<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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission Number: 0-23751
-------------------------------------------------------------------
SOUTHBANC SHARES, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 58-2361245
----------------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
907 N. Main Street, Anderson, South Carolina 29621-5526
----------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 225-0241
----------------
Securities registered pursuant to Section 12(b) of the Act: None
----------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
</TABLE>
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
----- -----
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 31, 2000, there were issued and outstanding 4,461,103 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 1, 2000 of $17.50, was
approximately $78.1 million. Solely for the purposes of this calculation,
officers and directors of the registrant are considered affiliates of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2000 and portions of Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders are incorporated by reference in Parts II and
III, respectively, of this Form 10-K.
<PAGE>
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 and changes in federal and state
legislation and regulation. These factors should be considered in evaluating
the forward-looking statements and undue reliance should not be placed on such
statements. SouthBanc Shares, Inc. assumes no obligation to update any forward-
looking statements.
Part I
Item 1. Business
-----------------
Merger
On July 31, 2000, SouthBanc Shares, Inc. ("Company" or "SouthBanc Shares")
completed its merger with Heritage Bancorp, Inc. ("Heritage Bancorp") pursuant
to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of
February 14, 2000, by and between SouthBanc Shares and Heritage Bancorp. The
merger was completed through the merger of Heritage Bancorp with and into
SouthBanc Shares. SouthBanc Shares was the surviving corporation in the merger.
As a result of the merger, Heritage Federal Bank ("Heritage Federal"), the sole
subsidiary of Heritage Bancorp prior to the completion of the merger, remains in
existence as a subsidiary of SouthBanc Shares.
Pursuant to the terms of the Merger Agreement, each share of Heritage
Bancorp common stock, par value $.01 per share, that was issued and outstanding
at the effective time of the merger, was converted into the right to receive
either $17.65 in cash or .992 of a share of SouthBanc Shares common stock, par
value $.01 per share. SouthBanc Shares issued a total of approximately
1,829,000 shares and paid a total of approximately $36.3 million in cash to the
former shareholders of Heritage Bancorp.
General
SouthBanc Shares, a Delaware corporation, was organized on November 6, 1997
for the purpose of becoming the holding company for Perpetual Bank, A Federal
Savings Bank ("Perpetual Bank") upon Perpetual Bank's reorganization as a wholly
owned subsidiary of the Company resulting from the conversion of SouthBanc
Shares, M.H.C., Anderson, South Carolina, 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 Perpetual Bank
issued and outstanding and held by persons other than the SouthBanc Shares,
M.H.C., Anderson, South Carolina 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 does not engage in any significant activity
other than holding the stock of Perpetual Bank and Heritage Federal
(collectively the "Banks"). Accordingly, the information set forth in this
report, including financial statement and related data, relates primarily to the
Banks.
The Company 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 Company originates loans secured by
commercial real estate as well as commercial business and consumer loans.
Perpetual Bank's and Heritage Federal's savings accounts are insured up to the
applicable limits by the Federal Deposit Insurance Corporation through the
Savings Association Insurance Fund. Both Perpetual Bank and Heritage Federal
are members of the Federal Home Loan Bank System.
-1-
<PAGE>
Market Area
The Company considers Anderson, Oconee, Laurens, Greenwood and Greenville
Counties, South Carolina, as its primary market area. Additional loan
origination demand is generated from customers living in contiguous counties.
The Banks also purchase 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. Laurens County, with an estimated population
of 62,000, is located to the east of the Greenville-Spartanburg-Anderson
metropolitan area. Although a rural county, the completion of U.S. Interstate
Routes I-26 and I-385 has provided access to the larger population and
employment centers of Columbia and Greenville-Spartanburg-Anderson. Oconee
County, located northwest of Anderson County, and Greenwood County, located
southwest of Anderson County, are also rural but rapidly growing counties.
Competition
Anderson, Oconee, Laurens, Greenwood and Greenville Counties have a
relatively large number of financial institutions, many of which are branches of
large southeast regional financial institutions, and thus the Company 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 Company has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities and mutual funds. The
Company's competition for loans comes principally from other thrift
institutions, credit unions, commercial banks, finance companies, mortgage
banking companies and mortgage brokers.
Lending Activities
General. Historically, the Company'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. The Company also
invests in commercial real estate loans, commercial business loans and
construction loans.
-2-
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family (1).................... $290,477 56.26% $143,526 56.18% $131,117 59.63%
Multi-family............................... 2,499 0.48 1,909 0.75 1,290 0.59
Commercial real estate..................... 63,863 12.37 46,198 18.08 33,779 15.36
Construction............................... 135,626 26.27 41,141 16.10 33,747 15.35
-------- ------ -------- ------ -------- ------
Total mortgage loans................... 492,465 95.38 232,774 91.11 199,933 90.93
-------- ------ -------- ------ -------- ------
Commercial business loans..................... 19,021 3.68 15,441 6.04 11,155 5.06
Consumer loans:
Home equity and second mortgage............ 988 0.20 1,454 0.57 2,122 0.97
Lines of credit............................ 26,714 5.17 12,943 5.07 11,538 5.25
Automobile loans........................... 4,565 0.88 4,907 1.92 5,366 2.44
Other...................................... 9,212 1.78 4,220 1.65 3,815 1.73
-------- ------ -------- ------ -------- ------
Total consumer loans.................... 41,479 8.03 23,524 9.21 22,841 10.39
-------- ------ -------- ------ -------- ------
Total loans............................. 552,965 107.09 271,739 106.36 233,929 106.38
Less:
Undisbursed proceeds for loans in process.. 29,278 (5.67) 13,316 (5.21) 11,886 (5.18)
Unearned discounts......................... 732 (0.14) 317 (0.12) 273 (0.12)
Allowance for loan losses.................. 6 ,616 (1.28) 2,618 (1.03) 2,374 (1.08)
-------- ------ -------- ------ -------- ------
Net loans receivable.................... $516,339 100.00% $255,488 100.00% $219,896 100.00%
======== ====== ======== ====== ======== ======
<CAPTION>
At September 30,
--------------------------------------------
1997 1996
--------------------------------------------
Amount Percent Amount Percent
--------------------------------------------
(Dollars in thousands)
<C> <C> <C> <C>
Mortgage loans:
One- to four-family (1).................... $118,279 66.16% $ 91,186 64.78%
Multi-family............................... 1,245 0.70 1,010 0.72
Commercial real estate..................... 26,976 15.09 17,009 12.08
Construction............................... 17,145 9.59 19,509 13.86
-------- ------ -------- ------
Total mortgage loans................... 163,645 91.54 128,714 91.44
-------- ------ -------- ------
Commercial business loans..................... 7,182 4.02 5,529 3.93
Consumer loans:
Home equity and second mortgage............ 3,405 1.90 5,036 3.58
Lines of credit............................ 9,156 5.12 6,713 4.77
Automobile loans........................... 3,540 1.98 2,677 1.90
Other...................................... 3,072 1.72 2,490 1.77
-------- ------ -------- ------
Total consumer loans.................... 19,173 10.72 16,916 12.02
-------- ------ -------- ------
Total loans............................. 190,000 106.28 151,159 107.39
Less:
Undisbursed proceeds for loans in process.. 8,985 (5.03) 8,866 (6.30)
Unearned discounts......................... 357 -- -- --
Allowance for loan losses.................. 1,886 (1.05) 1,535 (1.09)
-------- ------ -------- ------
Net loans receivable.................... $178,772 100.00% $140,758 100.00%
======== ====== ======== ======
</TABLE>
---------
(1) Includes construction loans converted to permanent loans and
participation loans.
