U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-SB
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Southcoast Financial Corporation
(Name of Small Business Issuer in its Charter)
South Carolina 57-1079460
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
530 Johnnie Dodds Boulevard, Mt. Pleasant, South Carolina 29464
(Address of Principal Executive Office, Zip Code)
Issuer's Telephone Number, Including Area Code: (843) 884-0504
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of Class)
<PAGE>
This document contains forward-looking statements with respect to the
financial condition, results of operations, and business of the Company and the
Bank. These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) the Company and its subsidiary bank may not be able
to operate profitably; (2) Competitive pressure in the banking industry may
increase significantly; (3) Costs or difficulties related to operation of the
Bank may be greater than expected; (4) Changes in the interest rate environment
may reduce margins; (5) General economic conditions, either nationally or
regionally, may be less favorable than expected, resulting in, among other
things, a deterioration in credit demand and quality; (6) Changes may occur in
the regulatory environment; (7) Changes may occur in business conditions and/or
inflation; (8) The Company and those it deals with may not successfully remedy
the Year 2000 problem; and (9) Changes may occur in the securities markets.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Such
forward-looking statements may be identified, without limitation, by the use of
the words "anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectations, beliefs or projections will result or be achieved or
accomplished.
PART I
Item 1. Description of Business.
General
Southcoast Financial Corporation (the "Company") is a South Carolina
corporation organized in 1999 for the purpose of being a holding company for
Southcoast Community Bank (the "Bank"). On April 29, 1999, pursuant to a Plan of
Exchange approved by the shareholders, all of the outstanding shares of capital
stock of the Bank were exchanged for shares of common stock of the Company and
the Company became the owner of all of the outstanding capital stock of the
Bank. The Company presently engages in no business other than that of owning the
Bank and has no employees.
The Bank is a South Carolina state bank incorporated in June, 1998, and
which commenced operations as a commercial bank in July, 1998. The Bank operates
from its offices in Mt. Pleasant and Charleston, South Carolina. The main office
is located at 530 Johnnie Dodds Boulevard, in Mt. Pleasant, South Carolina, and
the Charleston office is located at 802 Savannah Highway in Charleston, South
Carolina.
Both of the Bank's offices are located in Charleston County, South
Carolina. Charleston County, which had a 1996 population of approximately
278,000, is the state's third most populous county. Population growth in the
County has been low in recent years due to the closing of the Charleston Naval
Base which employed about 40,000 persons of whom 26,000 were military. The
closure has had a substantial dampening effect, slowing net population growth.
Major employers in county include other U.S. military facilities, the Medical
University of South Carolina, several private and governmental hospitals, lumber
and paper manufacturers and automobile parts manufacturers. Local governmental
entities and schools also employ large numbers of people. Charleston County is a
major tourist destination with a historically and architecturally significant
old city as well as several world-class beaches and beach resort complexes. Over
40,000 people are employed in tourism related jobs. Per capita and median family
income are the fourth highest for any county in South Carolina and have grown in
recent years somewhat faster than comparable growth at the state and national
level. Nonagricultural employment grew by approximately 7% from 1993 to 1997
excluding members of the armed forces. During the same period residential and
commercial construction increased by over 95%.
The Bank offers a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services.
2
<PAGE>
The Bank offers secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial, consumer and
residential purposes. Consumer loans include: car loans, home equity improvement
loans (secured by first and second mortgages), personal expenditure loans,
education loans, overdraft lines of credit, and the like. Commercial loans
include short term unsecured loans, short and intermediate term real estate
mortgage loans, loans secured by listed stocks, loans secured by equipment
inventory, accounts receivable, and the like. Management believes that the
credit staff possesses knowledge of the community and lending skills sufficient
to enable the Bank to maintain a sufficient volume of high quality loans.
Management of the Bank believes that the loan portfolio is adequately
diversified. There are no significant concentrations of loans in any particular
individuals, industries or groups of related individuals or industries and the
Bank has no foreign loans. The loan portfolio consists primarily of mortgage
loans and extensions of credit to businesses and individuals in its service area
within Charleston County, South Carolina. The economy of this area is
diversified and does not depend on any one industry or group of related
industries. Management has established loan policies and practices that include
set limitations on loan-to-collateral value for different types of collateral,
requirements for appraisals, obtaining and maintaining current credit and
financial information on borrowers, and credit approvals.
Other services offered by the Bank include residential mortgage loan
origination services, safe deposit boxes, night depository service, VISA(R) and
MasterCard(R) charge cards, tax deposits, travelers checks, and twenty-four hour
automated teller service is planned. The ATM will be part of the Intercept
network.
At April 15, 1999, the Bank employed 23 persons full-time. Management
of the Bank believes that its employee relations are excellent.
Financial Aspects of Business
The following information describes various financial aspects of the
Bank's business. The reader should bear in mind that the Bank was open for
business for less than half of 1998. Accordingly, the information provided below
will not necessarily provide much information about the future condition or
results of operations of the Bank. This information should be read in
conjunction with the financial statements of the Bank which appear elsewhere in
this document. Because the Company has no business other than ownership of the
Bank, the following information also describes the financial aspects of the
business of the Company.
The table, "Average Balances, Yields and Rates", provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and interest bearing liabilities for the Year ended December 31, 1998.
3
<PAGE>
Average Balances, Yields and Rates
<TABLE>
<CAPTION>
Period Ended December 31,
1998
Interest
Average Income/ Yields/
Balance(1) Expense Rates
---------- ------- -----
Assets
<S> <C> <C> <C>
Deposits in other banks ..................................................... $ 5 $ 1 4.75%
Securities .................................................................. 1,039 30 5.77%
Federal funds sold .......................................................... 8,297 193 4.65%
Loans ....................................................................... 3,873 270 13.94%
-------- ---- -----
Total interest earning assets .......................................... 13,214 494 7.48%
Cash and due from banks ..................................................... 209
Allowance for loan losses ................................................... (86)
Premises and equipment ...................................................... 888
Other assets ................................................................ 188
-------- ---- -----
Total assets ........................................................... $ 14,413
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts .................................... $ 229 $ 2 1.74%
Savings and Money Market accounts ........................................ 389 7 3.60%
Time deposits $100M and over ............................................. 1,221 37 6.06%
Other time deposits ...................................................... 1,438 40 5.56%
-------- ---- -----
Total interest bearing deposits ........................................ 3,277 85 5.25%
Short-term debt ............................................................. 5 1 5.15%
-------- ---- -----
Total interest bearing liabilities ..................................... 3,282 86 5.24%
Noninterest bearing demand deposits ......................................... 839
Other liabilities ........................................................... 41
Shareholders' equity ........................................................ 10,251
--------
Total liabilities and shareholders' equity ............................. $ 14,413
========
Interest rate spread (2) .................................................... 2.24%
Net interest income and net yield on earning assets (3) ..................... $408 6.18%
Interest free funds supporting earning assets (4) ........................... $ 9,932
</TABLE>
(1) Average balances are computed on a daily basis.
(2) Total interest bearing assets yield less the total interest bearing
liabilities rate.
(3) Net interest income divided by total interest earning assets.
(4) Total interest earning assets less total interest bearing liabilities.
4
<PAGE>
During 1999, management expects that interest rates will move within a
narrow range, and management has not identified any factors that would cause
interest rates to increase sharply in a short period of time. Therefore, any
improvements in net interest income for 1999 are expected to be largely the
result of increases in the volume of interest earning assets and liabilities or
changes in the mix of interest earning assets, such as increased loan volume.
Management expects to continue to use marketing strategies to increase the
Bank's market share for both deposits and quality loans within its service area.
These strategies involve offering attractive interest rates and continuing the
Bank's commitment to providing outstanding customer service.
Interest Rate Sensitivity
Interest rate sensitivity measures the timing and magnitude of the
repricing of assets compared with the repricing of liabilities and is an
important part of asset/liability management. The objective of interest rate
sensitivity management is to generate stable growth in net interest income, and
to control the risks associated with interest rate movements. Management
constantly reviews interest rate risk exposure and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a
cumulative basis through twelve months, rate sensitive assets exceeded rate
sensitive liabilities, resulting in a asset sensitive position at the end of
1998 of $2,407, for a cumulative gap ratio of 1.3. When interest sensitive
assets exceed interest sensitive liabilities for a specific repricing "horizon",
a positive interest sensitivity gap results, as was the case at the end of 1998
with respect to the one year time horizon. The gap is negative when interest
sensitive liabilities exceed interest sensitive assets. For a bank with a
positive gap, rising interest rates would be expected to have a positive effect
on net interest income and falling rates would be expected to have the opposite
effect.
The table below reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amounts of fixed rate loans are reflected at the loans' final maturity
dates. Variable rate loans are reflected at the earlier of their contractual
maturity date or the date at which the loan may be repriced contractually.
Deposits in other banks and debt securities are reflected at the earlier of each
instrument's repricing date for variable rate instruments or the ultimate
maturity date for fixed rate instruments. Overnight federal funds sold are
reflected in the earliest repricing interval due to the immediately available
nature of these funds. Interest bearing liabilities with no contractual
maturity, such as interest bearing transaction accounts and savings deposits are
reflected in the earliest repricing interval due to contractual arrangements
which give management the opportunity to vary the rates paid on these deposits
within a thirty-day or shorter period. However, the Bank is under no obligation
to vary the rates paid on those deposits within any given period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity dates. Federal funds purchased and long-term debt are
presented in the earliest repricing interval because their rates are adjustable
immediately by the lenders.
5
<PAGE>
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1998
Within 4-12 Over 1-5 Over 5
3 Months Months Years Years Total
-------- ------ ------- ------- ------
(Dollars in thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C>
Time deposits in other banks ...................... $ 946 $ 0 $ 0 $ 0 $ 946
Securities
Fixed rate ...................................... 2,259 2,259
Variable rate ................................... 474 0 0 0 474
Federal funds sold ................................ 4,220 0 0 0 4,220
Loans (1) ......................................... 877 3,924 1,832 4,514 11,147
------ ------- ------ ----- -------
Total interest earning assets ................. $6,517 $ 3,924 $1,832 6,773 $19,046
====== ======= ====== ====== =======
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ........... $ 388 $ 0 $ 0 $ 0 $ 388
Savings ......................................... 513 0 0 0 513
Time deposits $100M and over .................... 300 2,824 101 0 3,225
Other time deposits ............................. 531 2,528 259 0 3,318
Long-term debt .................................... 950 0 0 0 950
------ ------- ------ ------ -------
Total interest bearing liabilities ............ $2,682 $ 5,352 $ 360 $ 0 $ 8,394
====== ======= ====== ====== =======
Interest sensitivity gap ............................. $3,835 $(1,428)
Cumulative interest sensitivity gap .................. $3,835 $ 2,407
Gap ratio ............................................ 2.43 (.73)
Cumulative gap ratio ................................. 2.43 1.30
</TABLE>
(1) Includes fixed rate and variable rate loans.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. Provisions for loan losses were $325,000 for the year ended
December 31, 1998. There were no charge-offs in 1998. In addition, non-accrual,
past due and other unfavorable performance-characteristic loans continue to be
experienced at only nominal levels. See "Impaired Loans" and "Allowance for Loan
Losses" for a discussion of the factors management considers in its review of
the adequacy of the allowance and provision for loan losses.
