30, 1997, Compared to September 30, 1996,
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------ ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $1,781 $<144> $<26> $1,611 $2,311 $<392> $<113> $1,806
Commercial real estate 532 261 66 859 862 <60> <39> 763
Commercial other 318 <35> <18> 265 146 38 14 198
Consumer loans 300 <143> <23> 134 <78> 216 <9> 129
--- ----- ---- --- ---- --- --- ---
Total loans 2,931 <61> <1> 2,869 3,241 <198> <147> 2,896
Mortgage-backed securities and CMO's 1,170 <198> <70> 902 263 <30> <2> 231
Investment securities 948 25 70 1,043 320 <8> <38> 274
Interest-earning deposits 675 <7> <20> 648 <5> 65 <2> 58
Other interest-earning assets 79 0 0 79 16 0 0 16
-- - - -- - - --
Total net change in income on
interest-earning assets 5,803 <241> <21> 5,541 3,800 <143> <182> 3,475
----- ----- ---- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Savings accounts 68 <19> <2> 47 <15> <18> 0 <33>
NOW accounts 144 <39> <10> 95 112 <25> <6> 81
Certificates of deposit 631 10 1 642 1,144 131 26 1,301
--- -- - --- ----- --- -- -----
Total deposits 843 <48> <11> 784 1,241 88 20 1,349
--- ---- ---- --- ----- -- -- -----
Other interest-bearing liabilities 2,347 <137> <234> 1,976 648 37 37 722
----- ----- ----- ----- --- -- -- ---
Total net change in expense on
interest-bearing liabilities 3,190 <185> <245> 2,760 1,889 125 57 2,071
----- ----- ----- ----- ----- --- -- -----
Net change in net interest income $2,613 $ <56> $224 $2,781 $1,911 <$268> <$239> $1,404
========= ========= ========= ========= ======== ======== ======= ========
</TABLE>
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, repayment of loan
principal, and repayment of mortgage backed securities and CMOs, and, to a
lesser extent, maturities of investment securities, and short-term investments
and operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition. The
Company attempts to price its deposits to meet its asset/liability objectives
consistent with local market conditions. Excess balances are invested in
overnight funds. In addition, the Company is eligible to borrow funds from the
FHLB of Atlanta. Under OTS regulations, a member thrift institution is required
to maintain an average daily balance of liquid assets (cash, certain time
deposits and savings accounts, bankers' acceptances, and specified U. S.
government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage of its net
withdrawable accounts plus short-term borrowings. This liquidity requirement,
which is currently 4.0%, may be changed from time to time by the OTS to any
amount within the range of 4.0% to 10.0%, depending upon economic conditions and
the savings flow of member associations. Monetary penalties may be imposed for
failure to meet liquidity requirements. The liquidity of the Company at
September 30, 1998, was 21.6%.
The primary investing activity of the Company is lending. During the year ended
September 30, 1998, the Company originated $49.9 million of loans and sold $28.5
million. The Company also purchased $54.0 million of loans. The retained
originations were primarily funded by increases in deposits, principal
repayments of loans and mortgage-backed securities and CMO's, FHLB Advances, and
securities sold under agreements to repurchase.
Liquidity management is both a short and long-term responsibility of the
Company's management. The Company adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, (iv) yields available on interest-bearing
deposits, and (v) liquidity of its asset/liability management program. Excess
liquidity is generally invested in interest-bearing overnight deposits and other
short-term government and agency obligations. If the Company requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB and collateral eligible for repurchase agreements.
The Company anticipates that it will have sufficient funds available through
normal loan repayments to meet current loan commitments. At September 30, 1998,
the Company had outstanding commitments to originate loans of approximately
$22.9 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
1998, totaled $96.9 million. Based upon management's experience and familiarity
with the customers involved and the Company's pricing policy relative to that of
its perceived competitors, management believes that a significant portion of
such deposits will remain with the Company.
The Company plans to repurchase up to 1,141,523 shares of its common stock
during the first six months of fiscal year 1999. At approximately $20.00 per
share, up to $23 million may be required
17
<PAGE>
to support the repurchase. The Company intends to fund the repurchase program
through liquidation of some of its interest earning assets and may borrow funds
from outside sources.
YEAR 2000 ISSUES
- ----------------
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be effected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs, date-
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's year 2000 committee consists of the Information Services Steering
Committee consisting of a representative of each user department. The committee
coordinator makes a quarterly or, as major events are completed, progress report
to the Board of Directors. The committee has developed and is implementing a
comprehensive plan to make all information and non-information technology assets
year 2000 compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as
of September 30, 1997.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquiries and development of a follow-up plan and
timeline. This phase will be completed as of December 31, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A
third-party service bureau processes all customer transactions and has
completed upgrades to its systems to be year 2000 compliant. The
Company will test the third party systems by reviewing the results of
transactions at six different test dates before and after the year
2000 date change covering all of the applications used by the Company.
Testing was completed on mission critical systems as of December 10,
1998. In the event that testing reveals that the third party systems
are not year 2000 compliant, the Company's service bureau intends to
either transfer the Company to other systems that are year 2000
compliant or provide additional resources to resolve the year 2000
issues. Other parties whose year 2000 compliance may effect the
Company include the FHLB-Atlanta, brokerage firms, the operator of the
Company's ATM network, and the Company's pension plan administrator.
These third parties have indicated their compliance or intended
compliance. Where it is possible to do so, the Company has scheduled
testing with
18
<PAGE>
these third parties. Where testing is not possible, the Company will
rely on certifications from vendors and service providers.
5. Implementation - Replacement or repair of non-compliant technology. As
the Company progresses through the validation phase, the Company
expects to determine necessary remedial actions and provide for their
implementation. The Company has already implemented a new year 2000
compliance computerized teller system and has verified the year 2000
compliance of its computer hardware and other equipment containing
embedded microprocessors. The Company's plan provides for year 2000
readiness to be completed by June 30, 1999.
The Company estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be $150,000, of which $82,235 has been incurred as of
September 30, 1998. System maintenance or modification costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Company does
not separately track the internal costs and time that its own employees spend on
year 2000 issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those of
third parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve year 2000 issues
presents the following risks to the Company: (1) the Company could lose
customers to other financial institutions, resulting in a loss of revenue, if
the Company's third party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans to individuals rather than commercial
enterprises, management believes that year 2000 issues will not impair the
ability of the Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will effectively
address the year 2000 issue, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of the Company or its third-party vendors and service providers to
be year 2000 compliant will not have a material adverse effect on the Company's
business, financial condition or results of operations.
19
<PAGE>
MARKET RISK AND ASSET AND LIABILITY MANAGEMENT
- ----------------------------------------------
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, investment, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks such as credit quality and liquidity risk in the normal
course of business, management considers interest rate risk to be its most
significant market risk that could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in market interest
rates. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same rate, to the same extent or on the same basis. The
Company monitors the impact of changes in interest rates on its net interest
income using a test that measures the impact on net interest income and net
portfolio value of an immediate change in interest rates in 100 basis point
increments. Net portfolio value is defined as the net present value of assets,
liabilities and off-balance sheet contracts. At September 30, 1998, the
Company's calculations based on the information and assumptions produced for the
analysis, suggested that a 200 basis point increase in rates would increase net
interest income over a 12-month period by 2.0% and reduce net portfolio value by
6.0% while a 200 basis point decline in rates would decrease net interest income
over a 12-month period by 5.0% and increase net portfolio value by 3.0% in the
same period.
The following table is provided to the Company by the OTS and illustrates the
percent change in Net Present Value (NPV) as of September 30, 1998, based on OTS
assumptions. No effect has been given to any steps that the Company may take to
counteract the effect of the interest rate movements presented in the table.
<TABLE>
<CAPTION>
NPV AS PERCENT OF
NET INTEREST INCOME NET PORTFOLIO VALUE PRESENT VALUE OF ASSETS
-------------------- ---------------------------- ------------------------
Increase <Decrease>
BASIS POINTS (BP) BASIC POINT
CHANGE IN RATES AMOUNT % CHANGE AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
<S> <C> <C> <C> <C> <C> <C> <C>
400 bp $10,719 0% $46,743 <$13,028> <22%> 14.55 % <282>
300 bp 10,950 2 51,496 <8,275> <14> 15.69 <168>
200 bp 10,901 2 56,405 <3,365> <6> 16.82 <55>
100 bp 10,719 0 59,399 <372> <1> 17.43 5
0 bp 10,696 0 59,771 17.37
(100 bp) 10,150 <5> 61,388 1,618 3 17.59 22
(200 bp) 10,175 <5> 61,774 2,003 3 17.55 18
(300 bp) 9,672 <10> 63,273 3,502 6 17.77 39
(400 bp) 9,064 <15> 64,810 5,039 8 17.98 61
</TABLE>
20
<PAGE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Furthermore, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates likely could
deviate significantly from those assumed in calculating the table. Therefore,
the data presented in the table should not be relied upon as necessarily
indicative of actual results.
21
<PAGE>
Interest Sensitive Asset and Liability Maturity Table
The following table presents the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at September 30, 1998. Certain assumptions about
loan prepayment rates and deposit decay rates, among others, were utilized in
the preparation of the table. There are shortcomings inherent in this method of
analysis. For example, although a financial instrument may have a similar
maturity or remaining term to repricing as another financial instrument, the two
may react differently to changes in market interest rates. In the event of
changes in interest rates, prepayments and withdrawals would likely deviate
significantly from those assumed in the data underlying the table. (Dollar
amounts in the table are in thousands.)