-3-
<PAGE>
One- to Four-Family and Multi-Family Mortgage Loans. The Company
originates permanent conventional mortgage loans secured by one- to four-family
residential properties with original loan-to-value ratios up to 95% of the
appraised value or the purchase price of the property, whichever is less. The
Company 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 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 Company offers both fixed-rate mortgages and adjustable rate mortgage
loans with terms of 10 to 30 years. Borrower demand for adjustable rate
mortgages 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 adjustable rate mortgages. Fixed-
rate loans are originated for sale in the secondary market, though loans with
terms of 10 to 15 years occasionally are retained in the Company's portfolio.
The relative amount of fixed-rate and adjustable rate mortgage loans that can be
originated at any time is largely determined by the demand for each in the
prevailing competitive environment.
The Company has purchased one- to four-family mortgage loans from a
mortgage banking company located in Hilton Head Island, South Carolina, a
mortgage banking company located in Greenville, South Carolina, and a mortgage
banking company located in Columbia, S.C. During the year ended September 30,
2000, the Company purchased $28.3 million of one- to four-family mortgage
loans. Substantially all of these purchases were from the Greenville mortgage
company. In future periods, the Company 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, 2000, the Company had $1.4 million of purchased loans
secured by residential properties on Hilton Head Island, South Carolina, all of
which were one-year adjustable rate mortgage loans. These loans were all
purchased from the same mortgage company, located on Hilton Head Island. Prior
to purchase, the Company reviews each loan for conformance to the Company's
underwriting criteria. At September 30, 2000, the largest loan had an
outstanding balance of $647,000. Although all such loans were performing
according to their terms at September 30, 2000, they do possess certain risks
due to the average size of such loans and the location of the properties outside
the Company's primary market area.
At September 30, 2000, the Company had $84.6 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 Company has an equity
investment. See "-- Subsidiary Activities." Prior to purchase, the Company
reviews each loan for conformity with the Company's underwriting criteria.
Subject to market conditions, the Company expects to continue to purchase
additional such loans.
The Company does not actively solicit multi-family loans but extends them
as an accommodation to existing customers. At September 30, 2000, multi-family
loans consisted of 8 loans, the largest of which had an outstanding balance of
$2.2 million. All such loans are secured by properties located in the Company's
primary market area. At September 30, 2000, all multi-family loans were
performing according to their terms.
Construction Loans. The Company intends to continue emphasizing and
expanding construction 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
Company. The majority of construction loans are made against binding sales
contracts for the home being built. The Company also originates speculative
construction loans to a small number of residential builders in its primary
market area well known to the Company. At September 30, 2000, $50.9 million,
or 66.0%, of the Company construction loans were speculative construction loans.
-4-
<PAGE>
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 depends 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 Company 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 Company 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 Company's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Company 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 Company
are secured by property in the Company's primary market area. The Company
reviews such purchased construction loans for conformity with the Company's
underwriting criteria before purchase.
Commercial Real Estate Loans. The Company originates and purchases
commercial real estate loans. Currently, the Company originates commercial
real estate loans only to select borrowers known to the Company and secured by
properties in its primary market area and generally in amounts between $100,000
and $500,000. At September 30, 2000, the largest commercial real estate loan
originated by the Company had an outstanding balance of $2.0 million and was
secured by an industrial park. The loan was performing according to its terms
at that date. At September 30, 2000, the largest purchased commercial real
estate loan had an outstanding balance of $2.0 million and was secured by an
office building located in Greenville, 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 Company'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. 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 Company
generally requires annual financial statements from its commercial business
borrowers and personal guarantees if the borrower is a corporation. At
September 30, 2000, the largest outstanding commercial business loan was a $4.0
million line of credit that was secured by assigned real estate mortgages. At
September 30, 2000, there was an outstanding balance of $1.7 million 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
-5-
<PAGE>
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 Company 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 Company offers unsecured
consumer loans. Consumer loans totaled $41.5 million at September 30, 2000, or
8.0% of the Company's total loan portfolio.
At September 30, 2000, the largest component of the consumer loan portfolio
was lines of credit. At September 30, 2000, such loans totaled $26.7 million,
or 5.2% of the total loan portfolio. At September 30, 2000, commitments to
extend credit under lines of credit totaled $37.7 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 Company 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
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.
Consumer 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 Company 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 Company believes that offering consumer loans helps to expand and
create stronger ties to its customer base. The Company intends to continue
emphasizing this type of lending.
The Company 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 Company 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 Company 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, 2000 regarding the dollar amount of loans maturing in the
Company'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
unearned discounts, unearned income and allowance for loan losses.
-6-
<PAGE>
<TABLE>
<CAPTION>
After 3 After 5
One Year Years Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
---------- ---------- --------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage (1)............... $ 3,746 $10,280 $ 8,936 $22,068 $245,447 $290,477
Permanent Construction Loans........... -- -- -- -- 29,207 29,207
Commercial real estate................. 14,252 13,373 19,788 5,536 13,413 66,362
Commercial business.................... 14,630 3,163 928 300 -- 19,021
Construction........................... 71,358 5,783 -- -- -- 77,141
Automobile............................. 1,788 2,182 576 19 -- 4,565
Consumer lines of credit............... 26,714 -- -- -- -- 26,714
Other.................................. 9,051 858 236 55 -- 10,200
-------- ------- ------- ------- -------- --------
Total loans...................... $141,539 $35,639 $30,464 $27,978 $288,067 $523,687
======== ======= ======= ======= ======== ========
</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, 2001, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates
--------- -------------
(In thousands)
<S> <C> <C>
Residential mortgage (1).................. $189,205 $ 97,526
Permanent Construction Loans.............. -- 29,207
Commercial real estate.................... 40,094 12,016
Commercial business....................... 2,489 1,902
Construction.............................. 3,932 1,851
Automobile................................ 6,777 --
Consumer lines of credit.................. -- --
Other..................................... 706 443
-------- --------
Total loans......................... $243,203 $142,945
======== ========
</TABLE>
----------
(1) Includes one- to four-family and multi-family loans.
Loan Soliciting and Processing. Loan originations come from a number of
sources. The Company'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 Company also uses
three mortgage brokers to originate loans. All loans originated through these
mortgage brokers are underwritten by the Company pursuant to the Company's
underwriting guidelines.
The Company's Loan Committee approves loan applications up to and including
$ 1,000,000. Loan applications in excess of $ 1,000,000 must be approved by the
full Board of Directors.
Loan Purchases and Sales and Servicing. The Company is an active purchaser
of loans. The Company purchases one- to four-family, commercial real estate
and construction loans from a mortgage company in which a service corporation
subsidiary of Perpetual Bank has an equity investment and two additional
mortgage banking companies. Furthermore, the Company purchases periodically
participation interests in permanent real estate loans and
-7-
<PAGE>
construction loans. Any participation interest purchased must meet the Company's
own underwriting standards. The Company purchases loans from institutions in the
State of South Carolina.