Securities
The following table summarizes the carrying amounts of securities held
by the Bank at each of the dates indicated.
6
<PAGE>
Securities Portfolio Composition
1998
----
Available-
for-Sale
--------
(Dollars in thousands)
U.S. Government agencies ................... 2,733
Total ................................... $2,733
- --------------------------
Available-for-sale securities are stated at estimated fair value.
The following table presents maturities and weighted average yields of
securities at December 31, 1998.
Securities Portfolio Maturities and Yields
December 31, 1998
-----------------
Available-
for-Sale Yield
-------- -----
(Dollars in thousands)
U.S. Government agencies
After one through five years ......... $2,244 5.92%
After five through ten years ......... 489 4.76%
------
Over ten years ....................... $2,733 5.71%
======
- ------------------------
(1) Maturity categories based upon final stated maturity dates. Average
maturity is substantially shorter because of the monthly return of
principal on certain securities.
Management assigns securities upon purchase into one of the categories
(trading, available-for-sale and held- to-maturity) designated by Statement of
Financial Accounting Standards ("SFAS") No. 115 based on intent, taking into
consideration other factors including expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and capital
requirements. The bank has never held securities for trading purposes.
Loan Portfolio
Management believes the loan portfolio is adequately diversified. There
are no significant concentrations of loans in any particular individuals or
industry or group of related individuals or industries, and there are no foreign
loans.
The amount of loans outstanding at December 31, 1998 is shown in the
following table according to type of loan:
7
<PAGE>
Loan Portfolio Composition
December 31,
------------
1998
----
Amount %
------ -----
(Dollars in thousands)
Commercial and industrial ......................... $ 4,426 39.7%
Real estate - construction ........................ 405 3.6%
Real estate - mortgage
Farmland ....................................... 0 0%
1-4 family residential ......................... 5,876 52.7%
Multifamily (5 or more) residential ............ 0 0%
Nonfarm, nonresidential ........................ 0 0%
Consumer installment .............................. 440 4.0%
------- -----
Total ........................................ $11,147 100.0%
======= =====
A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and amounts of risks assumed and to ultimately minimize losses. Such
policies include limitations on loan-to-collateral values for various types of
collateral, requirements for appraisals of real estate collateral, problem loan
management practices and collection procedures, and nonaccrual and charge-off
guidelines.
Real estate construction loans generally consist of financing the
construction of 1-4 family dwellings and some nonfarm, nonresidential real
estate. Usually, loan to cost ratios are limited to 75% to 80% and permanent
financing commitments are usually required prior to the advancement of loan
proceeds. Loans secured by real estate mortgages comprised approximately 52.7%
of the Bank's loan portfolio at the end of 1998. Residential real estate loans
consist mainly of first and second mortgages on single family homes.
Loan-to-value ratios for these instruments are generally limited to 80% and
private mortgage insurance is required for loans in excess of 80%. The repayment
of both residential and business real estate loans is dependent primarily on the
income and cash flows of the borrowers, with the real estate serving as a
secondary or liquidation source of repayment. These types of loans are usually
regarded as having low risk because of the relatively stable value of the
collateral.
Consumer credit, as defined by FDIC regulations, is credit extended to
individuals for personal, family, or household purposes. This definition also
includes loans made for consumer purposes, secured by liens on real estate
provided that the institution relies substantially on the general credit
standing of the borrower rather than on the value of property for repayment.
Consumer loans will consist of installment loans for various purposes, including
home equity loans, auto, boat, home improvement loans, recreational vehicle
overdraft checking, and loans for other legitimate personal purposes. Maturity
of consumer loans will generally not exceed 15 years. Home improvement or equity
lines can be secured with second mortgages; however, the total of both first and
second positions should not exceed 90 percent of the appraisal amount, exclusive
of additional collateral. All consumer loans will be based on the earning
capacity and stability of employment or income stream of the borrower. Consumer
credit is generally more risky than loans made for the purchase or refinance of
the consumer's primary residence and generally provide a higher interest rate to
compensate for the additional risk.
Commercial and industrial loans primarily represent loans made to
businesses, and may be made on either a secured or an unsecured basis. When
taken, collateral consists of liens on receivables, equipment, inventories,
furniture and fixtures. Unsecured business loans are generally short-term with
emphasis on repayment strengths and low debt to worth ratios. Commercial lending
involves significant risk because repayment usually depends on the cash flows
generated by a borrower's business, and the debt service capacity of a business
can deteriorate because of downturns in national and local economic conditions.
To control risk, more in-depth initial and continuing financial analysis of a
borrower's cash flows and other financial information is generally required.
In compliance with the State of South Carolina's lending limit
regulations, the Bank limits obligations of one borrower or a related group of
borrowers to 10% (but this limit can be increased to 15% by a vote of at least
2/3 of the Bank's board members) of the Bank's capital plus unimpaired surplus.
Concentrations of credit are defined as loans granted that exceed the 10% of
capital and unimpaired surplus threshold. Concentrations can result from one
borrower and a related group of borrowers, a company in the local economy, or
one industry group. Concentrations are monitored as part of the Allowance for
Loan Losses Policy calculation. Under the Allowance for Loan Losses Policy, all
loans are assigned an initial risk rating that can be adjusted as part of loan
reviews. This rating is used in helping management determine an appropriate
level for the allowance for loan losses. The Bank does not have a predetermined
target for its loan to deposit ratio.
8
<PAGE>
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the Bank's
loans, by type, as of December 31, 1998, as well as the type of interest
requirement on such loans.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
1 Year 1-5 5 Years
or Less Years or More Total
------- ----- ------- -----
<S> <C> <C> <C> <C>
Commercial and industrial ......................................... $1,221 $ 782 $2,423 $ 4,426
Real estate - construction ........................................ 405 0 0 405
Real estate - mortgage ............................................ 277 320 5,329 5,926
Consumer installment .............................................. 40 295 55 390
------ ------ ------ -------
Total ........................................................ $1,943 $1,397 $7,807 $11,147
====== ====== ====== =======
Predetermined rate, maturity greater than one year ................ $1,269 $4,297 $ 5,566
====== ====== =======
Variable rate or maturity within one year ......................... $ 1,943 $ 128 $3,510 $ 5,581
======= ====== ====== =======
</TABLE>
Impaired Loans
A loan is considered to be impaired when, in management's judgment
based on current information and events, it is probable that the obligation's
principal or interest will not be collectible in accordance with the terms of
the original loan agreement. Impaired loans, when not material, are carried in
the balance sheet at a value not to exceed their observable market price or the
fair value of the collateral if the repayment of the loan is expected to be
provided solely by the underlying collateral. The carrying value of any material
impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, which is the contractual
interest rate adjusted for any deferred loan fees or costs, premium or discount
existing at the inception or acquisition of the loan.
Loans which management has identified as impaired generally are
nonperforming loans. Nonperforming loans include nonaccrual loans or loans which
are 90 days or more delinquent as to principal or interest payments.
Following is a summary of the Bank's impaired loans:
Nonaccrual and Past Due Loans
December 31,
------------
1998
----
(Dollars in thousands)
Nonaccrual loans ................................... $ 0
Accruing loans 90 days or more past due ............ 0
----
Total ........................................... $ 0
====
Generally, the accrual of interest is discontinued on impaired loans
and any previously accrued interest on such loans is reversed against current
income. Any subsequent interest income is recognized on a cash basis when
received unless collectibility of a significant amount of principal is in
serious doubt. In such cases, collections are credited first to the remaining
principal balance on a cost recovery basis. An impaired loan is not returned to
accrual status unless principal and interest are current and the borrower has
demonstrated the ability to continue making payments as agreed.
At December 31, 1998, there were no commitments to lend additional
funds to debtors owing amounts on nonaccrual loans.
9
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans are charged against the allowance in the
period in which management has determined that it is more likely than not such
loans have become uncollectible. Recoveries of previously charged off loans are
credited to the allowance. The table, "Summary of Loan Loss Experience",
summarizes loan balances at the end of each period indicated, averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense. In
reviewing the adequacy of the allowance for loan losses at year end, management
took into consideration the historical loan losses experienced by the bank,
management's experience with other institutions in the Bank's market area,
current economic conditions affecting the borrowers' ability to repay, the
volume of loans, the size of loans, and the trends in delinquent, nonaccruing,
and any potential problem loans, and the quality of collateral securing
nonperforming and problem loans. After charging off all known losses, management
considers the allowance for loan losses adequate to cover its estimate of
possible future loan losses inherent in the loan portfolio as of December 31,
1998.
In calculating the amount required in the allowance for loan losses,
management applies a consistent methodology that is updated quarterly. The
methodology utilizes a loan risk grading system and detailed loan reviews to
assess credit risks and the overall quality of the loan portfolio, as well as
considering other off-balance- sheet credit risks such as loan commitments and
standby letters of credit. Also, the calculation provides for management's
assessment of trends in national and local economic conditions that might affect
the general quality of the loan portfolio.
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Period Ended December 31,
-------------------------
1998
----
(Dollars in thousands)
<S> <C>
Total loans outstanding at end of Year ............................................ $11,147
Average amount of loans outstanding ............................................... 3,873
Balance of allowance for loan losses - beginning .................................. 0
-------
Loans charged off
Commercial and industrial ...................................................... 0
Consumer installment ........................................................... 0
-------
Total charge-offs ............................................................ 0
-------
Recoveries of loans previously charged-off
Commercial and industrial ...................................................... 0
Consumer installment ........................................................... 0
-------
Total recoveries ............................................................. 0
-------
Net charge-offs (recoveries) ...................................................... 0
-------
Additions to allowance charged to expense ......................................... 325
-------
Balance of allowance for loan losses - ending ..................................... $ 325
-------
Ratios
Net charge-offs to average loans outstanding ................................... 0%
Net charge-offs to loans at end of period ...................................... 0%
Allowance for loan losses to average loans ..................................... 8.39%
Allowance for loan losses to loans at end of period ... ..... ..... ............ 2.92%
Net charge-offs to allowance for loan losses ................................... 0%
Net charge-offs to provision for loan losses ................................... 0%
The following table presents the allocation of the allowance for loan
losses for the year ended December 31, 1998, compared with the percent of loans
in the applicable categories to total loans.