<TABLE>
<CAPTION>
After 3
Average Within 1 Year to Years to Beyond Fair
-------
Rate One Year 3 Years 5 Years 5 Years Total Value
---- -------- ------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Loans receivable, net of loans in process
and deferred loan fees 8.31% $140,721 $52,190 $14,546 $12,439 $219,896 $220,019
Investment securities 7.28 500 - - 22,801 23,301 23,301
Mortgage-backed securities 6.98 35,002 9,388 8,067 21,476 73,933 73,933
FHLB stock 7.25 3,289 - - - 3,289 3,289
FHLB overnight interest-bearing deposits 5.75 3,444 - - - 3,444 3,444
Interest-sensitive liabilities:
Interest bearing checking accounts 2.28 9,981 12,745 2,072 10,998 35,796 35,866
Savings accounts 2.61 9,816 7,123 3,960 4,305 25,204 25,227
Certificates of deposits 5.59 96,866 34,348 379 - 131,593 131,511
Advances from the FHLB 5.02 16,000 - 5,000 35,000 56,000 55,357
Securities sold under agreement 5.54 174 10,000 10,000 - 20,174 20,244
Off balance sheet items:
Commitments to extend credit 7.33 22,917 - - - 22,917 22,917
Unused lines of credit 9.03 20,502 - - - 20,502 20,502
Loans in process 8.33 15,093 - - - 15,093 15,093
</TABLE>
22
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------
Reporting Comprehensive Income
- ------------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. The purpose of SFAS 130 is to address
concerns over the practice of reporting elements of comprehensive income
directly in equity. This SFAS requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with the
other financial statements. This statement is effective for periods beginning
after December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. The Company will
adopt the provisions of this SFAS beginning with the quarter ending December 31,
1998.
Disclosures about Segments of an Enterprise and Related Information
- -------------------------------------------------------------------
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in June 1997. This statement applies to all public
entities. The provisions of SFAS 131 require certain disclosures regarding
material industry segments within an entity. Due to the Company's structure,
SFAS 131 is not expected to have a material impact.
Employers' Disclosures about Pensions and Other Postretirement Benefits
- -----------------------------------------------------------------------
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The new statement revises required
disclosures for employee benefit plans, but does not change the measurement or
recognition of such plans. While the new standard requires some additional
information about benefit plans, it helps preparers of financial statements by
eliminating certain disclosures and by standardizing the disclosures for
pensions and other Post-retirement benefits to the extent practicable. SFAS 132
supersedes the disclosure requirements in SFAS 87, "Employers' Accounting for
Pensions", SFAS 88, "Employers Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and SFAS 106
"Employers Accounting for Postretirement Benefits Other than Pensions". The new
disclosures are effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS will not have a material impact on the financial statements
of the Company due to the disclosure only requirements.
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new accounting and reporting requirements for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. The standard requires all
23
<PAGE>
derivatives to be measured at fair value and recognized as either assets or
liabilities in the statement of condition. Under certain conditions, a
derivative may be specifically designated as a hedge. Accounting for the changes
in fair value of a derivative depends on the intended use of the derivative.
Adoption of this standard is required for all fiscal years and quarters
beginning after June 15, 1999. Because the Company has a limited use of
derivative transactions, management does not expect that this standard would
have a material effect on the Company's financial statements.
Accounting for Mortgage-Backed Securities Retained after the Securitization of
- ------------------------------------------------------------------------------
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
- -------------------------------------------------------------
In October 1998, FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective for the first fiscal quarter
beginning after December 15, 1998. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. The adoption of this standard is not expected to have a
material effect on the Company's financial statements.
Accounting for Costs of Computer Software Developed or Obtained for Internal Use
- --------------------------------------------------------------------------------
In March 1998, the Accounting Standards of the Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1) provides guidance as to when it is or is not
appropriate not to capitalize the cost of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998, with early adoption encouraged. The adoption of SOP 98-1 will not
have a material effect on the Company's financial statements.
Effect of Inflation and Changing Prices
- ---------------------------------------
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP") which require the measurement of financial position and
operating results in terms of historical dollars, without considering the
changes in relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
24
<PAGE>
CHANGE IN INDEPENDENT AUDITORS
- ------------------------------
On May 18, 1998, the Company's Board of Directors, at the recommendation of its
Audit Committee, terminated the engagement of KPMG Peat Marwick LLP, Greenville,
South Carolina, as the Company's certifying accounts.
On May 18, 1998, the Company's Board of Directors, at the recommendation of its
Audit Committee, engaged Elliott, Davis & Company, LLP, Greenville, South
Carolina, as the Company's certifying accountants. The Company has not
consulted with Elliott, Davis & Company, LLP during its two most recent fiscal
years nor during any subsequent interim period prior to its engagement regarding
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, or regarding the reportable condition set
forth below.
The report of KPMG Peat Marwick LLP on the Company's financial statements for
either of the last two fiscal years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles.
During the Company's two most recent fiscal years and subsequent interim periods
preceding the date of termination of the engagement of KPMG Peat Marwick LLP,
the Company was not in disagreement with KPMG Peat Marwick LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
KPMG Peat Marwick LLP, would have caused KPMG Peat Marwick LLP to make reference
to the subject matter of the disagreement in connection with its report. In a
letter dated June 1, 1998, KPMG Peat Marwick noted its agreement with the
Company's reported statements with respect to the change in auditors.
25
<PAGE>
[LETTERHEAD OF ELLIOTT, DAVIS & COMPANY, L.L.P. APPEARS HERE]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SOUTHBANC, INC. AND SUBSIDIARY
Anderson, South Carolina
We have audited the accompanying consolidated balance sheet of SOUTHBANC,
INC. AND SUBSIDIARY as of September 30, 1998, and the related consolidated
statements of income, shareholder's equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statement based on our audit. The consolidated financial
statements of SouthBanc, shares Inc. and Subsidiary as of September 30, 1997 and
for the years ended September 30, 1997 and 1996 were audited by other auditors
whose report, dated November 7, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SOUTHBANC SHARES, INC. AND SUBSIDIARY as of September 30, 1998 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Elliott, Davis & Company, LLP
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
November 20, 1998
26
<PAGE>
SOUTHBANC SHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 21,197,419 $ 13,499,332
Investment securities available for sale 23,300,684 11,325,700
Federal Home Loan Bank stock, at cost 3,289,200 1,650,000
Mortgage-backed securities available for sale 73,933,292 35,862,700
Loans receivable, (net of allowance for loan losses of
$2,374,044 at September 30, 1998 and $1,886,243 at
September 30, 1997) 219,896,116 178,772,266
Investment in limited partnership 825,373 5,003,835
Real estate acquired in settlement of loans 88,965 162,776
Real estate held for development 1,909,394 2,284,038
Premises and equipment, net 6,350,491 6,294,465
Accrued interest receivable
Loans receivable 1,697,058 1,330,255
Mortgage-backed and other securities 527,823 238,186
Cash surrender value of life insurance 7,473,136 -
Other 2,039,982 569,787
-------------- -------------
Total Assets $ 362,528,933 $ 256,993,340
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 207,790,775 $ 201,001,858
Advances from the Federal Home Loan Bank ("FHLB") 56,000,000 15,000,000
Securities sold under agreements to repurchase 20,173,933 -
Advance payments by borrowers for property taxes and
insurance 333,681 396,886
Accrued interest payable 1,418,770 1,362,483
Accrued expenses and other liabilities 2,404,448 8,630,370
-------------- -------------
Total Liabilities 288,121,607 226,391,597
-------------- -------------
Commitments and contingencies - Note 17
STOCKHOLDERS' EQUITY
- --------------------
Common stock ($0.01 par value; authorized 7,500,000 shares; issued and
outstanding 4,306,410 shares at September 30, 1998. $1.00 par value;
authorized 20,000,000 shares; issued and outstanding 1,508,873 shares
at September 30, 1997) 43,064 1,508,873
Additional paid-in capital 57,470,324 11,651,917
Retained earnings, restricted 18,154,380 18,381,766
Unrealized gain on securities available for sale, net 180,009 188,423
Indirect guarantee of ESOP debt <711,140> <804,024>
Deferred compensation for Management
Recognition Plan (MRP) <729,311> <325,212>
-------------- --------------
Total stockholders' equity 74,407,326 <325,212>
-------------- --------------
Total liabilities and stockholders' equity $ 362,528,933 $ 256,993,340
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
For The Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 17,275,097 $ 14,406,160 $ 11,510,222
Mortgage-backed securities 4,204,475 3,302,541 3,071,524
Other investments 2,457,233 687,736 339,222
------------- ------------ -------------
Total interest income 23,936,805 18,396,437 14,920,968
------------- ------------- -------------
Interest expense:
Interest on deposits:
Transaction accounts 642,545 547,795 467,395
Passbook accounts 637,206 590,738 622,008
Certificate accounts 7,622,013 6,979,888 5,679,186
------------- ------------- -------------
Total interest on deposits 8,901,764 8,118,421 6,768,589
Interest on borrowings 3,353,810 1,377,960 656,203
------------- ------------- -------------
Total interest expense 12,255,574 9,496,381 7,424,792
------------- ------------- -------------
Net interest income 11,681,231 8,900,056 7,496,176
Provision for loan losses 606,500 655,000 349,250
------------- ------------- -------------
Net interest income after provision for
loan losses 11,074,731 8,245,056 7,146,926
------------- ------------- -------------
Other income:
Loan and deposit account service charges 2,295,710 1,526,208 1,268,722