The Company periodically sells one- to four-family mortgage loans to the
Federal Home Loan Mortgage Corporation 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 Company 's portfolio. The Company generally sells all fixed-
rate, 30-year residential mortgage loans.
The Company participates in loan servicing activities both directly and
indirectly. Direct servicing activities arise in connection with loans that the
Company originates but sells with servicing rights retained. The Company
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,
2000, the Company was servicing loans for others aggregating $101.2 million.
During the year ended September 30, 2000, the Company earned servicing fee
income of $169,000.
The Company 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, 2000, the mortgage banking company was
servicing 1,051 loans for others aggregating $175.0 million.
-8-
<PAGE>
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated. The merger was accounted for under the
purchase method of accounting. Accordingly, loan activity for Heritage Federal
is included for August and September 2000.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Total loans at beginning of period.................. $271,739 $219,896 $190,000
Loans acquired in merger............................ 281,198 -- --
-------- -------- --------
Total loans, including loans acquired............... 552,937 219,896 190,000
-------- -------- --------
Loans originated:
One- to four-family.............................. 22,471 28,977 50,582
Multi-family..................................... -- -- 119
Commercial real estate........................... 21,665 16,367 12,604
Construction loans............................... 12,601 14,548 17,140
Commercial business.............................. 11,625 16,846 7,481
Consumer......................................... 20,325 16,789 20,134
-------- -------- --------
Total loans originated........................ 88,687 93,527 108,060
-------- -------- --------
Loans purchased:
One- to four-family.............................. 33,443 30,518 47,829
Commercial real estate........................... -- 106 6,226
-------- -------- --------
Total loans purchased......................... 33,443 30,624 54,055
-------- -------- --------
Loans exchanged for mortgage-backed securities...... (47,954) 30,624 54,055
-------- -------- --------
Loans sold:
Total whole loans sold........................... -- (7,477) (33,684)
-------- -------- --------
Total loans sold.............................. -- (7,477) (33,684)
Mortgage loan principal repayments.................. (74,148) (64,831) (98,535)
Net loan activity................................ 28 51,843 29,896
-------- -------- --------
Total loans at end of period........................ $552,965 $271,739 $219,896
======== ======== ========
</TABLE>
Equity Investment in Limited Partnership. In December 1996, Perpetual 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 Company invests in servicing rights tied to a national
portfolio of residential mortgage loans. The value of the Company'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 decrease in market interest rates. Under
either circumstance, the Company may be required to revalue 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 Company. See Note 4 of Notes to
Consolidated Financial Statements.
Loan Commitments. The Company 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 Company had outstanding loan commitments
(including commitments to fund letters of credit) of approximately $102.8
million at September 30, 2000. See Note 19 of Notes to Consolidated Financial
Statements.
Loan Origination and Other Fees. The Company, 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 Company 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
-9-
<PAGE>
the contractual life of the loan. Deferred fees associated with loans that are
sold are recognized as income at the time of sale.
The Company offsets all loan origination fees against certain direct loan
costs. 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 Company 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 Company'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, efforts will be made to
contact the delinquent borrower. The Company'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 Company 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 Company's
non-performing assets for the periods indicated. During the periods shown, the
Company had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage......................................... $11,914 $2,145 $ 948 $ 220 $ 190
Consumer......................................... 63 86 21 -- --
Commercial....................................... 354 126 206 183 126
------- ------ ------ ------ -----
12,331 2,357 1,175 403 316
------- ------ ------ ------ -----
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential................................... -- -- -- 6 467
Consumer......................................... -- -- -- 8 2
Commercial....................................... -- -- -- 465 10
------- ------ ------ ------ -----
-- -- -- 479 479
------- ------ ------ ------ -----
Total of non-accrual and
past due 90 days or more......................... 12,331 2,357 1,175 882 795
------- ------ ------ ------ -----
Real estate owned, net.............................. 1,092 230 89 163 3
------- ------ ------ ------ -----
Total nonperforming assets.......................... $13,423 $2,587 $1,264 $1,045 $ 798
======= ====== ====== ====== =====
Total loans delinquent 90 days
or more to net loans............................. 2.39% 0.92% 0.53% 0.49% 0.56%
Total loans delinquent 90 days
or more to total assets.......................... 1.83% 0.63% 0.32% 0.34% 0.38%
Total nonperforming assets to
total assets..................................... 2.00% 0.70% 0.35% 0.41% 0.38%
</TABLE>
At September 30, 2000, non-accrual mortgage loans consisted of 42
speculative residential construction loans with an aggregate outstanding balance
of $5.3 million, 43 single-family residential mortgage loans with an aggregate
outstanding balance of $5.1 million, and nine commercial real estate mortgage
loans with an aggregate outstanding balance of $ 1.5 million. Non-accrual
consumer loans consisted of 1 loan on deposit with an aggregate outstanding
balance of $8,000, and five lines of credit loans with an aggregate outstanding
balance of $55,000. Non-accrual
-10-
<PAGE>
commercial loans consisted of three equipment loans with a balance of $352,000
and one unsecured commercial loan with a balance of $2,000.
The Company does not accrue interest on 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 $677,000 would have been recorded for
the year ended September 30, 2000.
Asset Classification. Office of Thrift Supervision regulations require
that each insured institution review and classify its assets on a regular basis.
In addition, in connection with examinations of insured institutions, Office of
Thrift Supervision 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 Company's classified assets and of the
Company's general and specific loss allowances and charge-offs for the period
then ended, were as follows:
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Loss........................... $ 2,257 $ 30 $ 56
Doubtful....................... -- 12 50
Substandard assets............. 12,797 2,419 1,254
Special mention................ 1,110 -- --
------- ------ ------
$16,164 $2,461 $1,360
======= ====== ======
General loss allowances........ $ 4,359 $2,588 $2,318
Specific loss allowances....... 2,257 30 56
Net charge-offs................ 761 237 119
</TABLE>
Real Estate Owned. Real estate acquired by the Company 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 of the property received. Subsequently, it is carried at the lower of its
new cost basis or fair value, less estimated selling costs. The Company had $1.1
million of real estate owned at September 30, 2000, consisting of four single
family homes, three speculative construction sites and one commercial real
estate property.
Allowance for Loan Losses. The Company'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,
-11-
<PAGE>
economic conditions and overall portfolio quality. At September 30, 2000, the
Company had an allowance for loan losses of $6.6 million, or 1.20% of total
loans. Based on past experience and future expectations, management believes
that the allowance for loan losses is adequate at September 30, 2000.