</TABLE>
10
<PAGE>
Allocation of Allowance for Loan Losses
December 31,
------------
1998
----
% of
Amount Loans
------ -----
(Dollars in thousands)
Commercial and industrial .................... $ 120 39.7%
Real estate - construction ................... 2 3.6%
Real estate - mortgage ....................... 197 52.7%
Consumer installment ......................... 6 4.0%
-------- -------
Total ..................................... $ 325 100.0%
======== =======
Unallocated
Deposits
The average amounts and percentage composition of deposits held by the
Bank for the year ended December 31, 1998, are summarized below:
Average Deposits
Period Ended December 31,
-------------------------
1998
----
Amount %
------ ------
(Dollars in thousands)
Noninterest bearing demand ................ $ 839 20.4%
Interest bearing transaction accounts ..... 229 5.6%
Savings ................................... 389 9.5%
Time deposits $100M and over .............. 1,221 29.6%
Other time ................................ 1,438 34.9%
------- -------
Total deposits ......................... $ 4,116 100.0%
======= =======
As of December 31, 1998, the Bank held $2,973,000 in time deposits of
$100,000 or more with approximately $300,000 maturing within three months,
$2,572,000 maturing over three through twelve months, and $101,000 maturing over
twelve months. Average time deposits $100,000 and over comprised approximately
29.6% of total average deposits during 1998. The vast majority of time deposits
$100,000 and over are acquired from customers within the Bank's service area in
the ordinary course of business. The Bank does not purchase brokered deposits.
While most of the large time deposits are acquired from customers with standing
relationships with the Bank, it is a common industry practice not to consider
these types of deposits as core deposits because their retention can be expected
to be heavily influenced by rates offered, and therefore such deposits may have
the characteristics of shorter-term purchased funds. Certificates of deposit
$100,000 and over involve the maintenance of an appropriate matching of maturity
distribution and a diversification of sources to achieve an appropriate level of
liquidity.
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for each period indicated.
11
<PAGE>
Period Ended December 31,
-------------------------
1998
----
Return on assets ............................ (3.13)%
Return on equity ............................ (4.40)%
Dividend payout ratio ....................... N/A
Equity to assets ratio ...................... 71.12%
Competition
Competition between commercial banks and thrift institutions (savings
and loan associations) and credit unions has intensified significantly as a
result of the elimination of many previous distinctions between the various
types of financial institutions, and the expanded powers and increased activity
of thrift institutions in areas of banking that previously had been the sole
domain of commercial banks. Recent legislation, together with other regulatory
changes by the primary regulators of the various financial institutions, has
resulted in the elimination of many distinctions between a commercial bank and
thrift institution. Consequently, competition among financial institutions of
all types is virtually unlimited with respect to legal authority to provide most
financial services.
The Bank competes in the South Carolina county of Charleston, for which
the most recent market share data available is as of June 30, 1998. At that
time, 15 banks, savings and loans, and savings banks with 103 branch locations
competed in Charleston County for aggregate deposits of approximately $3.01
billion.
Banks generally compete with other financial institutions through the
savings products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal concern with which services are offered. In the
conduct of certain areas of its business, the Bank competes with commercial
banks, credit unions, consumer finance companies, insurance companies, money
market mutual funds and other financial institutions, some of which are not
subject to the same degree of regulation and restriction imposed upon the Bank.
Many of these competitors have substantially greater resources and lending
limits than the Bank and offer certain services, such as international banking
services and trust services, that the Bank does not provide. Moreover, most of
these competitors have more numerous branch offices located throughout their
market areas, a competitive advantage that the Bank does not have to the same
degree.
The banking industry is significantly affected by prevailing economic
conditions as well as by government policies and regulations concerning, among
other things, monetary and fiscal affairs, the housing industry and financial
institutions. Deposits at banks are influenced by a number of economic factors,
including interest rates, competing instruments, levels of personal income and
savings, and the extent to which interest on retirement savings accounts is tax
deferred. Lending activities are also influenced by a number of economic
factors, including demand for and supply of housing, conditions in the
construction industry, and availability of funds. Primary sources of funds for
lending activities include savings deposits, income from investments, loan
principal repayments, and proceeds from sales of loans to conventional
participating lenders.
Effect of Government Regulation
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Bank.
12
<PAGE>
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), the Company is subject to the regulations of the Federal Reserve.
Under the BHCA, the Company's activities and those of its subsidiaries are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. The BHCA also prohibits the Company from
acquiring control of any bank operating outside the State of South Carolina
unless such action is specifically authorized by the statutes of the state where
the Bank to be acquired is located.
Additionally, the BHCA prohibits the Company from engaging in or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in a non-banking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such non-banking related activities.
The Company will also be registered under the bank holding company laws
of South Carolina. Accordingly, the Company is subject to regulation and
supervision by the State Board. A registered South Carolina bank holding company
must provide the State Board with information with respect to the financial
condition, operations, management and inter-company relationships of the holding
company and its subsidiaries. The State Board also may require such other
information as is necessary to keep itself informed about whether the provisions
of South Carolina law and the regulations and orders issued thereunder by the
State Board have been complied with, and the State Board may examine any bank
holding company and its subsidiaries.
Under the South Carolina Bank Holding Company Act (the "SCBHCA"), it is
unlawful without the prior approval of the State Board for any South Carolina
bank holding company (i) to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank or any other bank holding company,
(ii) to acquire all or substantially all of the assets of a bank or any other
bank holding company, or (iii) to merge or consolidate with any other bank
holding company.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
13
<PAGE>
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The Federal Reserve has adopted risk-based and leverage capital
adequacy guidelines for holding companies and banks that are members of the
Federal Reserve System subject to its regulation. The capital guidelines and the
Company's capital position are summarized in Note 17 to the Financial
Statements, contained elsewhere in this report. The Bank is considered well
capitalized, since it has ratios of total capital to risk weighted assets
exceeding 10% at the end of 1998.
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
Payment of Dividends
The Company will be a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its shareholders. It is not anticipated that the Company
will pay cash dividends in the near future.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its
affiliates, including the amount of the Bank' loans to or investments in nonbank
affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its affiliates
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. The FDIC equalized the assessment
rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. Thus,
for the semi-annual period beginning January 1, 1997, the assessments imposed on
all FDIC deposits for deposit insurance have an effective rate ranging from 0 to
27 basis points per $100 of insured deposits, depending
14
<PAGE>
on the institution's capital position and other supervisory factors. However,
because legislation enacted in 1996 requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"), the FDIC is currently
assessing BIF-insured deposits an additional 1.26 basis points per $100 of
deposits, and SAIF-insured deposits an additional 6.30 basis points per $100 of
deposits, to cover those obligations. The FICO assessment will continue to be
adjusted quarterly to reflect changes in the assessment bases of the respective
funds based on quarterly Call Report and Thrift Financial Report submissions.
Regulation of the Bank
The Bank is also subject to examination by the South Carolina state
bank examiners. In addition, the Bank is subject to various other state and
federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit and laws relating to branch banking. The Bank's
loan operations are also subject to certain federal consumer credit laws and
regulations promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information concerning their mortgage lending; the Equal Credit
Opportunity Act and the Fair Housing Act, prohibiting discrimination on the
basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things, the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of the Bank are also subject to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the Expedited Funds Availability Act, which deals with disclosure of the
availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs are evaluated as part of
the examination process, and also are considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA: restricting payment of capital distributions and management fees;
requiring FDIC to monitor the condition of the bank; requiring submission by the
bank of a capital restoration plan; restricting the growth of the bank's assets
and requiring prior approval of certain expansion proposals. A bank that is
"significantly undercapitalized" is also subject to restrictions on compensation
paid to senior management of the bank, and a bank that is "critically
undercapitalized" is further subject to restrictions on the activities of the
bank and restrictions on payments of subordinated debt of the bank. The purpose
of these provisions is to require banks with less than adequate capital to act
quickly to restore their capital and to have the FDIC move promptly to take over
banks that are unwilling or unable to take such steps.
15
<PAGE>
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions of the 1991 Banking Law (described in the previous paragraph).
Management does not believe that these regulations will have a material adverse
effect on the operations of the Bank.
Interstate Banking
In July 1994, South Carolina enacted legislation which effectively
provides that, after September 30, 1996, out-of-state bank holding companies
(including bank holding companies in the Southern Region, as defined under the
statute) may acquire other banks or bank holding companies having offices in
South Carolina upon the approval of the South Carolina State Board of Financial
Institutions and assuming compliance with certain other conditions, including
that the effect of the transaction not lessen competition and that the laws of
the state in which the out-of-state bank holding company filing the applications
has its principal place of business permit South Carolina bank holding companies
to acquire banks and bank holding companies in that state. Although such
legislation may increase takeover activity in South Carolina, the Bank does not
believe that such legislation will have a material impact on its competitive
position. However, no assurance of such fact may be given.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
has increased the ability of bank holding companies and banks to operate across
state lines. Under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994, the existing restrictions on interstate acquisitions of banks by
bank holding companies will be repealed one year following enactment, such that
the Company and any other bank holding company located in South Carolina would
be able to acquire a bank located in any other state, and a bank holding company
located outside South Carolina could acquire any South Carolina-based bank, in
either case subject to certain deposit percentage and other restrictions. The
legislation also provides that, unless an individual state elects beforehand
either (i) to accelerate the effective date or (ii) to prohibit out-of-state
banks from operating interstate branches within its territory, on or after June
1, 1999, adequately capitalized and managed bank holding companies will be able
to consolidate their multistate bank operations into a single bank subsidiary
and to branch interstate through acquisitions. De novo branching by an
out-of-state bank would be permitted only if it is expressly permitted by the
laws of the host state. The authority of a bank to establish and operate
branches within a state will continue to be subject to applicable state
branching laws. South Carolina law was amended, effective July 1, 1996, to
permit such interstate branching but not de novo branching by an out-of-state
bank. The Bank believes that this legislation may result in additional
acquisitions of South Carolina financial institutions by out-of-state financial
institutions. However, the Bank does not presently anticipate that such
legislation will have a material impact on its operations or future plans.
Legislative Proposals
New proposed legislation which could significantly affect the business
of banking has been introduced or may be introduced in Congress from time to
time. Management of the Bank cannot predict the future course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open-
16
<PAGE>
market dealings in United States government securities, the discount rate at
which banks may borrow from the Federal Reserve, and the reserve requirements on
deposits. The nature and timing of any changes in such policies and their impact
on the Company and the Bank cannot be predicted.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Plan of Operation.
The following discussion describes the Company's plan of operation for
the next twelve months.
The Company plans to complete construction of its home office building
at 530 Johnnie Dodds Boulevard, Mt. Pleasant, South Carolina, and move its
operations out of its temporary building into the permanent building. Subject to
the receipt of required regulatory approval, the Company plans to open two
additional branches located in Mt. Pleasant, South Carolina and Moncks Corner,
South Carolina. The opening of additional offices will increase the Company's
number of employees by about 8 employees per office.