Gain (Loss) on sale of investments 177,388 <307,534> 53,963
Gain on sale of real estate acquired in
settlement of loans 45,570 19,894 79,034
Gain (Loss) on sale of loans, net 20,797 12,509 <23.328>
Gain on sale of real estate held for
development 114,716 298,731 -
Gain (Loss) on sale of premises and
equipment <4,161> <191,894> 23,724
Other 1,110,592 497,042 525,221
------------- ------------- -------------
Total other income 3,760,612 1,854,956 1,927,336
------------- ------------- -------------
Loss reserve on limited partnership 4,500,000 - -
General and administrative expenses:
Salaries and employee benefits 4,294,678 3,926,888 3,056,726
Occupancy 509,465 486,776 386,796
Furniture and equipment expense 1,011,422 746,182 542,481
FDIC insurance premiums 132,163 151,903 1,292,262
Advertising 247,081 351,694 390,721
Data processing 442,664 299,951 237,980
Office supplies 328,981 386,525 332,794
Other 1,558,150 1,095,927 654,304
------------- ------------- -------------
Total general and administrative expenses 8,524,604 7,445,846 6,894,064
------------- ------------- -------------
Income before income taxes 1,810,739 2,654,166 2,180,198
Income taxes 548,696 925,803 755,811
------------- ------------- -------------
Net income $ 1,262,043 $ 1,728,363 $ 1,424,387
============= ============= =============
Basic earnings per share $ 0.29 $ 0.40 $ 0.33
============= ============= =============
Diluted earnings per share $ 0.29 $ 0.40 $ 0.33
============= ============= =============
Weighted average shares outstanding:
Basic 4,304,591 4,293,643 4,290,580
============= ============= =============
Diluted 4,406,381 4,322,815 4,315,880
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Indirect
Securities Guarantee Deferred
Additional Retained Available of Compensation
Common Paid-in Earnings for Sale ESOP for
Stock Capital Restricted Net of Taxes Debt MRP
---------- ------------ -------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $1,504,601 $ 852,966 $ 16,501,904 <$609,255> <$6,710> <$11,520>
Change in unrealized loss on
securities, net - - - <207,600> - -
Reduction of ESOP debt - - - - 6,710 -
Earned portion of MRP - - - - - 11,520
Dividends on common stock - - <319,022> - - -
Sale of common stock (less
offering expenses of
of $417,536 - 10,843,713 - - - -
Indirect guarantee of ESOP
debt - - - - <900,900> -
Net income - - 1,424,387 - - -
---------- ------------ ------------ ------------- ------------ ----------
Balance at September 30, 1996 1,504,601 11,696,679 17,607,269 <816,855> <900,900> -
Change in unrealized loss on
securities, net - - - 1,005,278 - -
Exercise of stock options 4,272 38,448 - - - -
Reduction of ESOP debt - - - - 96,876 -
ESOP expense - 32,152 - - - -
Purchase of common stock
for MRP - - - - - <404,093>
Earned portion of MRP - - - - - 78,881
Dividends on common stock - - <953,866> - - -
Offering expenses for the sale of
common stock - <115,362> - - - -
Net income - - 1,728,363 - - -
---------- ------------ ------------ ------------- ------------ ----------
Balance at September 30, 1997 1,508,873 11,651,917 18,381,766 188,423 <804,024> <325,212>
Change in unrealized gain on
securities, net - - - <8,414> - -
Exercise of stock options 1,317 31,937
Reduction of ESOP debt - - - - 92,884 -
ESOP expense - 187,592 - - - -
Purchase of common stock
for MRP - - - - - <616,558>
Earned portion of MRP - - - - - 212,459
Dividends on common stock - - <1,489,429> - - -
Sale of common stock (less
offering expenses of
$1,494,488) 22,813 44,108,939
Par value <1,489,939> 1,489,939
Net income - - 1,262,043 - - -
---------- ------------ ------------ ------------- ------------ ----------
Balance at September 30, 1998 $ 43,064 $57,470,324 $18,154,380 $ 180,009 <$711,140> <$729,311>
========== ============ ============ ============= ============ ==========
<CAPTION>
Total
---------------
<S> <C>
Balance at September 30, 1995 $ 18,231,986
Change in unrealized loss on
securities, net <207,600>
Reduction of ESOP debt 6,710
Earned portion of MRP 11,520
Dividends on common stock <319,022>
Sale of common stock (less
offering expenses of
of $417,536 10,843,713
Indirect guarantee of ESOP
debt <900,900>
Net income 1,424,387
--------------
Balance at September 30, 1996 29,090,794
Change in unrealized loss on
securities, net 1,005,278
Exercise of stock options 42,720
Reduction of ESOP debt 96,876
ESOP expense 32,152
Purchase of common stock
for MRP <404,093>
Earned portion of MRP 78,881
Dividends on common stock <953,866>
Offering expenses for the sale of
common stock <115,362>
Net income 1,728,363
--------------
Balance at September 30, 1997 30,601,743
Change in unrealized gain on
securities, net <8,414>
Exercise of stock options 33,254
Reduction of ESOP debt 92,884
ESOP expense 187,592
Purchase of common stock
for MRP <616,558>
Earned portion of MRP 212,459
Dividends on common stock <1,489,429>
Sale of common stock (less
offering expenses of
$1,494,488) 44,131,752
Par value -
Net income 1,262,043
--------------
Balance at September 30, 1998 $74,407,326
==============
</TABLE>
29
<PAGE>
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For The Years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,262,043 $1,728,363 $1,424,387
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 843,389 839,742 476,123
Amortization (accretion), net <768,076> <136,529> 121,183
Provision for loan losses 606,500 655,000 349,250
Loss <earnings>on investment in limited
partnership 4,359,587 <184,960> -
<Gain>loss on sale of investments, net <177,388> 307,534 <53,963>
Gain on sale of real estate <45,570> <19,894> <79,034>
Loss (Gain) on sale of loans, net <20,797> <12,509> 23,328
Gain on sale of real estate held for
development <114,716> - -
Loss (Gain) on sale of premises and
equipment 4,161 191,894 <26,096>
Deferred compensation 395,941 111,033 11,520
Increase in accrued interest
receivable and other assets <2,126,635> <46,895> <789,076>
Increase (Decrease) in other liabilities <986,822> 5,656,419 1,190,696
------------------- ------------------ -------------------
Net cash provided by operating activities 3,231,617 9,089,198 2,648,318
------------------- ------------------ -------------------
Cash flows from investing activities:
Increase in loans receivable, net <21,497,351> <12,676,474> <18,966,369>
Purchases of loans receivable <54,055,109> <31,960,810> <18,242,510>
Purchase of mortgage-backed securities <80,440,920> <18,760,688> -
Purchases of investment securities <26,071,961> <11,181,806> <2,488,144>
Purchase of investments in limited partnership <181,125> <4,818,875> -
Purchase of life insurance <7,390,000> - -
Purchases of FHLB stock <2,442,100> <1,306,300> <398,300>
Purchase of premises and equipment <924,376> <2,281,841> <1,558,569>
Sales of loans receivable 28,516,313 5,746,769 9,555,720
Proceeds from redemption of FHLB stock 802,900 650,000 1,804,600
Principal repayments on mortgage-backed securities 19,316,915 4,412,449 2,967,619
Proceeds from maturities of investment securities 14,710,657 2,550,000 800,000
Proceeds from sale of mortgage-backed securities,
available for sale 22,844,186 22,570,776 2,922,009
Proceeds from sale of investment securities,
available for sale 430,298 - -
Proceeds from the sale of premises and 20,800 - 91,096
equipment
Proceeds from sale of real estate owned 282,325 95,186 120,959
Proceeds from sale of real estate held for
development 1,213,625 1,149,353 -
Capital improvements of real estate held for
development <724,265> <2,027,247> <1,406,144>
------------------- ------------------ -------------------
Net cash used in investing activities <105,589,188> <47,839,508> <24,798,033>
------------------- ------------------ -------------------
</TABLE>
Continued
30
<PAGE>
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For The Years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposit accounts 6,788,917 40,758,235 10,926,744
Proceeds from FHLB Advances 153,813,120 68,000,000 61,000,000
Repayment of FHLB Advances <112,813,120> <69,000,000> <53,000,000>
Proceeds from securities sold under agreements
to repurchase 20,173,933 - -
Proceeds from the sale of stock subscriptions 45,659,494 - 11,261,250
Payment of stock offering costs <1,494,488> <72,642> <417,536>
Purchase of stock for MRP <612,448> <404,093> -
Repayments of ESOP loan 92,884 96,876 -
Dividends paid on common stock <1,489,429> <705,866> <319,022>
Decrease in advance payments by borrowers
for property taxes and insurance <63,205> <7,436> <346,858>
-------------- ------------ ------------
Net cash provided by financing activities 110,055,658 38,665,074 29,104,578
Net increase (decrease) in cash and cash equivalents 7,698,087 <85,236> 6,954,863
Cash and cash equivalents, beginning of year 13,499,332 13,584,568 6,629,705
-------------- ------------ ------------
Cash and cash equivalents, end of year $ 21,197,419 $ 13,499,332 $ 13,584,568
============== ============ ============
Supplemental disclosures:
Cash paid during the year for
Interest $ 12,199,287 $ 9,537,349 $ 7,434,366
============== ============ ============
Taxes $ 1,668,726 $ 641,000 $ 745,840
============== ============ ============
Noncash investing activities:
Additions to real estate acquired in settlement of loans $ 158,609 $ 233,748 $ 50,859
============== ============ ============
Loans receivable exchanged for mortgage-backed
securities $ 5,167,985 - $ 3,061,294
============== ============ ============
Change in unrealized net gain (loss) on securities
available for sale, net of tax <8,414> $ 1,005,278 <$207,600>
============== ============ ============
Increase <decrease> in Employee Stock
Ownership Plan debt guaranteed by the
Bank $ 92,884 <$96,876> $ 894,160
============== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
SOUTHBANC SHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
In September 1997, SouthBanc Shares, Inc., ("Company"), a Delaware
Corporation, was formed at the direction of Perpetual Bank, A Federal
Savings Bank, ("Savings Bank") to become the holding company for the
Savings Bank in connection with the conversion of the Savings Bank's parent
mutual holding company, SouthBanc Shares, M.H.C. ("MHC"), to a stock form
of organization. The conversion and reorganization was consummated on April
14, 1998. The Company exchanged 2.85164 shares of its common stock for each
outstanding share of Perpetual common stock held by stockholders of the
Savings Bank other than the MHC. The additional 2,281,312 shares of common
stock were sold at $20.00 per share for gross proceeds of $45,626,240, less
offering cost of $1,494,488 resulting in net proceeds of $44,131,752.
Consolidation
-------------
The accompanying consolidated financial statements include the accounts of
the Company, the Bank and its wholly owned subsidiaries, United Service of
Anderson, Inc. ("USC"), which primarily engages in real estate development,
and Mortgage First Service Corporation, which holds an equity investment in
a mortgage banking company (collectively the Company). United Service
Corporation has a wholly-owned subsidiary, United Investment Services,
Inc., which primarily engages in brokerage service. All significant
intercompany items and transactions have been eliminated in consolidation.
Loans Receivable, Net
---------------------
Loans receivable are stated at their unpaid principal balances less the
allowance for loan losses, and net of deferred loan origination fees and
discounts.