While the Company 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 Company's regulators, in
reviewing the Company's loan portfolio, will not request that the Company
increase its allowance for loan losses, thereby negatively affecting the
Company'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 Company'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>
Year Ended September 30,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period......... $2,618 $2,374 $1,886 $1,535 $1,278
------ ------ ------ ------ ------
Allowance acquired in merger............. 1,990 -- -- -- --
Provision for loan losses................ 2,720 481 607 655 349
Recoveries:
Residential mortgage.................. -- -- -- 4 6
Consumer.............................. 38 23 20 24 17
Commercial............................ 11 15 35 -- --
------ ------ ------ ------ ------
Total recoveries................... 49 38 55 28 23
------ ------ ------ ------ ------
Charge-offs:
Residential mortgage................. -- -- -- 4 18
Consumer.............................. 93 131 83 100 97
Commercial............................ 668 144 91 228 --
------ ------ ------ ------ ------
Total charge-offs.................. 761 275 174 332 115
------ ------ ------ ------ ------
Net charge-offs.................... 712 237 119 304 92
------ ------ ------ ------ ------
Allowance at end of period............... $6,616 $2,618 $2,374 $1,886 $1,535
====== ====== ====== ====== ======
Ratio of allowance to total loans
outstanding at the end of the period.. 1.20% 1.01% 1.07% 1.04% 1.08%
Ratio of net charge-offs to average
loans outstanding during the period... 0.23% 0.10% 0.06% 0.18% 0.07%
</TABLE>
-12-
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated. The allowance for loan losses
is available to absorb losses in all categories.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------
As a Percent As a Percent
Percent of Percent of
Of Out- Loans in Of Out- Loans in
Standing Category Standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage........ $1,958 0.67% 78% $ 976 0.52% 68% $ 851
Commercial real estate
and commercial business.. 4,244 5.12 15 1,085 1.76 23 953
Consumer.................... 414 1.00% 7 557 2.37 9 570
------ --- ------ --- ------
Total allowance for
loan losses.......... $6,616 1.20% 100% $2,618 1.01% 100% $2,374
====== === ====== === ======
<CAPTION>
---------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------
As a Percent As a Percent As a Percent
Percent of Percent of Percent of
Of Out- Loans in Of Out- Loans in Of Out- Loans in
Standing Category Standing Category Standing Category
Loans in to Total Loans in to Total Loans in to Total
Category Loans Amount Category Loans Amount Category Loans
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage......... 0.50% 70% $ 766 0.60% 70% $ 726 0.71% 72%
Commercial real estate 2.12 20 737 2.16 19 465 2.06 16
and commercial business...
Consumer..................... 2.50 10 383 2.00 11 344 2.03 12
--- ------ --- ------ ---
Total allowance for
loan losses........... 1.07% 100% $1,886 1.04% 100% $1,535 1.08% 100%
==== ====== === ====== ===
</TABLE>
-13-
<PAGE>
Investment Activities
The Company has made significant investments in mortgage-backed securities,
including collateralized mortgage obligations. The Company had mortgage-backed
securities with an amortized cost of $73.0 million and a market value of $72.7
million at September 30, 2000, all of which were invested in U.S. Government
agency securities and investment grade securities.
At September 30, 2000, the Company had invested $16.1 million in
collateralized mortgage obligations ($ 7.1 million in U.S. Government agency
issues and $ 9.0 million in investment grade private issues) with an average
estimated life varying from seven months to 30 years and an average yield of
7.73%. At September 30, 2000, collateralized mortgage obligations consisted of
Fannie Mae, Ginnie Mae and Freddie Mac issues, as well as investment grade
private issues. Collateralized mortgage obligations may be used as collateral
for borrowings and, through repayments, as a source of liquidity. Management
considers collateralized mortgage obligations 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
test. See "Regulation and Supervision -- Federal Savings Institution Regulation
-- Qualified Thrift Lender Test." At September 30, 2000, the collateralized
mortgage obligation portfolio consisted of various tranches but no residuals.
In recent years, the Company has used the proceeds from the paydown of
collateralized mortgage obligations 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.
Collateralized mortgage obligations are subject to repayment by the
mortgagors of the underlying collateral at any time. Such prepayment may
subject the Company's collateralized mortgage obligations to yield and price
volatility. To assess this volatility, the Office of Thrift Supervision
requires the Company to test annually its collateralized mortgage obligations 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 collateralized mortgage obligations and other mortgage
derivative securities. Securities failing any one of the tests are deemed to be
high-risk securities. The Office of Thrift Supervision may require an
institution to dispose of one or all of the collateralized mortgage obligations
failing such tests. At September 30, 2000, all of the Company's collateralized
mortgage obligations 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 Company's
collateralized mortgage obligations to fail a stress test. The Office of Thrift
Supervision may then require the Company to dispose of the collateralized
mortgage obligations failing the test.
Changes in the level of interest rates can have an adverse effect on the
mortgage-backed securities and collateralized mortgage obligation portfolio,
thereby exposing the Company to repayment risk and reinvestment risk.
-14-
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Percent Percent Percent
Amortized of Amortized of Amortized of
Cost (1) Portfolio Cost (1) Portfolio Cost (1) Portfolio
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. agency securities........................ $ 5,000 6% $ 8,158 11% $ 5,706 6%
Certificates of deposit....................... -- -- -- -- -- --
U.S. Treasury securities...................... 1,003 1 1,009 1 500 1
Equity mutual fund............................ -- -- 1,043 1 994 1
Common stock - savings and loans.............. 1,127 1 150 -- 1,733 2
Municipal bonds............................... -- -- 3,290 4 6,129 6
Bank preferred stock.......................... -- -- -- -- 3,152 3
Trust preferred bonds......................... 4,002 5 4,023 5 5,028 5
Mortgage-backed securities
and collateralized mortgage obligations.... 73,048 87 60,028 78 73,719 76
------- --- ------- --- ------- ---
Total................................... $84,180 100% $77,701 100% $96,961 100%
======= === ======= === ======= ===
</TABLE>
-----------
(1) The market value of the Company's investment portfolio amounted to $ 87.3
million, $74.6 million and $97.2 million at September 30, 2000, 1999 and
1998, respectively.
The following table sets forth the maturities and weighted average yields
of the debt securities in the Company's investment securities portfolio at
September 30, 2000.
<TABLE>
<CAPTION>
One to Five to
Less Than Five Ten Over Ten
One Year Years 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................ $ -- --% $ -- --% $5,000 7.55% $ -- --%
U.S. Treasury securities.............. 1,003 6.38 -- -- -- -- -- --
Common stock - savings and loans...... -- -- -- -- -- -- 1,127 --
Trust preferred stock................. -- -- -- -- -- -- 4,002 9.20
Mortgage-backed securities
and collateralized mortgage
obligations........................ 134 7.53 118 9.69% -- -- 72,796 7.57%
------ ---- ------ -------
Total........................... $1,137 6.52 $118 9.69% $5,000 7.55% $77,925 7.54%
====== ==== ====== =======
</TABLE>
-15-
<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 Company's stockholders' equity
at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
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........... $ -- $ -- $ 340 $ 333 $ 795 $ 795
Collateralized mortgage obligations...... 16,616 16,082 21,657 21,243 41,098 41,047
------- ------- ------- ------- ------- -------
Total.............................. $16,616 $16,082 $21,997 $21,576 $41,893 $41,842
======= ======= ======= ======= ======= =======
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company 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 Company
also has access to advances from the Federal Home Loan Bank-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 Company has also on occasion utilized
repurchase agreements.
Deposit Accounts. Local deposits are and traditionally have been the
primary source of the Company's funds for use in lending and other general
business purposes. The Company offers a number of deposit accounts, including
passbook, individual retirement accounts, 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 Company offers premiums to attract
deposits. The Company is a member of an automated teller machine network, which
is available to the Company's checking account depositors.
Since early 1995, the Company has increased its core deposit base by
aggressively promoting checking accounts. At September 30, 2000, checking
account balances totaled $59.7 million.