The Company plans to continue to grow its deposit base by offering
competitive rates and services. It plans to increase its lending activities as
well by offering competitive rates and services. The opening of additional
offices is expected to give the Company convenient access to a substantially
larger base of prospective customers in the Charleston, South Carolina
metropolitan area. It is not expected that the products and services offered
will vary substantially from those currently offered. Fixed rate 1-4 family
residential mortgages will be originated primarily for sale in the secondary
market.
The Company expects to be able to meet all of its cash requirements for
the next twelve months in the ordinary course of its business. The Company
regularly "borrows" from its customers in the form of deposits which the Company
uses to meet its cash requirements including withdrawals of deposits. The
Company also borrows funds in the ordinary course of business from the Federal
Home Loan Bank of Atlanta. Other sources of cash for the Company are payments
received of principal and interest on loans and investments. The Company may
sell additional securities in the next twelve months to provide the capital to
support additional growth. However, such capital is not needed to support
current plans for the next twelve months.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of the Bank.
This commentary should be read in conjunction with the financial statements and
the related notes and other statistical information in this report.
This discussion will concentrate on the first quarter operations ending
on March 31, 1999. The Bank commenced operations on July 20, 1998 and was not in
business in the first quarter of 1998. Where appropriate, comparisons to fourth
quarter or the Bank's operating plan have been made.
Earnings Review
The Bank's net loss for the first quarter of 1999 was $147,600 and was $184,000
for the fourth quarter of 1998. The first quarter loss per share was $.14
compared to a fourth quarter loss per share of $.18.
The following is a brief discussion of the more significant components of the
net loss:
16A
<PAGE>
Net Interest Income
Net interest income represents the difference between interest received
or accrued on interest earning assets and interest paid or accrued on interest
bearing liabilities. The following presents, in tabular form, the main
components of interest earning assets and interest bearing liabilities for the
three-month periods ended March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans .......................................... $13,866 $366 10.56% $ 6,799 $236 13.86%
Investment securities .......................... 2,848 47 6.62 1,595 23 5.73
Federal funds sold ............................. 4,169 49 4.68 6,498 71 4.38
------- ---- ---- ------- ---- -----
Total earnings assets .......................... 20,883 462 8.85 14,892 329 8.85
------- ---- ----- ------- ---- -----
Interest bearing deposits ...................... 11,077 133 4.81 4,784 57 4.80
Other borrowings ............................... 439 6 5.66 10 0 5.48
------- ---- ----- ------- ---- -----
Total interest bearing funds ................... 11,516 140 4.85 4,794 58 4.80
------- ---- ----- ------- ---- -----
Total net non-interest bearing funds ........... 9,367 10,096
Interest margin ................................ $20,883 $322 6.18% $14,892 $272 7.30%
Interest spread ................................ 4.00% 4.05%
</TABLE>
Non-interest Income
Non-interest income for the three-month period ended March 31,1999 was
$58,057. Of this total, $18,277 represented service fees on deposit accounts.
$15,170 was revenue from loans sold, and $24,610 was income from other fees
charged. For the three months ended December 31, 1998, non-interest income
totaled $14,340 and was comprised of $6,990 in service fees on deposit accounts
and $7,350 of other fees.
Non-interest Expense
Non-interest expenses for the three-month period were $ 379,148
consisting primarily of salaries and employee benefits of $ 252,153.
Provision for Loan Losses
The provision for loan losses of $225,000 was recorded during the first
three months of 1999 as well as the fourth quarter of 1998. Management's
judgement as to the adequacy of the allowance is based upon a number of
assumptions about future events that it believes to be reasonable, but which may
or may not be accurate. Thus, there can be no assurance that charge-offs in
future periods will not exceed the allowance for loan losses or that additional
increases in the loan loss allowances will not be required. The Bank had no
non-performing loans or net charge-offs in the first three months of 1999.
16B
<PAGE>
BALANCE SHEET REVIEW
Total consolidated assets increased by $ 9.7 million to $30.4 million
during the period ended March 31, 1999. The increase was generated primarily
through a $ 6.9 million increase in net loans and a $ 1.0 million increase in
property and equipment. Federal funds sold increased $ 0.9 million since
December 31, 1999. This growth in assets was funded by a $9.7 million increase
in deposits.
Loans
Outstanding loans represent the largest component of earning assets as
of March 31, 1999 at $ 17,762,314, or 58.4%, of total earning assets. Loans
increased $ 6.94 million, or 64.1% since December 31, 1998. Loans at December
31, 1998 represented 61.6% of total earning assets.
Allowance for Loan Losses
The allowance for loan losses at March 31, 1999 was $550,000, or 3.0%
of loans outstanding compared to an allowance of $325,000, or 2.9% at December
31, 1998. The allowance for loan losses is based upon management's continuing
evaluation of the collectibility of loans. Because of the lack of historical
data available in a new Bank, management's judgment has been based on
management's experience with other institutions in the Bank's market area,
current economic conditions affecting the ability of borrowers to repay, the
volume of loans, the size of loans, the quality of collateral securing loans,
and other factors deserving recognition. As of March 31, 1999, there have been
no non-performing or net charge-offs since inception.
Securities
Investment securities represented 10.6% of earning assets at March 31,
1999 with a total of $ 3,230,743, up $497,765 from the December 31, 1998 balance
of $ 2,732,978.
Deposits
The Bank's primary source of funds for loans and investments is its
deposits. Deposits grew $ 9,723,582, or 102% since year end for a total of $
19,283,072 at March 31,1999. During this period, the total number of deposit
accounts increased by 305 accounts to 736.
Liquidity
Liquidity management involves meeting cash flow requirements of the
Bank. The Bank's liquidity position is primarily dependent upon its need to
respond to short-term demand for funds caused by withdrawals from deposit
accounts and upon the liquidity of its assets. The Bank's primary liquidity
sources include cash and due from banks, federal funds sold and securities
available for sale. The Bank is also a member of the Federal Home Loan Bank
system and has the ability to borrow funds on a secured basis. At March 31,
1999, the Bank had $1,000,000 in borrowings outstanding from the Federal Home
Loan Bank of Atlanta. At March 31, 1999 the Bank had $3,000,000 in unused
federal lines of credit with correspondent banks.
The Bank believes it liquidity sources are adequate to meet its
operating needs and is not aware of any trends that may result in the Bank's
liquidity materially increasing or decreasing.
Capital Adequacy
The Federal Deposit Insurance Corporation has issued guidelines for
risk-based capital requirements. As of March 31, 1999, the Bank exceeds the
capital requirement levels that are to be maintained, as shown in the following
table.
16C
<PAGE>
Capital Ratios
(Amounts in thousands)
<TABLE>
<CAPTION>
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) ................ $10,459 59.1% $1,769 10.0% $1,416 8.00%
Tier 1 capital (to risk weighted assets) ............... 10,134 57.3 1,062 6.0 707 4.00
Tier 1 capital (to average assets) ..................... 10,134 43.2 1,174 5.0 939 4.00
</TABLE>
Year 2000
Many computer-based information systems in use today exclude the
century as part of the date definition, which could cause inaccurate
calculations after December 31, 1999. The "Year 2000 Problem" had been
recognized at the time Bank management was deciding which vendor packages to use
in its daily operations. Management obtained representations from all of its
vendors that the hardware/software was Year 2000 compliant. However, despite
these representations, management has completed extensive testing of all of its
computer hardware and software for Year 2000 compliance. The estimated total
cost of the testing was $20,000. The Bank does not anticipate incurring any
additional expenses to become Year 2000 compliant. Year 2000 problems
encountered by customers and vendors of goods and services other than computer
and data processing systems could adversely affect the Bank. Management has
developed contingency plans to deal with the types and extent of possible
problems it can foresee. Year 2000 problems could, however, have a material
adverse effect on the Bank, the dollar amount of which cannot be accurately
quantified at this time because of inherent variables and uncertainties.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Bank are primarily monetary in nature.
Therefore, interest rates have a more significant impact on the Bank's
performance than do the effects of changes in the general rate of inflation and
changes in prices. In addition, interest rates do not necessarily move in the
same magnitude as the prices of goods and services. Management seeks to manage
the relationships between interest sensitive assets and liabilities in order to
protect against wide rate fluctuations, including those resulting from
inflation.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. Under this statement, enterprises are required to
classify items of "other comprehensive income" by their nature in the financial
statement and display the balance of other comprehensive income separately in
the equity section of the balance sheet. SFAS 130 is effective for both interim
and annual periods beginning after December 15, 1997. The adoption of this
standard had no effect on the Bank's net income or stockholders' equity.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS 131 requires that a public enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the way that the operating segments were
determined and other items. The Statement is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 did not have a
material effect on the Bank's financial statements.
16D
<PAGE>
In April 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The new Statement revises the
required disclosures for employee benefit plans, but it does not change the
measurement or recognition of such plans. While the new standard requires some
additional information about benefit plans, it helps preparers of financial
statements by eliminating certain disclosure and by standardizing the
disclosures for pensions and other postretirement benefits to the extent
practicable. SFAS 88, "Employers' Accounting for Settlements and Curtailments of
defined Benefit Pension Plans and Termination Benefits", and SFAS 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions". The new
disclosures are effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS 132 will not have an impact on the financial statements of
the Bank due to the disclosure only requirements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". All derivatives are to be measured at fair
value and recognized in the balance sheet as assets or liabilities. The
statement is effective for fiscal years and quarters beginning after June 15,
1999. Because the Bank does not use derivative transactions at this time,
management does not expect that this standard will have a significant effect on
the Bank.
In October 1998, the FASB issued SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". The new statement established
accounting and reporting standards for certain activities of mortgage banking
enterprises. The statement is effective for the first quarter beginning after
December 15, 1998. The statement will have no effect on the financial statements
of the Bank.
Item 3. Description of Property.
The Bank owns in fee simple with no major encumbrances the real
property on which its main office and Charleston office are located as well as
properties on Coleman Boulevard in Mt. Pleasant and in Moncks Corner, South
Carolina which were acquired as future branch sites. Management believes these
facilities are suitable and adequate for the Bank's needs.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The number of shares owned and the percentage of outstanding common stock
such number represents at March 1, 1999, for all directors and executive
officers of the Company is shown under Item 5 below. No person or group is known
to management to be the beneficial owner of 5% or more of the Company's stock.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The table below shows as to each director his name and positions held
with the Company and the number of shares of the Company's common stock owned by
him at March 10, 1999. The persons listed below will continue to serve until the
2000 Annual Meeting of Shareholders of the Company.
17
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % SHARES POSITIONS
NAME AGE SHARES OUTSTANDING WITH BANK
- ---- --- ------ ----------- ---------
<S> <C> <C> <C> <C>
William A. Coates 49 19,251 2.0% Director
Thomas E. Hamer, Sr. 51 8,333 0.9% Director
Paul D. Hollen, III 50 30,218 3.2% Executive Vice President, Director
L. Wayne Pearson 51 34,400 3.6% President, Director
Norman T. Russell 46 8,333 0.9% Director
Robert M. Scott 55 24,900 2.6% Executive Vice President, Director
James H. Sexton, Jr. 49 18,833 2.0% Director
James P. Smith 44 17,000 1.8% Director
------- ----
All Directors, nominees
and executive officers
as a group (8 persons) 161,268 16.9%
</TABLE>
To the knowledge of management, all shares are owned directly with sole voting
power.