The Company provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the related allowance and all recoveries are
credited to the allowance. Additions to the allowance for loan losses are
provided by charges to operations based on various factors which, in
management's judgment, deserve current recognition in estimating losses.
Such factors considered by management include the market value of the
underlying collateral, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to outstanding loans, loss
experience, delinquency trends and economic conditions. Management
evaluates the carrying value of loans periodically and the allowance is
adjusted accordingly. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in
making evaluations. Allowances for loan
32
<PAGE>
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
losses are subject to periodic evaluation by various regulatory
authorities and may be subject to adjustment upon their examination.
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan", ("SFAS No. 114") requires that
creditors value all specifically reviewed loans for which it is probable
that the creditors will be unable to collect all amounts due according to
the terms of the loan agreement at either the present value of expected
cash flows discounted at the loan's effective interest rate, or if more
practical, the market price or value of the collateral. If the resulting
value of the impaired loan is less than the recorded balance, the
impairment must be recognized by creating a valuation allowance for the
difference and recognizing a corresponding bad debt expense. SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan and requires
additional disclosures about how a creditor recognizes interest income
related to impaired loans. The Company adopted the provisions of SFAS No.
114 and No. 118 effective October 1, 1995. The adoption of these standards
required no increase to the reserve for loan losses and had no impact on
net income.
Interest income on loans and lease financing is recorded on the accrual
basis. Accrual of interest on loans (including loans impaired under SFAS
No. 114) generally is discontinued when the loan is 90 days past due and
management deems that collection of additional interest is doubtful.
Interest received on nonaccrual loans and impaired loans is generally
applied against principal or may be reported as interest income depending
on management's judgment as to the collectibility of principal. When
borrowers with loans on a nonaccrual status demonstrate their ability to
repay their loans in accordance with the contractual terms of the notes,
the loans are returned to accrual status.
The Company provides an allowance for uncollectible interest based on an
experience method of anticipated collections. This allowance is netted
against accrued interest receivable for financial statement reporting
purposes.
Loan fees and direct incremental costs of originating loans are deferred
and amortized over the contractual life of the related loan. The
amortization of the net fees or costs are recognized as a yield adjustment
using the interest method.
Loans Held For Sale
-------------------
Loans held for sale are accounted for at the lower of aggregate cost or
market value.
33
<PAGE>
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Investment and Mortgage-Backed Securities
------------------------------------------
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. These investments are classified in three
categories and are accounted for as follows: (a) debt securities that the
Company has the positive intent and ability to hold to maturity are
classified as held for investment and reported at amortized cost; (b) debt
and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in
earnings; and (c) debt and equity securities not classified as either held
for investment securities or trading securities are classified as available
for sale securities and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity. The Company has no securities classified as held for
investment or trading. SFAS No. 115 may cause fluctuations in stockholders'
equity based on changes in values of debt and equity securities classified
as available for sale.
Securities classified as available for sale will be considered in the
Company's asset/liability management strategies and may be sold in response
to changes in interest rates, liquidity needs and/or significant prepayment
risk. The cost of investment securities sold is determined by the
"identified certificate" method.
Declines in the fair value of individual securities below their cost that
are deemed by management to be other than temporary result in write-downs
of the individual securities to their fair value. The write-downs are
included in earnings as realized losses.
At September 30, 1998, the Company had increased stockholders' equity by
approximately $180,000 for the unrealized gain, net of income taxes of
$86,000, on securities available for sale, and, at September 30, 1997, the
Company had increased stockholders' equity by approximately $188,000 for
the unrealized gain, net of income taxes of $97,000, on securities
available for sale.
Investment In Limited Partnership
---------------------------------
Investment in limited partnership represents an equity investment in a
limited partnership in which the Company owned more than 20 per cent but
not in excess of 50 per cent of the limited partnership and is accounted
for under the equity method. Accordingly, the Company records 20.625% of
the partnership's profits and losses in the consolidated statement of
income.
34
<PAGE>
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans represents real estate acquired
through foreclosure and is initially recorded at estimated fair value.
Subsequent to acquisition, real estate acquired in settlement of loans is
stated at the lower of cost or fair value, less estimated selling costs.
Costs related to holding these properties are charged to operations. Market
values of real estate acquired in settlement of loans are reviewed
regularly and allowances for losses are established when the carrying
values of real estate acquired in settlement of loans exceeds fair value
less costs to sell.
Premises and Equipment
----------------------
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated primarily on the straight-line method over the
estimated useful lives of the respective assets, five to forty years.
Securities Sold Under Agreements to Repurchase
----------------------------------------------
The Company enters into sales of securities under agreements to repurchase.
Fixed-coupon reverse repurchase agreements are treated as financings, with
the obligation to repurchase securities sold being reflected as a liability
and the securities underlying the agreements remaining as an asset. The
securities are delivered by appropriate entry by the Company's safekeeping
agent to the counterparties' accounts. The dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course
of their operations, and have agreed to resell to the Company substantially
identical securities at the maturities of the agreements.
Income Taxes
------------
The provision for income taxes is based upon income and expense reported
for financial statement purposes after adjustment for permanent differences
such as tax-exempt interest income.
When income and expenses are recognized in different periods for financial
reporting purposes than for income tax purposes, deferred taxes are
provided in recognition of these temporary differences. The Company
computes its income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes" which requires the use of the liability method to record
income taxes. The liability method calculates the effect of tax rates
expected to be in
35
<PAGE>
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
place when the related temporary differences reverse. Subsequent changes in
tax rates will require adjustment to these deferred tax assets and
liabilities.
Stock Based Compensation
------------------------
In 1996, the Company adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation". The statement permits the
Company to continue accounting for stock based compensation as set forth in
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees", provided the Company discloses the pro forma effect
on net income and earnings per share of adopting the full provisions of
SFAS No. 123. Accordingly, the Company continues to account for stock based
compensation under APB Opinion 25 and has provided the required pro forma
disclosures.
Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock such as
options, warrants, convertible securities or contingent stock agreements if
those securities trade in a public market. This standard specifies
computation and presentation requirements for both basic EPS and, for
entities with complex capital structures, diluted EPS. Basic earnings per
share is computed by dividing net income by the weighted average common
shares outstanding. Diluted earnings per share is similar to the
computation of basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
The dilutive effect of options outstanding under the Company's stock option
plan is reflected in diluted earnings per share by application of the
treasury stock method. SFAS No. 128 is effective for reporting periods
ending after December 15, 1997. The Company adopted SFAS No. 128 during the
quarter ended December 31, 1997. Accordingly, all prior period earnings per
share have been restated for SFAS No. 128.
<TABLE>
<CAPTION>
For The Years Ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic weighted average shares outstanding 4,304,591 4,293,643 4,290,580
Plus stock option incremental shares considered
outstanding for diluted EPS calculations 101,790 29,172 25,300
--------- --------- ---------
Diluted Weighted Average Shares Outstanding 4,406,381 4,322,815 4,315,880
========= ========= =========
</TABLE>
36
<PAGE>
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND DILUTED
EPS COMPUTATIONS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1998
-------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $1,262,043 4,304,591 $0.29
Effect of Diluted Securities
Stock Options - 101,790 -
---------- --------- -----
Diluted EPS $1,262,043 4,406,381 $0.29
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1997
-------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $1,728,363 4,293,643 $0.40
Effect of Diluted Securities
Stock Options - 29,172 -
---------- --------- -----
Diluted EPS $1,728,363 4,322,815 $0.40
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996
-------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $1,424,387 4,290,580 $0.33
Effect of Diluted Securities
Stock Options - 25,300 -
---------- --------- -----
Diluted EPS $1,424,387 4,315,880 $0.33
========== ========= =====
</TABLE>
37
<PAGE>
(1) Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Risks and Uncertainties
-----------------------
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market
risk. The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest earning assets. Credit risk is the risk
of default on the Company's loan portfolio that results from the borrowers'
inability or unwillingness to make contractually required payments. Credit
risk also applies to investment securities and mortgage-backed securities
should the issuer of the security be unable to make principal and interest
payments. Market risk reflects changes in the value of collateral
underlying loans receivable, the valuation of real estate held by the
Company, the valuation of loans held for sale, and the valuation of
investment securities.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period.
The Company also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions
resulting from the regulators' judgments based on information available to
them at the time of their examination.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
dates of the balance sheets and revenues and expenses for the periods
covered. Actual results could differ significantly from those estimates and
assumptions.
Reclassification
----------------
Certain reclassifications of accounts reported for previous periods have
been made in these consolidated financial statements. Such
reclassifications had no effect on stockholders' equity or the net income
as previously reported.
(2) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consisted of the following at September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Working funds $ 3,518,448 $ 2,229,557
Noninterest-earning demand deposits 3,709,229 1,805,522
Interest-earning overnight deposits 13,969,742 9,464,253
----------- -----------
$21,197,419 $13,499,332
=========== ===========
</TABLE>
38
<PAGE>
(3) Investment In Limited Partnership
---------------------------------
At September 30, 1998, the Company's investment in the limited partnership
consisted of a 20.625 percent interest in Dovenmuehle Mortgage Company
Limited Partnership which invests in mortgage servicing rights. The Company
committed and invested $5.0 million in Dovenmuehle in December 1996. The
Company has no obligation to contribute additional amounts to the limited
partnership and has no additional or potential future liability to the
limited partnership in excess of the commitment amount. In 1998, the
Company established a $4.5 million loss reserve for the limited partnership
investment due to declines in market interest rates which impaired the
valuation of the mortgage servicing rights. The investment was valued at
$825,373 and $5,003,835 at September 30, 1998 and 1997, respectively. The
investment may be subject to future declines in value depending upon
performance and market conditions.
The table below contains the summarized financial information of
Dovenmuehle (unaudited).