At September 30, 2000, certificate of deposits scheduled to mature within
one year totaled $285.5 million. Although no assurances can be given, based on
past experience, the Company believes that a substantial portion of these
certificates of deposit will be renewed.
At September 30, 2000, the Company had no brokered deposits.
-16-
<PAGE>
The following table sets forth information concerning the Company's
deposits at September 30, 2000.
<TABLE>
<CAPTION>
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
-------- ---------------- ----------------------------------------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
1.82% None Negotiable order of withdrawal ("NOW") accounts $ 100 $ 44,781 9.91%
-- None Noninterest bearing accounts 100 14,930 3.31
3.23 None Savings accounts 100 50,314 11.13
Certificates of Deposit
5.85 Within 6 months Fixed-terms, fixed rate 1,000 179,686 39.76
6.18 7-12 months Fixed-term, fixed rate 1,000 105,835 23.42
6.09 13-36 months Fixed-term, fixed rate 1,000 54,414 12.04
5.63 37-120 months Fixed-term, fixed rate 1,000 $ 1,953 0.43
------ -------- ------
$451,913 100.00%
======== ======
</TABLE>
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at September 30, 2000. Jumbo certificates of
deposit require minimum deposits of $100,000 and have negotiable interest rates.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
----------------- ----------------
(In thousands)
<S> <C>
Three months or less...................................... $22,133
Over three months through six months...................... 25,341
Over six months through twelve months..................... 29,131
Over twelve months........................................ 15,920
-------
Total............................................... $92,525
=======
</TABLE>
Deposit Flow. The following table sets forth the balances of deposits in
the various types of accounts offered by the Company at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
Percent Increase Percent Increase Percent Increase
Amount of Total (Decrease) Amount of Total (Decrease) Amount of Total (Decrease)
-------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing...... $ 14,930 3.31% $ (799) $ 15,729 7.11% $ 531 $ 15,198 7.31% $ 3,386
NOW checking.............. 44,781 9.91 1,525 43,256 19.55 7,460 35,796 17.23 9,800
Regular savings accounts.. 50,314 11.13 23,927 26,387 11.93 1,183 25,204 12.13 844
Fixed-rate certificates
which mature in the
year ending (1)(2):
Within 1 year.......... 285,521 63.18 167,798 117,723 53.21 20,857 96,866 46.62 (18,785)
After 1 year, but
within 2 years...... 49,187 10.88 34,162 15,025 6.79 (17,641) 32,666 15.72 15,667
After 2 years, but
within 5 years...... 7,180 1.59 4,042 3,138 1.41 1,077 2,061 0.99 (4,123)
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total............. $451,913 100.00% $230,655 $221,258 100.00% $ 13,467 $207,791 100.00% $ 6,789
======== ====== ======== ======== ====== ======== ======== ====== ========
</TABLE>
_______________________________
(1) At September 30, 2000, 1999 and 1998, jumbo certificates amounted to $92.5
million, $20.2 million, and $17.4 million, respectively.
(2) IRA accounts included in certificate balances are $55.4 million, $20.9
million, and $19.7 million at September 30, 2000, 1999 and 1998,
respectively.
-17-
<PAGE>
Time Deposits by Rates and Maturities. The following table sets forth the
time deposits in the Company classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Below 3.00%.......................... $ 701 $ 159 $ 165
3.00 - 5.00%......................... 45,846 58,368 1,392
5.01 - 7.00%......................... 266,704 77,022 129,629
7.01 - 9.00%......................... 28,637 337 407
-------- -------- --------
Total.......................... $341,888 $135,886 $131,593
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of time deposits
at September 30, 2000.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------ Percent
Over Two Over Three Over Five of Total
Less Than One to to Three to Five to Ten Certificate
One Year Two Years Years Years Years Total Accounts
---------- ----------- ---------- ------------ ----------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.50 - 5.00%....... $ 42,407 $ 2,984 $ 992 $ 163 $ -- $ 46,546 13.61%
5.01 - 7.00%....... 225,891 35,167 3,857 1,790 -- 266,705 78.01
7.01 - 9.00%....... 17,223 11,036 378 -- -- 28,637 8.38
-------- ------- ------ ------ ------ -------- ------
Total........ $285,521 $49,187 $5,227 $1,953 $ -- $341,888 100.00%
======== ======= ====== ====== ====== ======== ======
</TABLE>
Deposit Activity. The following table sets forth the savings activities of
the Company for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Beginning balance.................................... $221,258 $207,791 $201,002
Savings deposits acquired in merger.................. 209,121 -- --
-------- -------- --------
Total savings including savings acquired............. 430,379 207,791 201,002
-------- -------- --------
Net increase (decrease) before interest credited..... 9,668 4,746 (1,223)
Interest credited.................................... 11,866 8,721 8,012
-------- -------- --------
Net increase in savings deposits................ 21,534 13,467 6,789
-------- -------- --------
Ending balance....................................... $451,913 $221,258 $207,791
======== ======== ========
</TABLE>
Borrowings
Historically, the Company 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
Federal Home Loan Bank-Atlanta. Under repurchase agreements, the Company
"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 Company had $20.4 million of repurchase agreements outstanding at
September 30, 2000.
The Company 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 Company sells
-18-
<PAGE>
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 Federal Home Loan Bank are typically secured by the
Company's first mortgage loans. At September 30, 2000, the Company was eligible
to borrow up to $182.7 million from the Federal Home Loan Bank-Atlanta. The
Company had Federal Home Loan Bank advances of $98.5 million outstanding at
September 30, 2000. See Note 10 of Notes to Consolidated Financial Statements.
The Federal Home Loan Bank functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As members, Perpetual Bank and Heritage Federal are required to
own capital stock in the Federal Home Loan Bank and are 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 Federal Home Loan Bank's
assessment of the institution's creditworthiness. Under its current credit
policies, the Federal Home Loan Bank 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 Federal Home Loan Bank determines specific
lines of credit for each member institution.
The following table sets forth certain information regarding borrowings by
the Company at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Weighted average rate paid on:
Federal Home Loan Bank-Atlanta advances............ 6.21% 5.21% 5.03%
Securities sold under agreements to repurchase..... 6.65 5.54 5.54
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase........... $ 45,501 $20,366 $20,185
Federal Home Loan Bank-Atlanta advances.................. 148,322 78,000 61,784
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase........... 20,975 20,245 17,912
Federal Home Loan Bank-Atlanta advances.................. 84,374 65,975 40,241
Approximate weighted average rate paid on:
Securities sold under agreements to repurchase........... 6.11% 5.04% 5.61%
Federal Home Loan Bank-Atlanta advances.................. 6.37% 5.61% 5.54%
</TABLE>
Subsidiary Activities
The Company has two wholly owned subsidiaries, Perpetual Bank and Heritage
Federal. Perpetual Bank had an ownership interest in three service
corporations at September 30, 2000. Under Office of Thrift Supervision
regulations, the Banks are 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, 2000, Perpetual Bank's net investment of
approximately $2.9 million in its service corporations did not exceed this
investment authority.
-19-
<PAGE>
Perpetual 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 Perpetual Bank. At
September 30, 2000, 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 Perpetual Bank that had an outstanding
balance of $48,000 at September 30, 2000. As of September 30, 2000,
approximately 20 acres have been sold and Perpetual Bank had no outstanding
loans to purchasers. In October 1997, Perpetual Bank established a branch
office at this location. See "-- Properties." At September 30, 2000, Perpetual
Bank's net investment in this project was approximately $598,000.