Directors' Business Experience For The Past Five Years
Set forth below is information about the business experience of the Bank's
directors for the past five years.
William A. Coates Attorney; Shareholder, Love, Thronton, Arnold &
Thomson, P.A., Greenville, South Carolina
(attorneys).
Thomas E. Hamer, Sr. President, ABF Allied Business Forms, Inc.
(manufacturers of business forms and printers)
Paul D. Hollen, III Executive Vice President and Chief Operations
Officer of the Bank; until 1997, Executive Vice
President and Chief Operations Officer, Lowcountry
Savings Bank
L. Wayne Pearson President of the Bank; until 1997 President,
Lowcountry Savings Bank
Norman T. Russell Management Consultant, PricewaterhouseCoopers;
until 1998, President, CM Cables (electronic
equipment manufacturer)
Robert M. Scott Executive Vice President and Chief Financial
Officer of the Bank; 1996-1997, Executive Vice
President and Chief Financial Officer, Lowcountry
Savings Bank; until 1996, Chief Financial Officer,
First Republic Bank, Philadelphia, PA
James H. Sexton, Jr. Dentist (private practice)
James P. Smith Regional Manager, Franklin Life Insurance
insurance sales)
Neither the principal executive officer nor any director nominees are
related by blood, marriage or adoption in the degree of first cousin or closer.
18
<PAGE>
Item 6. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the chief executive
officer's compensation. No executive officers earned $100,000 or more during the
year ended December 31, 1998.
<TABLE>
<CAPTION>
Long Term
Compensation
Number of
Securities
Underlying
Annual Compensation Options All Other
Name and Principal Position Year Salary(1) Bonus Awarded Compensation (2)
- --------------------------- ---- --------- ----- ------- ----------------
<S> <C> <C> <C> <C> <C>
L. Wayne Pearson 1998 $62,666 -0- -0- $1,003
President and Chief Executive
Officer
</TABLE>
- ---------------
(1) The Bank also pays club dues for Mr. Pearson and provides him with the use
of a Bank car for business and personal use. Mr. Pearson reimburses the
Bank for mileage for personal use of the car. The total of such benefits
paid for Mr. Pearson was less than 10% of his annual salary and bonus
payments. Mr. Pearson participates in broad-based life and medical
insurance plans that are available generally to all employees on the same
terms generally available to all employees.
(2) Consists of matching contributions paid by the Bank pursuant to the 401(k)
plan.
Compensation of Directors
Directors of the Company and the Bank are not presently compensated for
service on the Board of Directors.
Item 7. Certain Relationships and Related Transactions
The Bank, in the ordinary course of its business, may make loans to and
has other transactions with directors, officers, principal shareholders, and
their associates. Loans, if made, are made on substantially the same terms,
including rates and collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve more than the normal risk of
collectibility or present other unfavorable features. The Bank expects to
continue to enter into transactions in the ordinary course of business on
similar terms with directors, officers, principal shareholders, and their
associates. The aggregate dollar amount of such loans outstanding at December
31, 1998 was $-0-. During 1998, no such loans were made.
Item 8. Description of Securities.
The following description is a summary of certain terms of the Company
Common Stock, and is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws and applicable provisions of South Carolina
law.
Authorized Capital. The Company is authorized to issue 20,000,000
shares of common stock, no par value per share, of which 1,047,985 shares were
issued and outstanding as of April 29, 1999. Pursuant to the provisions of the
South Carolina Business Corporation Act of 1988 (the "Business Corporation
Act"), any outstanding shares of capital stock of the Company reacquired by it
would be considered authorized but unissued shares.
19
<PAGE>
Voting and Other Rights. The holders of Company Common Stock are
entitled to one vote per share on each matter voted on at a shareholders'
meeting. A majority of the shares entitled to vote, represented at a meeting in
person or by proxy, constitutes a quorum, and, in general, most routine matters
will be approved if the votes cast in favor of the matter exceed the votes
against the matter. Directors are elected by a plurality of the votes cast by
the shares entitled to vote in the election at a meeting at which a quorum is
present. Each shareholder entitled to vote in such an election shall be entitled
to vote each share of Company Common Stock owned by such shareholder for as many
persons as there are directors to be elected. Pursuant to the Articles of
Incorporation of the Company, shareholders do not have cumulative voting rights.
In general, the affirmative vote of two-thirds of the Company Common
Stock outstanding and entitled to vote is required to approve: (i) amendments to
the Company's Articles of Incorporation, (ii) the dissolution of the Company, or
(iii) a merger, exchange or consolidation of the Company with, or the sale,
exchange or lease of all or substantially all of the assets of the Company to,
any person or entity. However, if the transaction has not been approved by the
affirmative votes of at least two-thirds of the full board of directors, then an
80% vote is required except as to some amendments to the Articles of
Incorporation.
The shareholders of the Company shall have dissenters' rights to an
appraisal with respect to their shares of Company Common Stock as provided by
the Business Corporation Act in connection with certain types of merger or share
exchange transactions. Dissenters' rights generally are also available with
respect to certain sales of all or substantially all of the property of the
Company and certain amendments to the Company's Articles of Incorporation that
materially and adversely affect certain enumerated rights of a dissenter's
shares.
Directors and Classes of Directors. Under the Company's Articles of
Incorporation and Bylaws and pursuant to the Business Corporation Act, the
number of directors shall be set by the Board of Directors from time to time at
six or more directors.
The Board of Directors of the Company will be divided into three
classes so that each director serves for a term ending on the date of the third
annual meeting following the annual meeting at which such director was elected.
In the event of any increase in the authorized number of directors, the newly
created directorships resulting from such increase shall be apportioned among
the three classes of directors so as to maintain such classes as nearly equal as
possible. When directors are elected at the 2000 annual meeting of shareholders,
the directors will be divided into three classes, with directors of the first
class to hold office for a term expiring at the annual meeting of shareholders
of the Company in 2001, directors of the second class to hold office for a term
expiring at the annual meeting of shareholders of the Company in 2002, and
directors of the third class to hold office until the annual meeting of
shareholders of the Company in 2003. At each annual meeting thereafter,
successors to the directors whose terms expire shall be elected to hold office
for terms expiring at the third succeeding annual meeting following their
election.
Because of the classification of directors, unless the shareholders act
under the Business Corporation Act to remove directors from office, two annual
meetings generally would be required to elect a majority of the Board of
Directors and three, rather than one, would be required to replace the entire
board.
The Articles of Incorporation provide that a director may be removed
only for cause by the affirmative vote of at least 80% of the outstanding voting
stock.
Liquidation Rights. In the event of liquidation, the holders of Company
Common Stock would be entitled to receive pro rata any assets legally available
for distribution to shareholders with respect to shares held by them.
Preemptive and Other Rights. The Company Common Stock does not have any
preemptive rights, redemption privileges, sinking fund privileges or conversion
rights. All the shares of Company Common Stock will, upon consummation of the
Exchange, be validly issued, fully paid and nonassessable.
20
<PAGE>
Distributions. The Company may issue share dividends in Company Common
Stock to the holders of shares of Company Common Stock. In addition, the holders
of shares of Company Common Stock will be entitled to receive such other
distributions as the Board of Directors of the Company may declare, subject to
any restrictions contained in the Company's Articles of Incorporation (of which
there currently are none), unless after giving effect to such distribution, (i)
the Company would not be able to pay its debts as they become due in the usual
course of business or (ii) the Company's total assets would be less than the sum
of the Company's total liabilities plus the amount that would be needed, if the
Company were to be dissolved at the time of the distribution, to satisfy claims
of shareholders who have preferential rights superior to the rights of holders
of Company Common Stock.
Although the Company is not subject to the restrictions on dividends
applicable to state banks, the ability of the Company to make distributions to
holders of Company Common Stock is dependent to a large extent upon the ability
of the Bank, to pay dividends. The ability of the Bank, as well as of the
Company, to pay dividends in the future may also be affected by the various
minimum capital requirements.
Indemnification of Officers and Directors. Sections 33-8-500 through
33-8-580 of the Business Corporation Act contain provisions prescribing the
extent to which directors and officers shall or may be indemnified. Section
33-8-510 permits a corporation, with certain exceptions, to indemnify a current
or former director against liability if (i) he conducted himself in good faith,
(ii) he reasonably believed (x) that his conduct in his official capacity with
the corporation was in its best interest and (y) his conduct in other capacities
was at least not opposed to the corporation's best interest, and (iii) in the
case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. A corporation may not indemnify a current or former
director in connection with a proceeding by or in the right of the corporation
in which he was adjudged liable to the corporation or in connection with a
proceeding charging improper personal benefit to him. The above standard of
conduct is determined by the Board of Directors or a committee thereof or
special legal counsel or the shareholders as prescribed in Section 33-8- 550.
Sections 33-8-520 and 33-8-560 require a corporation to indemnify a
director or officer in the defense of any proceeding to which such person was a
party because of his or her capacity as officer or director against reasonable
expenses when such person is wholly successful in his or her defense, unless the
Articles of Incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if such person is adjudged
fairly and reasonably so entitled under Section 33-8-540. Section 33-8-560
allows a corporation to indemnify and advance expenses to an officer, employee
or agent who is not a director to the same extent as a director or as otherwise
set forth in the corporation's Articles of Incorporation or Bylaws or by
resolution of the Board of Directors or by contract.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
Limitation of Director Liability. As permitted by the Business
Corporation Act, the Company's Articles of Incorporation provide that no
director shall be personally liable to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a director except for (a)
breach of the duty of loyalty to the Company or its shareholders, (b) acts or
omissions not in good faith or which involve gross negligence, intentional
misconduct or a knowing violation of law, (c) making unlawful distributions or
(d) a transaction from which the director derived an improper personal benefit.
Duty of Directors in Connection with Business Combinations. The
Company's Articles of Incorporation require the Board of Directors to consider
the interests of the employees of the Company and the communities in which it
does business in addition to the interests of the Company and its shareholders
when evaluating a proposed plan of merger, consolidation, exchange or sale of
all, or substantially all, of the assets of the Company.