<TABLE>
<CAPTION>
For the nine months ended
Condensed Operations Statement September 30, 1998
------------------
<S> <C>
Service Fees $ 5,595,074
Other Income 1,350,008
-------------
Total Income 6,945,082
-------------
Servicing Expense 1,428,267
Purchased Mortgage Servicing Rights
Amortization 19,961,184
Other Expense 1,691,284
-------------
Total Expense 23,080,735
-------------
Net Loss ($16,135,653)
=============
Condensed Balance Sheet At September 30, 1998
---------------------
Cash $ 577,341
Accounts Receivable 1,626,123
Purchased Mortgage Servicing Rights 27,220,384
Other Assets 40,881
Organizational Costs 397,727
-------------
Total Assets $ 29,862,456
=============
Accounts Payable 1,454,496
Long Term Debt 18,990,000
Shareholders' Equity 9,417,960
-------------
Total Liabilities and Shareholders'
Equity $ 29,862,456
=============
</TABLE>
39
<PAGE>
(4) Investment and Mortgage-Backed Securities Available for Sale
------------------------------------------------------------
The Company had securities available for sale as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
September 30, 1998
------------------
Investment securities:
FHLB Zero Coupon Bond $ 5,706,038 $122,905 $ 30,393 $ 5,798,550
U. S. Treasury Note 500,000 940 500,940
Stock Mutual Fund 993,695 993,695
Equity Investments 1,732,524 86,274 1,646,250
Municipal Bond 6,128,961 22,679 6,151,640
Bank Preferred Stock 3,152,581 27,419 3,180,000
Trust Preferred Bonds 5,028,292 20,000 18,683 5,029,609
----------- -------- -------- -----------
$23,242,091 $193,943 $135,350 $23,300,684
=========== ======== ======== ===========
Mortgage-backed securities:
FHLMC and FNMA
fixed rate $14,695,509 $163,306 $ $14,858,815
GNMA Fixed Rate 4,697,785 7,137 4,704,922
GNMA Adjustable Rate 12,075,269 106,180 12,181,449
FNMA Adjustable Rate 357,267 11,508 345,759
Private label collateralized
mortgage obligations
(CMOs) 16,706,471 66,367 22,737 16,750,101
Agency (CMOs) 25,186,843 67,158 161,755 25,092,246
----------- -------- -------- -----------
$73,719,144 $410,148 $196,000 $73,933,292
=========== ======== ======== ===========
</TABLE>
40
<PAGE>
(4) Investment and Mortgage-Backed Securities Available for Sale, Continued
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1997
------------------
Investment securities:
Federal Home Loan Bank
Indexed Principal
Reduction Bond $ 4,002,933 $ - $ 7,773 $3,995,160
FHLB Optional Principal
Redemption Bond 6,187,732 144,368 - 6,332,100
U. S. Treasury Notes 998,272 168 998,440
----------- -------- ---------- ----------
$11,188,937 $144,536 $ 7,773 $11,325,700
=========== ======== ========== ===========
Mortgage-backed securities:
FHLMC and FNMA
fixed rate $13,117,125 $114,313 $ 23,290 $13,208,148
FHLMC five year balloons 131,893 - 315 131,578
FNMA adjustable rate 438,330 - 14,271 424,059
Private label collateralized
mortgage obligations
(CMOs) 11,736,540 54,103 891 11,789,752
Agency CMOs 10,290,087 19,076 - 10,309,163
----------- -------- ---------- -----------
$35,713,975 $187,492 $ 38,767 $35,862,700
=========== ======== ========== ===========
</TABLE>
The amounts of scheduled maturities of investments and mortgage-backed
securities at September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Less than one year $ 500,000 $ 500,940
One year to ten years 3,386,699 3,428,657
Ten to twenty years 24,161,506 24,386,559
Twenty to twenty-five years 1,331,112 1,330,734
Twenty-five to thirty years 59,839,516 59,929,641
No stated maturity 7,742,402 7,657,445
----------- -----------
$96,961,235 $97,233,976
=========== ===========
</TABLE>
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at September 30, 1998 by contractual
maturity are shown above. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
41
<PAGE>
(4) Investment and Mortgage-Backed Securities Available for Sale, Continued
-----------------------------------------------------------------------
At September 30, 1998 and 1997, $300,000 of securities were pledged as
collateral for certain deposits.
Proceeds from sales of securities available for sale and the related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
For The Years Ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of securities $23,274,484 $22,872,420 $2,922,009
Gross realized gains 226,884 7,866 56,228
Gross realized losses 49,496 315,400 2,265
</TABLE>
(5) Loans Receivable, Net
---------------------
Loans receivable at September 30, 1998, and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First mortgage loans, substantially all
one to four family $118,624,939 $118,663,177
Construction 33,746,675 17,145,456
Commercial real estate 35,069,154 26,975,976
Loan participations purchased 12,492,101 859,952
Home improvement loans 2,122,370 3,405,621
Commercial loans 11,155,726 7,181,746
Consumer loans 19,134,765 14,422,484
Loans secured by deposits 1,583,465 1,345,137
------------ ------------
233,929,195 189,999,549
Less:
Deferred loan fees, net 272,752 356,780
Allowance for loan losses 2,374,044 1,886,243
Undisbursed loans in process 11,386,283 8,984,260
------------ ------------
Loans receivable, net $219,896,116 $178,772,266
============ ============
</TABLE>
Changes in the allowance for loan losses for the years ended September 30,
1998, 1997, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $1,886,243 $1,534,773 $1,278,423
Provision for loan losses 606,500 655,000 349,250
Charge-offs <174,183> <332,194> <115,558>
Recoveries 55,484 28,664 22,658
---------- ---------- ----------
Balance, end of year $2,374,044 $1,886,243 $1,534,773
========== ========== ==========
</TABLE>
42
<PAGE>
(5) Loans Receivable, Net, Continued
--------------------------------
Loans serviced for others amounted to approximately $74,877,000,
$62,148,000, and $73,303,000 at September 30, 1998, 1997 and 1996,
respectively.
At September 30, 1998 and 1997, the Company had approximately $ -0- and
$479,000, respectively, in loans receivable, which were ninety days or more
delinquent and accruing interest.
As of September 30, 1998, the Company had purchased loans in the state of
South Carolina as follows:
1 - 4 family residential $36,873,390
Real estate development 7,593,989
Construction 22,693,382
Loans Held for Sale at September 30, 1998 and September 30, 1997 were $ -0-
and $7,102,000, respectively.
At September 30, 1998, 1997 and 1996, the Company had approximately
$1,175,000, $403,000, and $316,000, respectively, in non-accrual loans. The
amount of interest income that would have been recognized had these loans
performed according to their contractual terms amounted to approximately
$110,000, $19,000, and $22,000 during the years ended September 30, 1998,
1997, and 1996, respectively. The actual interest income recognized on
these loans amounted to approximately $26,000, $11,000, and $28,000 during
the years ended September 30, 1998, 1997, and 1996, respectively.
At September 30, 1998, 1997, and 1996, the carrying value of loans that are
considered to be impaired under SFAS No. 114 totaled approximately
$1,264,000, $517,000, and $795,000, respectively. Impairments on these
loans are included in loan losses. The average balance of impaired loans
was $1,339,250, $512,000, and $687,400 for years ended September 30, 1998,
1997 and 1996, respectively. Interest income recognized on impaired loans
was $26,489, $68,414, and $28,176, for years ended September 30, 1998, 1997
and 1996, respectively.
Activity in loans to officers, directors and other related parties for the
years ended September 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $925,503 $ 975,762
New loans 88,000 143,923
Repayments <96,489> <194,182>
-------- ---------
Balance at end of year $917,014 $ 925,503
======== =========
</TABLE>
43
<PAGE>
(5) Loans Receivable, Net, Continued
--------------------------------
The Company primarily grants residential loans to customers in Anderson
County, South Carolina, and the surrounding communities. The Company's
ability to collect these balances depends substantially upon the economic
conditions and real estate market in the region. The Company does not have
any concentrations of loans to any one borrower. The Company has increased
its commercial and consumer loan portfolios which may entail greater risk
than residential mortgage loans.
(6) Real Estate
-----------
Real estate is summarized at September 30, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate held for development $1,909,394 $2,284,038
Real estate acquired in settlement of loans 88,965 162,776
---------- ----------
$1,998,359 $2,446,814
========== ==========
</TABLE>
(7) Premises and Equipment
----------------------
Premises and equipment are summarized at September 30, 1998 and 1997 as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 871,242 $ 871,242
Office and other buildings 3,716,123 3,643,431
Furniture, fixtures and equipment 5,174,312 4,543,952
----------- -----------
9,761,677 9,058,625
Less accumulated depreciation (3,411,186) (2,764,160)
----------- -----------
$ 6,350,491 $ 6,294,465
=========== ===========
</TABLE>
Depreciation expense was $843,389, $647,848, and $472,343 for the years
ended September 30, 1998, 1997 and 1996, respectively.
44
<PAGE>
(8) Deposits
--------
Deposits outstanding by type of account and range of interest rates at
September 30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Range of Range of
Interest Interest
Balance Rates Balance Rates
------- ----- ------- -----
<S> <C> <C> <C> <C>
Non-interest bearing checking accounts $ 15,198,169 - $ 11,811,694 -
Interest-bearing checking accounts 35,795,875 1.21% - 5.01% 25,995,824 1.75% - 4.76%
Passbook accounts 25,203,536 2.12% - 3.04% 24,359,999 1.75% - 3.00%
----------- -----------
76,197,580 62,167,517
Certificate accounts 131,593,195 2.28% - 8.00% 138,834,341 2.50% - 8.00%
----------- -----------
$ 207,790,775 $ 201,001,858
============= =============
Weighted average interest rate 4.35% 4.64%
===== =====
</TABLE>
The amounts of scheduled maturities of certificate accounts at September
30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Maturing within one year $ 96,866,360 $115,651,298
Maturing one through three years 34,348,026 22,328,414
Maturing after three years 378,809 854,629
------------ ------------
$131,593,195 $138,834,341
============ ============
</TABLE>
At September 30, 1998, 1997 and 1996, the aggregate amounts of time
deposits of $100,000 or more amounted to $17,412,810, $18,540,473, and
$13,650,728, respectively. Interest paid on time deposits greater than
$100,000 was $988,989, $1,083,484, and $580,155 for the years ended
September 30, 1998, 1997 and 1996, respectively.