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 Perpetual Bank that had an outstanding
balance of $1.0 million at September 30, 2000. Perpetual 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, 2000, 60 lots were sold and
Perpetual Bank had outstanding loans to purchasers totaling $120,000. At
September 30, 2000, Perpetual Bank's net investment in this project was
approximately $1.2 million.
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 Perpetual Bank that had been paid off as of
September 30, 2000. The lots are being developed in four phases of 11 lots
each. As of September 30, 2000, 40 lots have been sold and 4 lots remain unsold
in phase IV. At September 30, 2000, Perpetual Bank had loans outstanding to
purchasers totaling $801,000. At September 30, 2000, Perpetual Bank's net
investment in this project was approximately $68,000.
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 Perpetual Bank
that had an outstanding balance of $46,000 as of September 30, 2000. As of
September 30, 2000, 28 acres had been sold and Perpetual Bank had outstanding
loans to purchasers totaling $352,000, all of which were permanent mortgage
loans. At September 30, 2000, Perpetual Bank's net investment in this project
was approximately $318,000.
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 loss of $48,000 for the year ended September 30,
2000.
Mortgage First is a wholly-owned subsidiary of Perpetual 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, 2000, First
Trust closed 793 loans totaling $120.1 million.
Perpetual 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 Perpetual Bank's underwriting
standards. Perpetual Bank intends to purchase at least $1.5 million of loans
from First Trust monthly. At September 30, 2000, Perpetual 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 equity
investment of $552,000 through Mortgage First. Perpetual 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. Perpetual
Bank recorded a loss of approximately $30,000 related to First Trust's
operations for the year ended
-20-
<PAGE>
September 30, 2000. Robert W. Orr, President and Chief Executive Officer of the
Company and Perpetual Bank, and Barry C. Visioli, Senior Vice President of the
Company and Perpetual Bank, are directors of First Trust.
Heritage Federal does not have any subsidiaries.
Personnel
As of September 30, 2000, the Company had 158 full-time employees and 27
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees is
good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, SouthBanc Shares is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the Office of Thrift Supervision. The Banks are subject to
extensive regulation, examination and supervision by the Office of Thrift
Supervision, as its primary federal regulator, and the Federal Deposit Insurance
Corporation, as the deposit insurer. The Banks are members of the Federal Home
Loan Bank System and, with respect to deposit insurance, of the Savings
Association Insurance Fund managed by the Federal Deposit Insurance Corporation.
They must file reports with the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation concerning their activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The Office of Thrift Supervision and/or the Federal Deposit
Insurance Corporation conduct periodic examinations to test the Banks' safety
and soundness and compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. 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 regulatory
requirements and policies, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or the Congress, could have a material
adverse impact on SouthBanc Shares, Perpetual Bank and Heritage Federal and
their operations. Certain of the regulatory requirements applicable to the
Banks and to SouthBanc Shares are referred to below or elsewhere in this report.
The description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this report does not
purport to be a complete description of such statutes and regulations and their
effects on the Banks and SouthBanc Shares.
Holding Company Regulation
SouthBanc Shares is a multiple savings and loan holding company within the
meaning of federal law. As a multiple savings and loan holding company,
SouthBanc Shares is generally limited to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the
prior approval of the Office of Thrift Supervision, and certain activities
authorized by Office of Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of SouthBanc Shares and the
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision may not approve any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies and (ii) the acquisition of a savings
-21-
<PAGE>
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Banks must notify
the Office of Thrift Supervision 30 days before declaring any dividend to
SouthBanc Shares. In addition, the financial impact of a holding company on its
subsidiary institutions is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution. The Office of Thrift Supervision has recently proposed to
require certain savings and loan holding companies to notify the Office of
Thrift Supervision before engaging in or committing to engage in a limited set
of debt transactions, transactions that reduce capital, some asset acquisitions,
and other transactions. The proposal would generally exclude holding companies
whose subsidiary savings associations' assets represent a small percent of
consolidated assets and holding companies that would have consolidated tangible
capital of ten percent or greater following the transaction.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core
(Tier 1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the Office of Thrift Supervision
has deferred implementation of the interest rate risk capital charge. At
September 30, 2000, the Banks met each of their capital requirements.
-22-
<PAGE>
The following table presents Perpetual Bank's regulatory capital position
at September 30, 2000.
<TABLE>
<CAPTION>
Capital
Excess -----------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
---------- ----------- -------------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............. $34,098 $ 5,567 $28,531 9.2% 1.50%
Core (Leverage)...... 34,098 14,847 19,251 9.2 4.00
Risk-based........... 36,781 20,260 16,521 14.5 8.00
</TABLE>
The following table presents Heritage Federal's regulatory capital position
at September 30, 2000.
<TABLE>
<CAPTION>
Capital
Excess -----------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
---------- ----------- -------------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............. $32,419 $ 4,302 $28,117 11.3% 1.50%
Core (Leverage)...... 32,419 11,472 20,947 11.3 4.00
Risk-based........... 36,442 14,934 21,508 19.5 8.00
</TABLE>
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date a savings institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
Insurance of Deposit Accounts. The Banks are members of the Savings
Association Insurance Fund. The Federal Deposit Insurance Corporation maintains
a risk-based assessment system by which institutions are assigned to
-23-
<PAGE>
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information.
An institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for Savings Association Insurance Fund member
institutions are determined semiannually by the Federal Deposit Insurance
Corporation and currently range from zero basis points for the healthiest
institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the Savings Association
Insurance Fund. During 1999, FICO payments for Savings Association Insurance
Fund members approximated 6.1 basis points, while Bank Insurance Fund members
paid 1.2 basis points. By law, there was equal sharing of FICO payments
between Savings Association Insurance Fund and Bank Insurance Fund members as
of January 1, 2000.
The Banks were not required to pay any premiums for fiscal 2000. Payments
toward the FICO bonds amounted to $18,000. The Federal Deposit Insurance
Corporation has authority to increase insurance assessments. A significant
increase in Savings Association Insurance Fund insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Banks. Management cannot predict what insurance assessment rates will be in
the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Banks does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At
September 30, 2000, Perpetual Banks' and Heritage Federal's limit on loans to
one borrower were $5.4 and $5.2 million respectively and Perpetual Banks' and
Heritage Federal's largest aggregate outstanding balances of loans to one
borrower were $2.7 million and $3.7 million respectively.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2000, Perpetual Bank's and Heritage Federal's
maintained 89.6% and 97.8% of their portfolio assets in qualified thrift
investments, respectively, and, therefore, met the qualified thrift lender test.
Recent legislation has expanded the extent to which education loans, credit card
loans and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. The rule
effective in the first quarter of 1999 established three tiers of institutions
based primarily on an institution's capital level. An institution that exceeded
all capital requirements before and after a proposed capital distribution ("Tier
1 Bank") and had not been advised by the Office of Thrift Supervision that it
was in need of more than normal supervision, could, after prior notice but
without obtaining approval
-24-
<PAGE>
of the Office of Thrift Supervision, make capital distributions during the
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval.