21
<PAGE>
Statutory Matters
Business Combination Statute. The South Carolina business combinations
statute provides that a 10% or greater shareholder of a resident domestic
corporation cannot engage in a "business combination" (as defined in the
statute) with such corporation for a period of two years following the date on
which the 10% shareholder became such, unless the business combination or the
acquisition of shares is approved by a majority of the disinterested members of
such corporation's board of directors before the 10% shareholder's share
acquisition date. This statute further provides that at no time (even after the
two-year period subsequent to such share acquisition date) may the 10%
shareholder engage in a business combination with the relevant corporation
unless certain approvals of the board of directors or disinterested shareholders
are obtained or unless the consideration given in the combination meets certain
minimum standards set forth in the statute. The law is very broad in its scope
and is designed to inhibit unfriendly acquisitions but it does not apply to
corporations whose articles of incorporation contain a provision electing not to
be covered by the law. The Company's articles of incorporation do not contain
such a provision. An amendment of the articles of incorporation to that effect
would, however, permit a business combination with an interested shareholder
even though that status was obtained prior to the amendment.
Control Share Acquisitions. South Carolina law also contains provisions
that, under certain circumstances, would preclude an acquiror of the shares of a
South Carolina corporation who crosses one of three voting thresholds (20%,
331/3% or 50%) from obtaining voting rights with respect to such shares unless a
majority in interest of the disinterested shareholders of the corporation votes
to accord voting power to such shares.
The legislation provides that, if authorized by the articles of
incorporation or bylaws prior to the occurrence of a control share acquisition,
the corporation may redeem the control shares for their fair value if the
acquiring person has not complied with certain procedural requirements
(including the filing of an "acquiring person statement" with the corporation
within 60 days after the control share acquisition) or if the control shares are
not accorded full voting rights by the shareholders. The Company is not
authorized by its articles or bylaws to redeem control shares pursuant to such
legislation.
General. Taken together, the foregoing provisions of the Articles of
Incorporation and South Carolina law favor maintenance of the status quo and may
make it more difficult to change current management, and may impede a change of
control of the Company even if desired by a majority of its shareholders.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
The Bank
Prior to acquisition of its stock by the Company, the common stock of
the Bank was traded from time to time on an individual basis, but there was no
well established trading market. The Bank's common stock was traded on the
NASDAQ Electronic Bulletin Board, and there were only two market makers known to
management. The Bank sold all of its outstanding shares to the public in the
spring of 1998 for $10.91 per share. During the rest of 1998, management was
aware of a few transactions in which the Bank's common stock traded in a range
from $7.73 to $12.27 per share. The per share prices have been adjusted to
reflect an 11-for-10 stock split effected as a 10% stock dividend in March,
1999. During the period January 1, to February 28, 1999, management is aware of
a few transactions in which the Bank's common stock traded for prices of from
$7.50 per share to $8.64 per share. However, management has not ascertained that
these transactions are the result of arm's length negotiations between the
parties, and because of the limited number of shares involved, these prices may
not be indicative of the market value of the common stock.
22
<PAGE>
The Bank has not yet had positive earnings with which to pay cash
dividends, and to support its continued capital growth, does not expect to pay
cash dividends in the near future. The dividend policy of the Bank is subject to
the discretion of the Board of Directors and depends upon a number of factors,
including earnings, financial conditions, cash needs and general business
conditions, as well as applicable regulatory considerations. South Carolina
banking regulations restrict the amount of cash dividends that can be paid to
shareholders, and all of the Bank's cash dividends to its shareholder are
subject to the prior approval of the South Carolina Commissioner of Banking.
The Company
Since the Company's acquisition of the Bank's common stock is being
effected on the day immediately before the filing of this registration
statement, management is not aware of any transactions in the Company's common
stock. Furthermore, it is not expected that an active trading market for the
Company's common stock will develop in the near future. The Company's common
stock is not traded on the NASDAQ National Market system and there are only two
market makers.
As of April 29, 1999, there were approximately 981 holders of record of
the Company's common stock, excluding individual participants in security
position listings.
The future dividend policy of the Company is also subject to the
discretion of the Board of Directors and will depend upon a number of factors,
including future earnings, financial condition, cash needs, and general business
conditions. The Company's initial ability to distribute cash dividends will
depend entirely upon the Bank's ability to distribute dividends to the Company,
and the Bank must comply with the requirements of state law as set forth above
before paying any dividend. It is not anticipated that the Company will pay cash
dividends in the near future. In addition, neither the Bank nor the Company may
declare or pay a cash dividend on any of their stock if they are insolvent or if
the payment of the dividend would render them insolvent or unable to pay their
obligations as they become due in the ordinary course of business, and the Bank
may not declare or pay a dividend if the effect thereof would cause the minimum
capital of the Bank to be reduced below the minimum capital requirements imposed
by the FDIC.
Item 2. Legal Proceedings
The Bank is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Bank's business and operations.
Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 4. Recent Sales of Unregistered Securities.
In 1998, the Bank sold 952,713 shares of its common stock for $13.00
per share. Aggregate proceeds to the Bank were $10,520,053. The offering of
common stock was exempt from registration under the Securities Act of 1933
pursuant to section 3(a)(2) thereof.
In 1999, the Company exchanged 1,047,985 shares of its common stock for
all of the issued and outstanding shares of capital stock of the Bank. The
offering of the common stock was exempt from registration under the Securities
Act of 1933 pursuant to Section 3(a)(12) thereof.
23
<PAGE>
Item 5. Indemnification of Directors and Officers.
Sections 33-8-500 through 33-8-580 of the Business Corporation Act
contain provisions prescribing the extent to which directors and officers shall
or may be indemnified. Section 33-8-510 permits a corporation, with certain
exceptions, to indemnify a current or former director against liability if (i)
he conducted himself in good faith, (ii) he reasonably believed (x) that his
conduct in his official capacity with the corporation was in its best interest
and (y) his conduct in other capacities was at least not opposed to the
corporation's best interest, and (iii) in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful. A corporation
may not indemnify a current or former director in connection with a proceeding
by or in the right of the corporation in which he was adjudged liable to the
corporation or in connection with a proceeding charging improper personal
benefit to him. The above standard of conduct is determined by the Board of
Directors or a committee thereof or special legal counsel or the shareholders as
prescribed in Section 33-8-550.
Sections 33-8-520 and 33-8-560 require a corporation to indemnify a
director or officer in the defense of any proceeding to which such person was a
party because of his or her capacity as officer or director against reasonable
expenses when such person is wholly successful in his or her defense, unless the
Articles of Incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if such person is adjudged
fairly and reasonably so entitled under Section 33-8-540. Section 33-8-560
allows a corporation to indemnify and advance expenses to an officer, employee
or agent who is not a director to the same extent as a director or as otherwise
set forth in the corporation's Articles of Incorporation or Bylaws or by
resolution of the Board of Directors or by contract.
Insofar as indemnification for liabilities arising under the Securities
Exchange Act of 1934 (the "Act") may be permitted to directors, officers and
controlling persons of the Bank pursuant to the foregoing provisions, or
otherwise, the Bank has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
PART F/S
Financial Statements.
24
<PAGE>
SOUTHCOAST COMMUNITY BANK
REPORT ON FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Southcoast Community Bank.
Mt. Pleasant, South Carolina
We have audited the accompanying balance sheet of Southcoast
Community Bank (the "Bank") as of December 31, 1998 and the related statements
of operations, changes in shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents
fairly, in all material respects, the financial position of the Southcoast
Community Bank at December 31, 1998 and the results of its operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
February 11, 1999, except for Note 19, as to
which the date is March 3, 1999
26
<PAGE>
SOUTHCOAST COMMUNITY BANK
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CASH AND DUE FROM BANKS .................................................................................. $ 1,211,451
FEDERAL FUNDS SOLD ....................................................................................... 4,220,000
INVESTMENT SECURITIES .................................................................................... 2,732,978
LOANS, NET ............................................................................................... 10,821,975
PROPERTY AND EQUIPMENT, NET .............................................................................. 1,243,133
OTHER ASSETS ............................................................................................. 453,207
------------
Total assets ...................................................................................... $ 20,682,744
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing deposits ........................................................................ $ 2,114,621
Interest bearing deposits ........................................................................... 7,444,869
------------
Total deposits .................................................................................... 9,559,490
Federal Home Loan Bank (FHLB) borrowings .............................................................. 950,000
Other liabilities ..................................................................................... 98,670
------------
Total liabilities ................................................................................. 10,608,160
COMMITMENTS AND CONTINGENCIES - Notes 8, 10 and 13
SHAREHOLDERS' EQUITY
Common stock, $5 par value, 20,000,000 shares authorized,
1,047,987 shares issued ............................................................................. 5,239,935
Paid-in capital ....................................................................................... 5,280,118
Retained deficit ...................................................................................... (451,147)
Accumulated other comprehensive income, net of
income taxes of $2,925 .............................................................................. 5,678
------------
Total shareholders' equity ........................................................................ 10,074,584
------------
Total liabilities and shareholders' equity ........................................................ $ 20,682,744
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
27
<PAGE>
SOUTHCOAST COMMUNITY BANK
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
INTEREST INCOME
<S> <C>
Loans and fees on loans ............................................................................... $ 270,972
Investment securities ................................................................................. 30,303
Federal funds sold .................................................................................... 193,319
---------
Total interest income ............................................................................. 494,594
INTEREST EXPENSE
Deposits and borrowings ............................................................................... 86,498
Net interest income ............................................................................... 408,096
PROVISION FOR POSSIBLE LOAN LOSSES ....................................................................... 325,000
Net interest income after provision for possible loan losses ...................................... 83,096
NONINTEREST INCOME
Service fees on deposit accounts ...................................................................... 7,979
Fees on loans sold .................................................................................... 3,500
Other ................................................................................................. 8,611
---------
Total noninterest income .......................................................................... 20,090
NONINTEREST EXPENSES
Salaries and employee benefits ........................................................................ 326,659
Occupancy ............................................................................................. 15,834
Furniture and equipment ............................................................................... 38,229
Advertising and public relations ...................................................................... 46,841
Professional fees ..................................................................................... 10,614
Travel and entertainment .............................................................................. 32,420
Telephone, postage and supplies ....................................................................... 25,058
Organizational and pre-opening ........................................................................ 271,538
Other operating ....................................................................................... 19,548
---------
Total noninterest expenses ........................................................................ 786,741
Loss before income taxes .......................................................................... (683,555)
INCOME TAX BENEFIT ....................................................................................... 232,408
---------
Net loss .......................................................................................... $(451,147)
=========
NET LOSS PER COMMON SHARE ................................................................................ $ (.43)
=========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ............................................................................. 1,047,987
</TABLE>
The accompanying notes are an integral part of this financial statement.