45
<PAGE>
(9) Advances from the FHLB
----------------------
Advances from the FHLB at September 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Maturity September 30, 1998 September 30, 1997
------------------ ------------------
Date Interest Rate Balance Interest Rate Balance
---- ------------- ------- ------------- -------
<S> <C> <C> <C> <C>
1998 4.78 $25,000,000 6.47 $10,000,000
1999 5.21 31,000,000 5.78 5,000,000
----------- -----------
$56,000,000 $15,000,000
=========== ===========
</TABLE>
At September 30, 1998, the Company had $56,000,000 in outstanding Federal
Home Loan Bank of Atlanta ("FHLB") advances and, based upon eligible
collateral, available credit of $32,100,000.
The Company, as a member institution of the FHLB of Atlanta, is required to
own capital stock in the FHLB of Atlanta based generally on the Company's
balances of residential mortgage loans and FHLB Advances. No ready market
exists for the FHLB stock, and it has no quoted market value. Redemption of
this stock has historically been at par value. As collateral for its
Advances, the Company has pledged qualifying residential mortgage loans
totaling $88.1 million and all of its FHLB stock.
(10) Securities Sold Under Agreements to Repurchase
----------------------------------------------
The Company had $20,173,933 and $0 borrowed under agreements to repurchase
at September 30, 1998 and 1997, respectively. The Company did not enter
into agreements during 1997 and 1996. The amount of securities sold under
agreements to repurchase at September 30, 1998 was $22,916,463. The maximum
amount outstanding at any month end during fiscal 1998 was $20,185,183. The
average amount of outstanding agreements for fiscal 1998 was approximately
$17,912,000.
(11) Income Taxes
------------
Income taxes for the years ended September 30, 1998, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ 994,696 $ 544,803 $1,008,811
Deferred (446,000) (381,000) (253,000)
--------- --------- ----------
Total $ 548,696 $ 925,803 $ 755,811
========= ========= ==========
</TABLE>
46
<PAGE>
(11) Income Taxes, Continued
-----------------------
Income tax expense differs from the amount computed at the federal
statutory rate of 34% for the years ended September 30, 1998, 1997 and
1996, as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes at federal rate $615,651 $902,416 $741,267
Differences resulting from:
State taxes, net of
federal benefit 29,000 81,000 71,000
Decrease in beginning of year
valuation allowance (80,000) (81,000) (71,000)
Other (15,955) 23,387 14,544
-------- -------- --------
$548,696 $925,803 $755,811
======== ======== ========
Effective income tax rate 30.3% 34.9% 34.7%
======== ======== ========
</TABLE>
At September 30, 1998, the Company has state net operating loss
carryforwards of approximately $49 million. These carryforwards expire in
various amounts beginning in fiscal year 1999 through 2011.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss allowances deferred for tax purposes $ 901,000 $ 716,000
State loss carryforwards 2,401,000 2,465,000
Other 286,000 89,000
--------- ---------
Total gross deferred tax assets 3,588,000 3,270,000
Less valuation allowances, primarily for tax
loss carryforwards <2,400,000> <2,480,000>
----------- -----------
Net deferred tax assets 1,188,000 790,000
--------- -------
Deferred tax liabilities:
Depreciation for tax purposes in excess of such
amount for financial reporting purposes 177,000 172,000
Tax bad debt reserve in excess of base year 307,000 307,000
Unrealized gain on securities available for sale 86,000 97,000
Loan fee income adjustments for tax purposes 22,000 36,000
Other 109,000 148,000
------- -------
Total gross deferred tax liabilities 701,000 760,000
------- -------
Net deferred tax asset (included in
other assets) $ 487,000 $ 30,000
=========== ===========
</TABLE>
<PAGE>
(11) Income Taxes, Continued
-----------------------
A portion of the change in the deferred tax asset relates to unrealized
losses on securities available for sale. In fiscal 1998, the related
deferred tax benefit of $11,000 has been recorded directly to
stockholders' equity. The balance of the change in the net deferred tax
asset results from the current period deferred tax benefit of $446,000. In
fiscal 1997, the deferred taxes related to the unrealized gains on
securities available for sale of $518,000 has been recorded directly to
stockholders' equity with the balance of the change in the net deferred
tax asset resulting from the current period deferred tax expense of
$381,000.
The realization of net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income
in certain periods, and the utilization of tax planning strategies.
Management has determined that it is more likely than not that the net
deferred tax assets can be supported based upon these criteria except for
the state loss carryforwards. A valuation allowance for the deferred tax
asset has been reflected to reduce the potential deferred tax assets,
primarily for state loss carryforwards, to an amount that more likely than
not can be realized at September 30, 1998 and 1997.
Legislation has been passed which repeals the "Percentage of Taxable
Income Method" of accounting for savings and loan bad debt reserves for
the first tax year beginning after December 31, 1995 (the fiscal year
ending September 30, 1997 for the Company). This legislation requires all
savings and loan institutions to account for bad debts using either the
specific charge-off method (available to all savings and loans) or the
experience method (available only to savings and loans that qualify as
"small banks", i.e., under $500 in assets.) The Company currently uses the
experience method of accounting for its bad debt reserves. The legislation
suspends the recapture of bad debt reserves taken through 1987 (i.e., the
base year reserve), but requires savings and loans to recapture or repay
bad debt deductions taken after 1987 over an eight-year period. The
legislation allows the Company to defer recapture of this amount for the
years ended September 30, 1998 and 1997, suspending the recapture to begin
with the year ended September 30, 1999. The recapture is then shortened to
six years due to the two year deferral. As of September 30, 1998, the bad
debt reserve subject to recapture, for which deferred taxes have
previously been provided, totaled approximately $808,000. As permitted
under SFAS 109, no deferred tax liability is provided for approximately
$5.2 million of such tax bad debt reserves that arose prior to October 1,
1988.
(12) Capital
-------
The Company is not subject to any regulatory capital requirements. The
Savings Bank's actual capital and ratios as required by the Savings Bank's
primary regulator, the Office of Thrift Supervision (OTS), as well as
those required to be considered well capitalized according to the Prompt
Corrective Action Provisions are presented in the following table. As of
September 30, 1998, the most recent notification from the OTS categorized
the Savings Bank as well capitalized under the regulatory framework for
prompt corrective action. To be
48
<PAGE>
(12) Capital, Continued
------------------
categorized as well capitalized, the Savings Bank must maintain minimum
total risk-based, Tier I risked-based, and Tier I core ("leverage") ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Savings Bank's
category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
- -------------------------
Tangible Capital (To Total Assets) $49,983 14.8% $ 5,075 1.5% $ - -%
Core Capital (To Total Assets) 49,983 14.8 13,533 4.0 16,916 5.00
Tier I Capital (To Risk-Based Assets) 49,983 23.7 - - 12,661 6.00
Risk-Based Capital (To Risk-Based
Assets) 50,266 23.8 16,881 8.0 21,101 10.00
As of September 30, 1997:
- -------------------------
Tangible Capital (To Total Assets) 27,320 10.6 3,825 1.5
Core Capital (To Total Assets) 27,320 10.6 7,651 3.0 12,811 5.00
Tier I Capital (To Risk-Based Assets) 27,320 17.3 - - 9,503 6.00
Risk-Based Capital (To Risk-Based
Assets) 29,066 18.4 12,670 8.00 15,838 10.00
</TABLE>
If the Savings Bank were to fail to meet the minimum capital requirements,
it will be required to file a written capital restoration plan with
regulatory agencies and would be subject to various mandatory and
discretionary restrictions on its operations.
49
<PAGE>
(12) Capital, Continued
------------------
The following table reconciles the Company's consolidated stockholders'
equity to its regulatory capital positions at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Stockholders' equity $74,407,326 $30,601,743
Adjustment for equity of Company not eligible
for computation <21,672,605>
Adjustments for unrealized (gains) losses on
available for sale securities (217,984) (188,423)
Investments in and advances to nonincludable
subsidiaries (1,920,541) (2,092,695)
Disallowed servicing assets (613,615) (1,000,767)
----------- -----------
Regulatory tangible and core capital 49,982,581 27,319,858
Supplemental capital 2,318,291 1,746,230
Equity Assets to be deducted <2,035,031> 0
----------- -----------
Risk-based capital $50,265,841 $29,066,088
=========== ===========
</TABLE>
(13) Employee Benefit Plans
----------------------
The Company has a profit sharing and deferred compensation plan for
substantially all full-time employees. The plan permits eligible
participants to contribute a percentage of their salary up to amounts
permitted by the Internal Revenue Code each year. At the discretion of the
Board of Directors, the Company may match a percentage of each
participant's contribution during the plan year. In addition, the Board of
Directors may from year to year make a discretionary contribution to the
plan. The Company's contribution recorded as expense for the years ended
September 30, 1998, 1997 and 1996, was $203,790, $219,123, and $160,525,
respectively.
Supplemental benefits are provided to certain key officers under
Supplemental Executive Retirement Agreements. These agreements are not
qualified under the Internal Revenue Code, and the benefits are unfunded.
However, certain benefits are informally and indirectly funded by
insurance policies on the lives of the covered officers.
(14) Stock Option Plan
-----------------
In October 1993, the Savings Bank's Board of Directors adopted a stock
option and incentive plan. The plan was assumed by the Company. Pursuant
to the plan, an aggregate of 32,805 shares of common stock were reserved
for issuance upon exercise of stock options and awards to be granted to
directors, officers, and other key employees from time to time under the
plan. The Company's management was granted incentive stock options, and
the Company's non-officer directors were granted non-incentive stock
options. These options are at an exercised price of $3.51 per share and
expire in October 2003.
50
<PAGE>
(14) Stock Option Plan, Continued
----------------------------
In April 1997, the Bank's stockholders approved a second stock option plan
and incentive plan. Pursuant to the plan, which was assumed by the
Company, 166,825 shares of common stock have been reserved for issuance
upon exercise of stock options and awards to be granted to directors,
officers, and other key employees from time to time under the plan. The
Company's management was granted incentive stock options, and the
Company's non-officer directors were granted non-qualified stock options.
These options are at an exercised price of $8.85 and expire in April 2007.