Effective April 1, 1999, the Office of Thrift Supervision's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the Office of Thrift Supervision is required prior to any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under Office of Thrift Supervision regulations (i.e.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with Office of
Thrift Supervision. If an application is not required, the institution must
still provide prior notice to Office of Thrift Supervision of the capital
distribution if, like the Banks, they are subsidiaries of a holding company. In
the event the Banks' capital fell below its regulatory requirements or the
Office of Thrift Supervision notified it that it was in need of more than normal
supervision, the Banks' ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the Office of Thrift Supervision determines that
such distribution would constitute an unsafe or unsound practice.
Liquidity. The Banks are required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the Office of Thrift Supervision to any amount within the range of 4% to 10%.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. Perpetual Bank's and Heritage Federal's liquidity ratio for
September 30, 2000 were 14.21%, and 14.28%, respectively, which exceeded the
applicable requirements. The Banks have never been subject to monetary
penalties for failure to meet their liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Banks' latest quarterly thrift financial report. The assessments paid by
Perpetual Bank and Heritage Federal for the fiscal year ended September 30, 2000
totaled $73,000 and 64,000, respectively.
Transactions with Related Parties. The Banks' authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including SouthBanc Shares and its non-
savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Banks' authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Banks may make to insiders based, in part, on
the Banks' capital position and requires certain board approval procedures to be
followed.
-25-
<PAGE>
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $27,500 per day, or even $1.2 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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 Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
Federal Home Loan Bank System
The Banks are members of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Banks are as
members of the Federal Home Loan Bank, required to acquire and hold shares of
capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. Perpetual
Bank and Heritage Federal were in compliance with this requirement with an
investment in Federal Home Loan Bank stock at September 30, 2000 of $4.5 million
and $3.0 million, respectively.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Banks' net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
memberships.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $42.8 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $42.8 million, the reserve requirement is $1.284
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $42.8
million. The first $5.5 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. At September 30, 2000, the Banks complied with the foregoing
requirements.
-26-
<PAGE>
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Office of Thrift
Supervision regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift
Supervision, in connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of applications by such institution.
The Community Reinvestment Act requires public disclosure of an institution's
Community Reinvestment Act rating. Perpetual Bank's and Heritage Federal's
latest Community Reinvestment Act rating, received from the Office of Thrift
Supervision, were both satisfactory.
TAXATION
Federal Taxation
General. The Company and the Banks report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Banks' reserves 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
Banks or the Company. For additional information regarding income taxes, see
Note 12 of Notes to Consolidated Financial Statements.
Bad Debt Reserve. Historically, savings institutions such as the Banks,
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 Banks' 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
Banks' actual loss experience, or a percentage equal to 8% of the Banks' taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Banks' loss
experience, the Banks 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 Banks' bad debt deductions must be determined under the experience
method using a formula based on actual bad debt experience over a period of
years or, if the Banks are "large" banks (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 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.
-27-
<PAGE>
Distributions. To the extent that the Banks make "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 Banks' 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 Banks' taxable income. Nondividend distributions include
distributions in excess of the Banks' current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Banks' current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Banks' 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 the Banks make 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 and Supervision" for limits on the payment of dividends
by the Banks. The Banks do 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 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 alternative minimum taxable income. In
addition, only 90% of alternative minimum taxable income can be offset by net
operating loss carryovers. Alternative minimum taxable income is increased by
an amount equal to 75% of the amount by which the Company's adjusted current
earnings exceeds its alternative minimum taxable income (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 alternative minimum taxable income
(with certain modification) over $2.0 million is imposed on corporations,
including the Company, 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 Banks 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 Banks will not file a consolidated tax return, except that if
the Company or the Banks own 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
The Company's and Perpetual Bank's Federal income tax returns were audited
through 1999 in March 2000. There have not been any audits of the Company's
state income tax returns during the past five years. There have not been any
Internal Revenue Service audits of Heritage Federal's Federal income tax returns
or audits of Heritage Federal's state income tax returns during the past five
years.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables sets forth certain information regarding the executive
officers of the Company, Perpetual Bank and Heritage Federal. The officers of
SouthBanc Shares, Perpetual Bank and Heritage Federal are elected annually by
their respective boards of directors. Each officer holds office until his
successor is duly elected and qualified or until his death or until he resigns
or is removed.
-28-
<PAGE>
Executive Officers of SouthBanc Shares
<TABLE>
<CAPTION>
Name Age(1) Position
---- ------ ---------
<S> <C> <C>
J. Edward Wells 61 Chairman of the Board
Robert W. "Lujack" Orr 53 President, Chief Executive Officer and a Director
Thomas C. Hall 53 Senior Vice President, Treasurer and Chief Financial Officer
Barry C. Visioli 52 Senior Vice President
Sylvia B. Reed 60 Corporate Secretary
</TABLE>
----------
(1) As of September 30, 2000
Executive Officers of Perpetual Bank
<TABLE>
<CAPTION>
Name Age(1) Position
---- ------ ---------
<S> <C> <C>
Robert W. "Lujack" Orr 53 President and Chief Executive Officer
Thomas C. Hall 53 Senior Vice President and Treasurer
Barry C. Visioli 52 Senior Vice President
Sylvia B. Reed 60 Corporate Secretary
</TABLE>
----------
(1) As of September 30, 2000.
Executive Officers of Heritage Federal
<TABLE>
<CAPTION>
Name Age(1) Position
---- ------ ---------
<S> <C> <C>
J. Edward Wells 61 President and Chief Executive Officer
William B. Ferguson 43 Senior Vice President
James H. Wasson, Jr. 56 Vice President and Secretary
</TABLE>
-------
(1) As of September 30, 2000
J. Edward Wells has served as Chairman of the Board since 2000 and is the
President and Chief Executive Officer of Heritage Federal, positions he has held
since 1972. Until the Company's merger with Heritage Bancorp in 2000, Mr. Wells
served as Director, President and Chief Executive Officer of Heritage Bancorp.
Mr. Wells also serves as Director of Perpetual Bank and Heritage Federal.
Robert W. "Lujack" Orr has been affiliated with Perpetual Bank since 1974.
He became President of Perpetual Bank in 1991 and has served as President and
Chief Executive Officer of the Company (and its predecessor, SouthBanc Shares,
MHC) since 1991. Mr. Orr is also a Director of Perpetual Bank and Heritage
Federal. Age 53. Director since 1989.
Thomas C. Hall has been employed by Perpetual Bank since 1975 and currently
serves as Senior Vice President, Treasurer and Chief Financial Officer of the
Company and Perpetual Bank responsible for areas of accounting, investments,
data processing and deposits.
Barry C. Visioli has been affiliated with Perpetual Bank since 1973. Mr.
Visioli serves as Senior Vice President of the Company and Perpetual Bank 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
Company has an equity investment.
-29-
<PAGE>
William B. Ferguson is Senior Vice President of Heritage Federal, a position
he has held since June, 2000.
Sylvia B. Reed joined Perpetual Bank in 1986 and currently serves as
Corporate Secretary of the Company and Perpetual Bank.
James H. Wasson, Jr. is Secretary and Vice President of Heritage Federal
responsible for mortgage lending, positions he has held since 1977. Mr. Wasson
has been employed by Heritage Federal since 1968.
Item 2. Properties
-------------------
The following table sets forth certain information relating to the Company's
offices as of September 30, 2000. All offices are owned by the Company except as
noted in the table.