28
<PAGE>
SOUTHCOAST COMMUNITY BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
other Total
Common stock Paid-in Retained comprehensive shareholders'
Shares Amount capital deficit income equity
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ......................... - $ - $ - $ - $ - $ -
Net loss ...................................... - - - (451,147) - (451,147)
Other comprehensive income (net of income
taxes of $2,926) ............................ - - - - 5,678 5,678
-----------
Comprehensive income .......................... (445,469)
Sale of stock (net of offering costs
of $912,503) ................................ 952,713 4,763,565 5,756,488 - - 10,520,053
Net effect of 11 for 10 stock split 95,274 476,370 (476,370)
--------- ---------- ---------- --------- ------- -----------
Balance, December 31, 1998 ....................... 1,047,987 $5,239,935 $5,280,118 $(451,147) $5,678 $10,074,584
======== ========== ========== ========= ====== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
29
<PAGE>
SOUTHCOAST COMMUNITY BANK
STATEMENT OF CASH FLOWS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net loss ......................................................................................... $ (451,147)
Adjustments to reconcile net loss to net cash used in
operating activities
Deferred income taxes .......................................................................... (232,408)
Provisions for loan losses ..................................................................... 325,000
Depreciation and amortization .................................................................. 37,000
Increase in other assets ....................................................................... (176,224)
Increase in other liabilities .................................................................. 98,670
------------
Net cash used for operating activities ..................................................... (399,109)
------------
INVESTING ACTIVITIES
Purchase of investment securities ................................................................ (2,771,875)
Increase in federal funds sold ................................................................... (4,220,000)
Increase in loans, net ........................................................................... (11,146,975)
Purchase of property and equipment ............................................................... (1,280,133)
------------
Net cash used for investing activities .............................................................. (19,418,983)
------------
FINANCING ACTIVITIES
Increase in FHLB borrowings ...................................................................... 950,000
Sale of stock, net ............................................................................... 10,520,053
Net increase in deposits ......................................................................... 9,559,490
------------
Net cash provided by financing activities .................................................. 21,029,543
Net increase in cash and cash equivalents .................................................. 1,211,451
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................................ -
------------
CASH AND CASH EQUIVALENTS, END OF YEAR .............................................................. $ 1,211,451
============
CASH PAID FOR
Interest ......................................................................................... $ 55,325
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
30
<PAGE>
SOUTHCOAST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Southcoast Community Bank, Mt. Pleasant, South Carolina (the "Bank"),
was incorporated June 16, 1998 under the laws of the State of South Carolina for
the purpose of operating as a de novo bank. The Bank sold 952,713 shares of
common stock to the public under an initial public offering price of $12 per
share. The Bank also obtained regulatory approval to operate as a South Carolina
chartered bank and opened for business on July 20, 1998, with a total
capitalization of $10.5 million. The Bank provides full commercial banking
services to customers and is subject to regulation by the Federal Deposit
Insurance Corporation and the South Carolina Board of Financial Institutions.
Basis of presentation
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to general practices in the banking
industry. The Bank uses the accrual basis of accounting. Organizational
transactions totalling approximately $67,000 which occurred in late 1997,
have been presented in the 1998 financial statements for ease of
presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amount of income and expenses during
the reporting periods. Actual results could differ from those estimates.
Concentrations of credit risk
The Bank makes loans to individuals and businesses in and around Charleston
County for various personal and commercial purposes. The Bank has a
diversified loan portfolio and the borrowers' ability to repay their loans
is not dependent upon any specific economic sector.
Investment securities
The Bank accounts for investment securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The statement requires
investments in equity and debt securities to be classified into three
categories:
1. Available for sale: These are securities which are not classified as
either held to maturity or as trading securities. These securities are
reported at fair market value. Unrealized gains and losses are reported,
net of income taxes, as separate components of shareholders' equity
(accumulated other comprehensive income).
2. Held to maturity: These are investment securities which the Bank has the
ability and intent to hold until maturity. These securities are stated
at cost, adjusted for amortization of premiums and the accretion of
discounts. The Bank has no held to maturity securities.
3. Trading: These are securities which are bought and held principally for
the purpose of selling in the near future. Trading securities are
reported at fair market value, and related unrealized gains and losses
are recognized in the income statement. The Bank has no trading
securities.
31
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Loans, interest and fee income on loans
Loans are stated at the principal balance outstanding. Unearned discount,
unamortized loan fees and the allowance for possible loan losses are
deducted from total loans in the balance sheet. Interest income is
recognized over the term of the loan based on the principal amount
outstanding. Points on real estate loans are taken into income to the
extent they represent the direct cost of initiating a loan. The amount in
excess of direct costs is deferred and amortized over the expected life of
the loan.
Loans are generally placed on non-accrual status when principal or interest
becomes ninety days past due, or when payment in full is not anticipated.
When a loan is placed on non-accrual status, interest accrued but not
received is generally reversed against interest income. If collectibility
is in doubt, cash receipts on non-accrual loans are not recorded as
interest income, but are used to reduce principal.
Allowance for possible loan losses
The provision for possible loan losses charged to operating expenses
reflects the amount deemed appropriate by management to establish an
adequate reserve to meet the present and foreseeable risk characteristics
of the current loan portfolio. Management's judgement is based on periodic
and regular evaluation of individual loans, the overall risk
characteristics of the various portfolio segments, past experience with
losses and prevailing and anticipated economic conditions. Loans which are
determined to be uncollectible are charged against the allowance. Provision
for possible loan losses and recoveries on loans previously charged off are
added to the allowance.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all lenders value loans at the loan's fair value if it is probable
that the lender will be unable to collect all amounts due according to the
terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market price of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate. SFAS No.
114 was amended by SFAS No. 118 to allow a lender to use existing methods
for recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest income on
an impaired loan.
Under SFAS No. 114, as amended by SFAS 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. When this doubt does
not exist, cash receipts are applied under the contractual terms of the
loan agreement first to principal then to interest income. Once the
reported principal balance has been reduced to zero, future cash receipts
are applied to interest income, to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are
typically applied to principal and interest receivable in accordance with
the terms of the restructured loan agreement. Interest income is recognized
on these loans using the accrual method of accounting. As of December 31,
1998, the Bank had no impaired loans.
Non-performing assets
Non-performing assets include real estate acquired through foreclosure or
deed taken in lieu of foreclosure, and loans on non-accrual status. Loans
are placed on non-accrual status when, in the opinion of management, the
collection of additional interest is questionable. Thereafter no interest
is taken into income unless received in cash or until such time as the
borrower demonstrates the ability to pay principal and interest. At
December 31, 1998 the Bank had no non-performing assets.
32
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Property and equipment
Property, furniture and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets. Maintenance and repairs
are charged to operations, while major improvements are capitalized. Upon
retirement, sale or other disposition the cost and accumulated depreciation
are eliminated from the accounts, and gain or loss is included in income
from operations.
Organizational and preopening costs
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which
provides guidance on the financial reporting of start-up costs and
organization costs. SOP 98-5 requires start-up costs and organization costs
to be expensed as incurred. The Bank has elected early adoption of SOP 98-5
and accordingly, has expensed organization and pre-opening costs.
Income taxes
The financial statements have been prepared on the accrual basis. When
income and expenses are recognized in different periods for financial
reporting purposes versus for purposes of computing income taxes currently
payable, deferred taxes are provided on such temporary differences. The
Bank accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". Under SFAS 109, deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have
been recognized in the financial statements or tax return. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be realized or settled.
Advertising and public relations expense
Advertising, promotional and other business development costs are generally
expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place.
External costs relating to direct mailing costs are expensed in the period
in which the direct mailings are sent.
Net loss per common share
Net loss per common share is computed on the basis of the weighted average
number of common shares outstanding in accordance with SFAS No. 128,
"Earnings per Share". For purposes of calculating net loss per share, the
calculation assumed the stock was outstanding for all of 1998. The treasury
stock method is used to compute, if required, the effect of stock options
on the weighted average number of common shares outstanding for the diluted
method. The Bank has no stock options outstanding as of December 31, 1998.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents are defined
as those amounts included in the balance sheet caption "Cash and Due From
Banks". Cash and cash equivalents have an original maturity of three months
or less.
Comprehensive income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a full
set of financial statements. Under this statement, enterprises are required
to classify items of "other comprehensive income" by their nature in the
financial statement and display the balance of other comprehensive income
separately in the equity section of the balance sheet. Statement 130 is
effective for both interim and annual periods beginning after December 15,
1997. The adoption of this standard had no effect on the Company's net
income or stockholders' equity.
(Continued)
33
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Fair values of financial instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," as
amended by SFAS No. 119, requires disclosure of fair value information for
financial instruments, whether or not recognized in the balance sheet,
when it is practicable to estimate the fair value. SFAS No. 107 defines a
financial instrument as cash, evidence of an ownership interest in an
entity or contractual obligations which require the exchange of cash or
other financial instruments. Certain items are specifically excluded from
the disclosure requirements, including the Bank's common stock. In
addition, other nonfinancial instruments such as property and equipment
and other assets and liabilities are not subject to the disclosure
requirements.
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments as disclosed herein:
Cash and due from banks - The carrying amounts of cash and due from
banks (cash on hand, due from banks and interest bearing deposits with
other banks) approximate their fair value.
Federal funds sold - The carrying amounts of federal funds sold
approximate their fair value.
Investment securities - Fair values for investment securities are based
on quoted market prices.
Loans - For variable rate loans that reprice frequently and for loans
that mature within one year, fair values are based on carrying values.
Fair values for all other loans are estimated using discounted cash
flow analyses, with interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values
for impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposits - The fair values disclosed for demand deposits are, by
definition, equal to their carrying amounts. The carrying amounts of
variable rate, fixed-term money market accounts and short-term
certificates of deposit approximate their fair values at the reporting
date. Fair values for long-term fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities.
FHLB borrowings - The carrying amounts of FHLB borrowings approximate
their fair values.
Off balance sheet instruments - Fair values of off balance sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Recently issued accounting standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instrument and Hedging Activities." All derivatives are to be measured at
fair value and recognized in the balance sheet as assets or liabilities.
The statement is effective for fiscal years and quarters beginning after
June 15, 1999. Because the Bank does not use derivative transactions at
this time, management does not expect that this standard will have an
effect of the financial statements.
Other accounting standards that have been proposed or issued by
standard-setting groups that do not require adoption until a future date
will have no material impact on the financial statements upon adoption.
34
<PAGE>
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances, computed
by applying prescribed percentages to its various types of deposits, either at
the bank or on deposit with the Federal Reserve Bank. At December 31, 1998 these
required reserves were met by vault cash.
NOTE 3 - FEDERAL FUNDS SOLD
When the Bank's cash reserves (Note 2) are in excess of the required
amount, it may lend the excess to other banks on a daily basis. As of December
31, 1998, federal funds sold amounted to $4,220,000.
NOTE 4 - INVESTMENT SECURITIES
The amortized costs and fair value of investment securities are as
follows:
<TABLE>
<CAPTION>
Amortized Gross unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal agencies .......................... $2,724,375 $8,603 $ - $2,732,978
========== ====== =========== ==========
</TABLE>
The amortized costs and fair values of securities at December 31,
1998, by contractual maturity, are shown in the following chart. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized
cost Fair value
---- ----------
<S> <C> <C>
Due after five through ten years ....................................... $2,250,000 $2,243,604
Due after ten years .................................................... 474,375 489,374
---------- ----------
Total investment securities ........................................ $2,724,375 $2,732,978
========== ==========
</TABLE>
Investment securities with an aggregate par value of approximately
$1,250,000 ($1,245,000 fair value) at December 31, 1998 were pledged to secure
public deposits and for other purposes.