The following table summarizes option activity during the years ended
September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
<S> <C> <C>
Outstanding at September 30, 1995 25,300 $3.51
Granted - -
Exercised - -
Outstanding at September 30, 1996 25,300 3.51
Granted 166,825 8.85
Exercised 12,182 3.51
------- -----
Outstanding at September 30, 1997 179,943 8.47
Granted
Exercised 3,765 8.85
------- -----
Outstanding at September 30, 1998 176,178 $8.45
======= =====
</TABLE>
The Company applies APB Opinion 25 in accounting for the stock-based
option plans which are described in the preceding paragraph. Accordingly,
no compensation expense has been recognized for the stock-based option
plans. Had compensation cost been recognized for the stock-based option
plans applying the fair-value-based method as prescribed by SFAS 123, the
Bank's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net Income
----------
As Reported $1,262,043 $1,728,363 $1,424,387
Pro forma 1,184,589 1,702,803 1,424,387
Earnings Per Share
--------------------
Basic
As Reported $ .29 $ .40 $ .33
Pro forma .28 .40 .33
Diluted
As Reported $ .29 $ .40 $ .33
Pro forma .27 .39 .33
</TABLE>
51
<PAGE>
(14) Stock Option Plan, Continued
----------------------------
The effects of applying SFAS 123 may not be representative of the effects
on reported net income in future years.
The fair value of each option granted 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:
Dividend yield 3.25%
Expected volatility 38%
Risk-free interest rate 6.59%
Expected lives 7.5 years
There were no options granted in 1998 and 1996.
(15) Management Recognition Plan
---------------------------
The Company adopted a Management Recognition Plan ("MRP") during fiscal
1994. Those eligible to receive benefits under the MRP included certain
officers of the Company as determined by a committee appointed by the
Board of Directors of the Company. During the year ended September 30,
1994, 9,838 shares of common stock were granted to management under the
MRP, vesting over a three year period. Vested shares at September 30, 1998
and 1997 were 9,838 for both years. All shares are vested at September 30,
1998 and 1997. For fiscal 1998 and 1997, there was no compensation related
to vesting of the shares; and for 1996, compensation was $11,520.
In April 1997, the Company adopted a second Management Recognition Plan
with 66,728 shares of common stock being granted to management, vesting
over a five-year period. The 1996 MRP was assumed by the Company. During
the fiscal year 1998, 32,551 shares were purchased and for fiscal year
1997, 34,177 shares were purchased by the Company for issuance of awards.
Compensation expense related to vesting of shares was $208,354 and $78,881
for fiscal year 1998 and 1997, respectively.
(16) Employee Stock Ownership Plan
-----------------------------
The Bank has an Employee Stock Ownership Plan (ESOP) established by the
Board of Directors during fiscal 1994. The ESOP borrowed $80,500 from a
third party lender and acquired 22,956 shares of the Company's common
stock in October 1993. All shares acquired in 1993 have been allocated to
participants. With the stock offering in September 1996, the ESOP borrowed
$900,900 from a third party lender and acquired 133,457 shares of the
Company's common stock. In 1998, this loan with the third party lender was
paid off,
52
<PAGE>
(16) Employee Stock Ownership Plan, Continued
----------------------------------------
and the ESOP refinanced the loan with the Company in connection with the
Conversion and Reorganization. The Company has presented the out-standing
loan amounts as an other liability and as a reduction of stockholders'
equity in the accompanying consolidated balance sheets. Interest on the
unpaid principal balance is due quarterly and is based on the prime rate.
The Company paid interest of $65,845, $72,552, and $3,535 for fiscal 1998,
1997, and 1996, respectfully. Compensation recorded under the ESOP was
$188,330, $129,028, and $10,245 for the fiscal years 1998, 1997, and 1996,
respectively.
(17) Commitments and Contingencies
-----------------------------
In conjunction with its lending activities, the Company enters into
various commitments to extend credit and issue letters of credit. Loan
commitments (unfunded loans and unused lines of credit) and letters of
credit are issued to accommodate the financing needs of the Bank's
customers. Loan commitments are agreements to lend moneys at a future
date, so long as there are no violations of any conditions established in
the agreement. Letters of credit commit the Company to make payments on
behalf of customers when certain specified events occur.
Financial instruments where the contract amount represents the Company's
credit risk at September 30, 1998 and 1997, include loan and letter of
credit commitments of $35,815,000 and $27,941,000, respectively.
These loan and letter of credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon management's assessment of the
credit risk. Since many of the extensions of credit are expected to expire
without being drawn, the total commitment amounts do not necessarily
represent future cash requirements.
Outstanding commitments on mortgage loans not yet closed amounted to
approximately $22,697,000 and $7,273,000 at September 30, 1998 and 1997,
respectively. Substantially, all of these commitments were at variable
interest rates. Such commitments, which are funded subject to certain
limitations, extend over varying periods of time with the majority being
funded within thirty days.
commitments will be funded with the cash flow generated from normal
operations, as well as possible utilization of existing credit facilities
available to the Company.
(18) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The Company's fair value methods, assumptions, carrying amounts and fair
value of financial instruments at September 30, 1998 and 1997 are
summarized below:
53
<PAGE>
(18) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
For cash and cash equivalents and FHLB stock, the carrying value is a
reasonable estimate of fair value.
For investment securities available for sale, mortgage-backed securities
and collateralized mortgage obligations, fair value is based on available
quoted market prices or quoted market prices for similar securities if a
quoted market price is not available.
The fair value of the limited partnership is based on an appraised value
by an independent appraiser.
The fair value of fixed rate loans is estimated based upon discounted
future cash flows using discount rates comparable to rates currently
offered for such loans. The discounted future cash flows reflect estimated
maturity dates adjusted for expected prepayments. For adjustable rate
loans, the fair value is equal to the carrying amount due to frequent
repricing.
The fair value of time deposits is estimated by discounting the amounts
payable at the certificate rates currently offered for deposits of similar
remaining maturities. The fair value of all other deposit account types is
the amount payable on demand at year-end.
For FHLB Advances, fair value is estimated based on discounting amounts
payable at the current rates offered to the Company for debt of the same
remaining maturities.
The fair value of securities sold under agreements to repurchase is equal
to the carrying amount due to their short maturities.
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 21,197,419 $ 21,197,419 $ 13,499,332 $ 13,499,332
Investment in Limited Partnership 825,373 825,373 5,003,835 5,003,835
Investment securities available
for sale 23,300,684 23,300,684 11.325,700 11,325,700
Federal Home Loan Bank stock 3,289,200 3,289,200 1,650,000 1,650,000
Mortgage-backed securities and
collateralized mortgage
obligations, net 73,933,292 73,933,292 35,862,700 35,862,700
Loans receivable, net 219,896,116 220,019,468 178,772,266 179,094,089
Financial liabilities:
Deposits
Demand deposits 76,197,580 76,311,647 62,167,517 62,301,280
Certificate accounts 131,593,195 131,511,270 138,834,341 139,272,816
Advances from the FHLB 56,000,000 55,356,682 15,000,000 15,069,702
Securities sold under agreements
to repurchase 20,173,933 20,173,933 - -
</TABLE>
54
<PAGE>
(18) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
The Company had $58.5 million of off-balance sheet financial commitments,
which are commitments to originate loans and unused consumer lines of
credit. Since these obligations are based on current market rates, the
carrying amount is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale the Company's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and
prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates.
Further, the fair value estimates were calculated as of September 30, 1998
and 1997. Changes in market interest rates and prepayment assumptions
could significantly change the fair value. Therefore, management believes
that the foregoing information is of limited value and has no basis for
determining whether the fair value presented would be indicative of the
value which could be negotiated during an actual sale.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise value, loan servicing
portfolio, real estate, deferred tax liabilities, premises and equipment,
and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
these estimates.
(19) Dividends
---------
During fiscal 1998, the Company's Board of Directors declared cash
dividends of $.12 per share for all four quarters.
During fiscal 1997, the Board of Directors declared cash dividends of $.11
per share for the first quarter and $.12 per share for the second, third,
and fourth quarters. For all 1997 dividends, the MHC obtained permission
from the OTS to waive the receipt of dividends paid by the Bank.
55
<PAGE>
(19) Dividends, Continued
--------------------
During fiscal 1996, the Board of Directors declared cash dividends of $.11
per share for all four quarters. For fiscal 1996 dividends, the Bank
obtained permission from the OTS to waive dividends payable to the MHC.
On April 14, 1998, the Company completed the Conversion and
Reorganization. A special liquidation account was established by the Bank
for the preconversion retained earnings of approximately $12.9 million.
The liquidation account will be maintained for the benefit of depositors
who held a savings or demand account as of the June 30, 1996 eligibility
or the December 31, 1997 supplemental eligibility record dates who
continue to maintain their deposits at the Bank after the conversion. In
the event of a future liquidation (and only in such an event), each
eligible and supplemental eligible account holder who continues to
maintain his or her savings account will be entitled to receive a
distribution from the liquidation account. The total amount of the
liquidation account will be decreased in an amount proportionately
corresponding to decreases in the savings account balances of eligible and
supplemental eligible account holders on each subsequent annual
determination date. Except for payment of dividends by the Bank to the
holding company and repurchase of the Company's stock, the existence of
the liquidation account will not restrict the use or application of such
net worth.
The Company is prohibited from declaring cash dividends on its common
stock or repurchasing its common stock if the effect thereof would cause
its net worth to be reduced below either the amount required for the
liquidation account or the minimum regulatory capital requirement. In
addition, the Company is also prohibited from declaring cash dividends and
repurchasing its own stock without prior regulatory approval in any amount
in a calendar year in excess of 100% of its current year's net income to
the date of any such dividend or repurchase, plus 50% of the excess of its
capital at the beginning of the year over its regulatory capital
requirement.
56
<PAGE>
(20) CONDENSED FINANCIAL INFORMATION FOR SOUTHBANC SHARES, INC.