<TABLE>
<CAPTION>
Lease
Year Owned Square Expiration
Location Opened or Leased Footage Date
--------- ----------- ----------------- -------------- ----------------------------
<S> <C> <C> <C> <C>
Perpetual Bank Main Office:
907 N. Main Street
Anderson, South Carolina 1979 Owned 50,000 --
Perpetual Bank 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, 2005, with four
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
Heritage Federal Bank Main Office:
201 West Main Street
Laurens, SC 29360 1995(1) Owned 24,500 --
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
Lease
Year Owned Square Expiration
Location Opened or Leased Footage Date
--------- ----------- ----------------- -------------- ----------------------------
<S> <C> <C> <C> <C>
Heritage Federal Bank Branch
Offices:
Belton
208 Anderson Street 1962 Owned 1,800 --
Belton, SC 29627
Ware Shoals 1968 Owned 1,444 --
81 North Greenwood Avenue
Ware Shoals, SC 29692
Simpsonville 1977 Owned 3,668 --
514 North Main Street
Simpsonville, SC 29681
</TABLE>
-----------
(1) Perpetual Bank occupied a smaller facility at the same location from 1955
to 1995.
The Company 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.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on properties
in which the Company holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Company's
business. The Company 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 Company.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On July 18, 2000, the Company held a special meeting of stockholders to
approve and adopt the Agreement and Plan of Merger, dated as of February 14,
2000, by and between the Company and Heritage Bancorp pursuant to which,
Heritage Bancorp merged with and into the Company effective July 31, 2000. The
number of votes cast at the meeting was:
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1,806,491 101,896 6,261 1,025,792
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
--------------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Market for Common
Stock and Dividend Information" in the 2000 Annual Report to Stockholders is
incorporated herein by reference.
-31-
<PAGE>
Item 6. Selected Financial Data
--------------------------------
The information contained under the section captioned "Selected Financial
Information" in the 2000 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Market Risk and
Asset and Liability Management" in the 2000 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,
2000 and 1999
Consolidated Statements of Income for the Years Ended September 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998
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
--------------------
None.
PART III
Item 10. Directors, Executive Officers of the Registrant
---------------------------------------------------------
The information regarding directors and executive officers of the
registrant is incorporated herein by reference from the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders under the caption
"Election of Directors" and from "Part 1 - Business - Executive Officers" of the
Registrant's Form 10-K.
Item 11. Executive Compensation
--------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" in the Proxy Statement for the 2001
Annual Meeting of Stockholders is incorporated herein by reference.
-32-
<PAGE>
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 "Stock Ownership" in the Proxy Statement for the
2001 Annual Meeting of Stockholders.
(b) Security Ownership of Management
The information required by this item is incorporated herein by reference
to the sections captioned "Stock Ownership" in the Proxy Statement for
the 2001 Annual Meeting of Stockholders.
(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.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information set forth under the section captioned "Transactions with
Management" in the Proxy Statement for the 2001 Annual Meeting of Stockholders
is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of February 14, 2000, by
and between SouthBanc Shares, Inc. and Heritage Bancorp, Inc.
(incorporated by reference to SouthBanc Shares current Report on
Form 8-K (File No. 000-23751) filed on February 22, 2000).
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) filed on
December 17, 1997)
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) filed on December 17, 1997)
4.0 Specimen stock certificate (incorporated by reference to Exhibit
4.0 to the Company's Registration Statement on Form S-1
(File No. 333-42517) filed on December 17, 1997)
10.1 Employment Agreement between SouthBanc Shares, Inc. and Robert W.
Orr (incorporated by reference to Exhibit 10.1 to the Company's Form
10-K (File No. 000-23751 filed on December 28, 1999)
10.2 Employment Agreement between SouthBanc Shares, Inc. and Thomas C.
Hall (incorporated by reference to Exhibit 10.2 to the Company's
Form 10-K (File No. 000-23751 filed on December 28, 1999)
10.3 Employment Agreement between SouthBanc Shares, Inc. and Barry C.
Visioli (incorporated by reference to Exhibit 10.3 to the Company's
Form 10-K (File No. 000-23751 filed on December 28, 1999)
10.4 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Robert W. Orr (incorporated by reference to Exhibit 10.4 to the
Company's Form 10-K (File No. 000-23751 filed on December 28, 1999)
10.5 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Thomas C. Hall (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-K (File No. 000-23751 filed on December 28, 1999)
-33-
<PAGE>
10.6 Employment Agreement between Perpetual Bank, A Federal Savings
Bank and Barry C. Visioli (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-K (File No. 000-23751 filed
on December 28, 1999)
10.7 1998 Stock Option Plan (incorporated by reference to the Company's
Annual Meeting Proxy Statement dated December 18, 1998)
10.8 1998 Management Development and Recognition Plan (incorporated by
reference to the Company's Annual Meeting Proxy Statement dated
December 18, 1998)
10.9 Supplemental Executive Retirement Agreement with Robert W. Orr
(incorporated by reference to Exhibit 10.9 to the Company's
Form 10-K (File No. 000-23751 filed on December 28, 1999)
10.10 Supplemental Executive Retirement Agreement with Thomas C. Hall
(incorporated by reference to Exhibit 10.10 to the Company's
Form 10-K (File No. 000-23751 filed on December 28, 1999)
10.11 Supplemental Executive Retirement Agreement with Barry C. Visioli
(incorporated by reference to Exhibit 10.11 to the Company's
Form 10-K (File No. 000-23751 filed on December 28, 1999)
10.12 Employment Agreement between SouthBanc Shares, Inc. and J. Edward
Wells
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott, Davis & Company, LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 2, 2000, SouthBanc Shares filed a Report on Form 8-K
(File No. 000-23751) reporting that SouthBanc Shares had completed its merger
with Heritage Bancorp pursuant to an Agreement and Plan of Merger dated
February 14, 2000. The press release announcing the completion of the merger was
attached as an exhibit to the Form 8-K.
<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.
Date: December 29, 2000 By: /s/ Robert W. Orr
---------------------------------------
Robert W. Orr
President and Chief Executive Officer
(Duly Authorized Representative)
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.
By: /s/ J. Edward Wells By: /s/ Robert W. Orr
------------------------------- -------------------------------------
J. Edward Wells Robert W. Orr
Chairman of the Board President and Chief Executive Officer
(Principal Executive Officer)
Date: December 29, 2000 Date: December 29,2000
By: /s/ Thomas C. Hall By:
------------------------------- -----------------------------------
Thomas C. Hall Harold A. Pickens, Jr.
Senior Vice President and Treasurer Vice Chairman of the Board
(Principal Financial and Accounting
Officer)
Date: December 29, 2000
By: /s/ F. Stevon Kay By: /s/ J. Riley Bailes
------------------------------- ------------------------------------
F. Stevon Kay J. Riley Bailes
Director Director
Date: December 29, 2000 Date: December 29, 2000
By: /s/ Martha S. Clamp By: /s/ Richard C. Ballenger
------------------------------- ------------------------------------
Martha S. Clamp Richard C. Ballenger
Director Director
Date: December 29, 2000 Date: December 29, 2000
By: /s/ John C. Owings, II
-------------------------------
John C. Owings, II
Director
Date: December 29, 2000