----------------------------------------------------------
The following are condensed statements of the Company (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets SEPTEMBER 30, 1998
------------------
<S> <C>
Assets
Cash and cash equivalents $10,572
Investment securities 10,837
Investment in bank subsidiary 52,735
ESOP loan Perpetual Bank FSB 711
Other assets 110
-------
Total Assets $74,965
=======
Liabilities and Stockholders' Equity
Liabilities $ 558
Stockholders' Equity 74,407
-------
Total Liabilities and Stockholders' Equity $74,965
=======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
Condensed Statement of Income SEPTEMBER 30, 1998
------------------
<S> <C>
Equity in undistributed net income of bank subsidiary $ 904
Interest Income - Investments 576
Other Expenses <218>
------
Net Income $1,262
======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
Condensed Statement of Cash Flows SEPTEMBER 30, 1998
------------------
<S> <C>
Operating Activities:
Net Income $ 1,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of bank subsidiary <904>
Increase in other assets <110>
Increase in other liabilities 558
--------
Net cash provided by operating activities 806
Investing Activities:
Purchase of investments <10,876>
ESOP loan <711>
--------
Net cash used in investing activities <11,587>
Cash flow from financing activities:
Proceeds from sale of stock 22,066
Dividends paid <713>
--------
Net cash provided by financing activities 21,353
--------
Net increase (decrease) in cash and cash equivalents 10,572
Cash and cash equivalents, beginning of year -
--------
Cash and cash equivalents, end of year $ 10,572
========
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- ---- -------------------------------------------
Summarized unaudited quarterly operating results for the years ended
September 30, 1998 and 1997 are as follows (in thousands, except share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
- ------------------
Interest income $5,073 $5,688 $6,378 $6,798
Interest expense 2,741 3,156 3,073 3,285
---------- ---------- ---------- ----------
Net interest income 2,332 2,532 3,305 3,513
Provision for loan losses 88 175 40 304
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 2,244 2,357 3,265 3,209
Noninterest income 719 949 877 1,216
Loss reserve on limited partnership - - 100 4,400
Noninterest expense 2,000 2,160 2,226 2,139
---------- ---------- ---------- ----------
Income <loss> before income taxes 963 1,146 1,816 <2,114>
Income taxes 328 389 610 <778>
---------- ---------- ---------- ----------
Net income <loss> $635 $757 $1,206 <$1,336>
========== ========== ========== ==========
Basic earnings <loss> per share $0.14 $0.18 $0.28 <$0.31>
Diluted earnings <loss> per share 0.14 0.18 0.27 <0.30>
Weighted average shares outstanding
Basic 4,302,763 4,302,763 4,304,596 4,306,410
Diluted 4,404,281 4,412,576 4,411,353 4,400,474
SEPTEMBER 30, 1997
- ------------------
Interest income $4,182 $4,407 $4,808 $4,999
Interest expense 2,000 2,293 2,498 2,704
---------- ---------- ---------- ----------
Net interest income 2,182 2,114 2,310 2,295
Provision for loan losses 30 145 90 390
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 2,152 1,969 2,220 1,905
Noninterest income 511 714 709 <79>
Noninterest expense 1,798 2,051 1,927 1,670
---------- ---------- ---------- ----------
Income before income taxes 865 632 1,002 156
Income taxes 294 215 341 76
---------- ---------- ---------- ----------
Net income $571 $417 $661 $80
========== ========== ========== ==========
Basic earnings per share $0.13 $0.10 $0.15 $0.02
Diluted earnings per share 0.13 0.10 0.15 0.02
Weighted average shares outstanding
Basic 4,290,580 4,290,580 4,290,580 4,296,705
Diluted 4,297,561 4,298,437 4,309,892 4,372,283
</TABLE>
58
<PAGE>
(22) SUBSEQUENT EVENT
- ---------------------
On October 29, 1998, the Company announced plans to repurchase up to 26.5%
or 1,141,523 of its outstanding common stock. The repurchase program began
November 2, 1998, and is expected to be completed over the next six months.
As of December 8, 1998, the Company has repurchased 546,118 shares of its
common stock at a cost of $10,864,292.
59
<PAGE>
CORPORATE INFORMATION
EXECUTIVE AND SENIOR OFFICERS TITLE
- ----------------------------- -----
Robert W. "Lujack" Orr President/CEO
Thomas C. Hall Senior Vice President
Barry C. Visioli Senior Vice President
Sylvia B. Reed Corporate Secretary
John W. Dawkins Vice President
David L. Peters Vice President
James P. Vickery Vice President
Doris W. Hoover Vice President
Teresa A. Hix Vice President
Quinnette Morrison Vice President
Rose Alice Robinson Vice President
DIRECTORS OCCUPATION
- --------- ----------
Richard C. Ballenger President, City Glass Company and D&B Glass
Company, Inc., a glass company
Martha S. Clamp Certified Public Accountant
F. Stevon Kay President, Hill Electric Company, Inc., an
electrical contractor
Jack F. McIntosh Attorney
Robert W. "Lujack" Orr President/CEO, SouthBanc Shares, Inc.
H. A. Pickens, Jr. Owner, Harold A. Pickens & Sons, Inc., a
commercial construction contractor
C. G. Seabrook, Jr. Mentor
Jim Gray Watson Retired President Perpetual Bank FSB
DIRECTOR EMERITI OCCUPATION
- ---------------- ----------
Charles W. Fant, Jr. Partner, Fant & Fant Architects, an
architectural firm
J. Roy Martin, Jr. Retired Chairman of Martin Roofing Company, a
commercial roofing contractor
Wade A. Watson, Jr. Retired President of Perpetual Bank FSB
FORM 10
- -------
A copy of the Company's Annual Report on Form 10-K as filed with the Securities
and Exchange Commission for the year ended September 30, 1998, may be obtained
without charge by writing to Thomas C. Hall, Chief Financial Officer, at the
Corporate Address.
ANNUAL MEETING OF STOCKHOLDERS
- ------------------------------
The Annual Meeting of Stockholders will be held on Wednesday, January 27, 1999,
at 2:00 P. M. Eastern Time at the Corporate Office.
60
<PAGE>
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
SouthBanc Shares' common stock is traded on the NASDAQ National Market under the
symbol "SBAN". As of December 1, 1998, there were approximately 1,858 registered
shareholders. The holders of common stock are entitled to receive dividends when
and as declared by the Board of Directors. The payment of dividends by the
Company is within the discretion of the Company's Board of Directors. The
ability of the Company to declare and pay cash dividends depends primarily on
the ability of the Savings Bank to pay cash dividends to the Company. See Note
19 of the Notes to the Consolidated Financial Statements for the regulatory
restrictions applicable to the Savings Bank's ability to pay cash dividends.
The table below presents the range of high and low stock prices and dividends,
adjusted for the stock split on April 14, 1998, declared during the quarter. The
Company's common stock began trading on April 15, 1998. Data presented before
that date is for the common stock of the Savings Bank.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
---- --- --------
<S> <C> <C> <C>
December 31, 1996 $ 8.50 $ 7.10 $0.11
March 31, 1997 $ 9.29 $ 7.91 $0.12
June 30, 1997 $10.43 $ 8.46 $0.12
September 30, 1997 $19.99 $10.61 $0.12
December 31, 1997 $22.97 $17.71 $0.12
March 31, 1998 $23.40 $20.95 $0.12
June 30, 1998 $23.76 $18.50 $0.12
September 30, 1998 $20.75 $15.00 $0.12
</TABLE>
61
<PAGE>
CORPORATE OFFICES
-----------------
SouthBanc Shares, Inc.
907 North Main Street
Anderson, South Carolina 29621
BRANCH OFFICES
--------------
Northtowne Branch
3898 Liberty Highway
Anderson, South Carolina 29621
Perpetual Square
2125 North Highway 81
Anderson, South Carolina 29621
Seneca Office
1007 Bypass 123
Seneca, South Carolina 29678
Watson Village
2821 South Main Street
Anderson, South Carolina 29626
Whitehall Office
104 Whitehall Road
Anderson, South Carolina 29625
INDEPENDENT AUDITORS
--------------------
Elliott, Davis & Company LLP
Greenville, South Carolina
SPECIAL SECURITIES COUNSEL
--------------------------
Muldoon, Murphy & Faucette
Washington, D. C.
62
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Registrant
- ----------
SouthBanc Shares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------------------------------- --------------- ----------------------
<S> <C> <C>
Perpetual Bank, A Federal Savings Bank 100% United States
United Service Corporation of
Anderson, Inc.(b) 100% South Carolina
United Investments Services, Inc.(c) 100% South Carolina
Mortgage First Service Corporation(b) 100% South Carolina
- -------------------------
</TABLE>
(a) The operations of the wholly owned subsidiaries of the Registrant are
included in the Registrant's Consolidated Financial Statements contained in
the Annual Report attached hereto as Exhibit 13.
(b) Wholly-owned by the Savings Bank.
(c) Wholly-owned by United Service Corporation of Anderson, Inc.
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS REPORT
---------------------------
The Board of Directors
Perpetual Bank, A Federal Savings Bank
and Subsidiaries
We have audited the consolidated balance sheets of Perpetual Bank, A Federal
Savings Bank and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended September 30, 1997. 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 Perpetual Bank, A
Federal Savings Bank and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
November 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF SOUTHBANC SHARES, INC. FOR THE YEAR ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,277
<INT-BEARING-DEPOSITS> 13,970
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,234
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 219,896
<ALLOWANCE> 2,374
<TOTAL-ASSETS> 362,529
<DEPOSITS> 207,791
<SHORT-TERM> 25,000
<LIABILITIES-OTHER> 4,157
<LONG-TERM> 51,174
0
0
<COMMON> 57,508
<OTHER-SE> 16,899
<TOTAL-LIABILITIES-AND-EQUITY> 362,529
<INTEREST-LOAN> 17,275
<INTEREST-INVEST> 6,662
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,937
<INTEREST-DEPOSIT> 8,902
<INTEREST-EXPENSE> 12,256
<INTEREST-INCOME-NET> 11,681
<LOAN-LOSSES> 606
<SECURITIES-GAINS> 177
<EXPENSE-OTHER> 8,525
<INCOME-PRETAX> 1,811
<INCOME-PRE-EXTRAORDINARY> 1,811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,262
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 7.90
<LOANS-NON> 1,175
<LOANS-PAST> 0
<LOANS-TROUBLED> 89
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,886
<CHARGE-OFFS> 174
<RECOVERIES> 55
<ALLOWANCE-CLOSE> 2,374
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,374
</TABLE>