NOTE 5 - FEDERAL HOME LOAN BANK STOCK
The Bank, as a member institution of the Federal Home Loan Bank of
Atlanta, is required to own capital stock in the FHLB based generally upon the
balance of residential mortgage loans and FHLB borrowings. FHLB capital stock
with a cost of $47,500 is presented with other assets in the balance sheet and
is pledged to secure FHLB borrowings. No ready market exists for this stock, and
it has no quoted market value, however, redemption of this stock has
historically been at par value.
35
<PAGE>
NOTE 6 - LOANS
The composition of loans by major loan category is presented below:
<TABLE>
<CAPTION>
<S> <C>
Commercial ..................................................................................... $ 4,426,000
Real estate - construction ..................................................................... 405,000
Real estate - mortgage ......................................................................... 5,876,000
Consumer ....................................................................................... 439,975
------------
Loans, gross ................................................................................... 11,146,975
Less allowance for possible loan losses ........................................................ (325,000)
------------
Loans, net ..................................................................................... $ 10,821,975
============
</TABLE>
At December 31, 1998, there were no nonaccruing loans. During 1998
there were no loan charge-offs or recoveries.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Components of property and equipment included in the balance sheet
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Land ............................................................................................ $ 226,867
Furniture and equipment ......................................................................... 621,869
Buildings and improvements ...................................................................... 431,397
----------
1,280,133
Accumulated depreciation ........................................................................ 37,000
----------
Total property and equipment ................................................................ $1,243,133
==========
</TABLE>
Depreciation expense was $37,000. Depreciation is charged to
operations over the estimated useful lives of the assets. The estimated useful
lives and methods of depreciation for the principal items follow:
Type of Asset Life in Years Depreciation Method
------------- ------------- -------------------
Software 3 to 7 Straight-line
Furniture and equipment 5 to 10 Straight-line
Buildings and improvements 5 to 40 Straight-line
NOTE 8 - DEPOSITS
The following is a detail of the deposit accounts:
<TABLE>
<CAPTION>
<S> <C>
Noninterest bearing ......................................................................... $2,114,621
Interest bearing
NOW ....................................................................................... 388,448
Money market .............................................................................. 391,144
Savings ................................................................................... 121,819
Time, less than $100,000 .................................................................. 3,570,458
Time, $100,000 and over ........................................................................ 2,973,000
----------
Total deposits ........................................................................ $9,559,490
==========
</TABLE>
Interest expense on time deposits greater than $100,000 was $39,437
in 1998.
(Continued)
36
<PAGE>
NOTE 8 - DEPOSITS, Continued
At December 31, 1998 the scheduled maturities of time deposits are as
follows:
1999 $ 6,342,000
2000 100,000
2001 -
2002 -
2003 and thereafter 101,458
--------------
$ 6,543,458
NOTE 9 - FHLB BORROWINGS
At December 31, 1998 the Bank had $950,000 in outstanding borrowings
from the FHLB. The borrowings bear interest at 5.15 percent and mature December
1999.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Bank has entered into construction contracts to build a main
office and to renovate a building to serve as its branch office. The main office
is to be constructed for approximately $1,200,000 and is expected to be
completed in third quarter of 1999. The Bank also began renovation of a building
to serve as its first branch office. Total costs for the renovation are expected
to be $225,000 and the branch is expected to open in second quarter of 1999. At
December 31, 1998 no costs have been incurred under these contracts.
The Bank is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the Bank's financial position.
NOTE 11 - UNUSED LINES OF CREDIT
At December 31, 1998, the Bank had unused lines of credit to purchase
federal funds totaling $3,000,000 from unrelated banks. These lines of credit
are available on a one to seven day basis for general corporate purposes of the
Bank. All of the lenders have reserved the right to withdraw these lines at
their option.
NOTE 12 - INCOME TAXES
The income tax benefit of $232,408 recorded in 1998 reflects the
value of net operating losses available for offset against future taxable income
and are available through 2013. The resulting deferred tax asset is presented
with other assets in the balance sheet.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the ordinary course of business, and to meet the financing needs
of its customers, the Bank is a party to various financial instruments with off
balance sheet risk. These financial instruments, which include commitments to
extend credit and standby letters of credit, involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amount of those instruments reflects the extent
of involvement the Bank has in particular classes of financial instruments.
(Continued)
37
<PAGE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK, Continued
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any material condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. At December 31, 1998, unfunded
commitments to extend credit were $704,568. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.
At December 31, 1998, there was an $81,420 commitment under a letter
of credit. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. Collateral
varies but may include accounts receivable, inventory, equipment, marketable
securities and property. Since letters of credit are expected to expire without
being drawn upon, they do not necessarily represent future cash requirements.
NOTE 14 - EMPLOYEE BENEFIT PLAN
On August 29, 1998, the Bank adopted the SouthCoast Community Bank
Profit Sharing and 401(k) Plan for the benefit of all eligible employees. The
Company contributes to the Plan annually upon approval by the Board of
Directors. Contributions made to the Plan in 1998 amounted to $5,643.
NOTE 15 - DIVIDENDS
There are no current plans to initiate payment of cash dividends and
future dividend policy will depend on the Bank's earnings, capital requirements,
financial condition and other factors considered relevant by the Board of
Directors. The Bank is restricted in its ability to pay dividends under the laws
and regulations of the State of South Carolina. Generally, these restrictions
require the Bank to pay dividends derived solely from net profits and require
prior regulatory approval.
NOTE 16 - TRANSACTIONS WITH DIRECTORS, OFFICERS AND ASSOCIATES
Directors and officers of the Bank and associates of such persons are
customers of and had transactions with the Bank in the ordinary course of
business. Additional transactions may be expected to take place in the future.
No loans were made to directors, officers and related interests in 1998.
Deposits by directors, officers and their related interest, as of December 31,
1998 approximated $818,000.
38
<PAGE>
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification of the
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category. The Bank's actual capital amounts and ratios and minimum regulatory
amounts and ratios are presented as follows:
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
----------- -----------------------
adequacy purposes action provisions
----------------- -----------------
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(amounts in $000)
As of December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted
assets) ........................................ $10,171 92.40% $880 8.00% $1,100 10.00%
Tier I Capital (to risk weighted
assets) ........................................ 9,960 90.50 440 4.00 660 6.00
Tier I Capital (to average assets) ............... 9,960 55.49 653 4.00 816 5.00
</TABLE>
NOTE 18 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments were as
follows at December 31, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Carrying Fair
amount value
------ -----
FINANCIAL ASSETS
<S> <C> <C>
Cash and due from banks .................................................. $ 1,211 $ 1,211
Federal funds sold ....................................................... 4,220 4,220
Investment securities .................................................... 2,733 2,733
Loans .................................................................... 10,822 10,822
FINANCIAL LIABILITIES
Deposits ................................................................. 9,559 9,559
FHLB borrowings .......................................................... 950 950
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit ............................................. 705 705
Standby letters of credit ................................................ 81 81
</TABLE>
39
<PAGE>
NOTE 19 - SUBSEQUENT EVENTS
On March 3, 1999 the Bank declared an eleven (11) for ten (10) stock
split in the form of a ten percent stock dividend payable on March 26, 1999 to
shareholders of record as of March 11, 1999. The stock split has state
regulatory approval. Following is a proforma restatement of outstanding shares
of common stock at December 31, 1998 and a proforma recalculation of net loss
per share for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Proforma
Prior to the restatement for
stock split the stock split
----------- ---------------
<S> <C> <C>
Weighted average number of common shares outstanding ......................... 952,713 1,047,981
Net loss per share ........................................................... $ (.47) $ (.43)
</TABLE>
Net loss per share has been calculated as though outstanding shares
of stock were issued at the beginning of 1998 and were outstanding for the
entire year.
On February 26, 1999, the Bank purchased a building in Mt. Pleasant,
South Carolina for $375,000. Management anticipates this new branch location
will open in the fourth quarter of 1999.
40
<PAGE>
SOUTHCOAST COMMUNITY BANK
BALANCE SHEET
MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CASH AND DUE FROM BANKS .................................................................................. $ 1,421,476
FEDERAL FUNDS SOLD ....................................................................................... 5,140,000
INVESTMENT SECURITIES .................................................................................... 3,230,743
LOANS, NET ............................................................................................... 17,762,314
PROPERTY AND EQUIPMENT, NET .............................................................................. 2,212,938
OTHER ASSETS ............................................................................................. 623,940
------------
Total assets ...................................................................................... $ 30,391,411
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing deposits ........................................................................ $ 2,728,085
Interest bearing deposits ........................................................................... 16,554,987
------------
Total deposits .................................................................................... 19,283,072
Federal Home Loan Bank (FHLB) borrowings .............................................................. 1,000,000
Other liabilities ..................................................................................... 199,743
------------
Total liabilities ................................................................................. 20,482,815
COMMITMENTS AND CONTINGENCIES - Notes 8, 10 and 13
SHAREHOLDERS' EQUITY
Common stock, $5 par value, 20,000,000 shares authorized,
1,047,987 shares issued ............................................................................. 5,239,935
Paid-in capital ....................................................................................... 5,280,118
Retained deficit ...................................................................................... (598,747)
Accumulated other comprehensive income, net of
income taxes of $6,547 .............................................................................. (12,710)
------------
Total shareholders' equity ........................................................................ 9,908,596
------------
Total liabilities and shareholders' equity ........................................................ $ 30,391,411
============
</TABLE>
41
<PAGE>
SOUTHCOAST COMMUNITY BANK
STATEMENT OF OPERATIONS
For the quarter ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
INTEREST INCOME
<S> <C>
Loans and fees on loans ............................................................................. $ 366,146
Investment securities ............................................................................... 47,143
Federal funds sold .................................................................................. 48,748
-----------
Total interest income ........................................................................... 462,037
INTEREST EXPENSE
Deposits and borrowings ............................................................................. 139,542
Net interest income ............................................................................. 322,495
PROVISION FOR POSSIBLE LOAN LOSSES ..................................................................... 225,000
Net interest income after provision for possible loan losses .................................... 97,495
NONINTEREST INCOME
Service fees on deposit accounts .................................................................... 18,277
Fees on loans sold .................................................................................. 15,170
Other ............................................................................................... 24,610
-----------
Total noninterest income ........................................................................ 58,057
NONINTEREST EXPENSES
Salaries and employee benefits ...................................................................... 252,153
Occupancy ........................................................................................... 13,984
Furniture and equipment ............................................................................. 32,577
Advertising and public relations .................................................................... 17,623
Professional fees ................................................................................... 15,715
Travel and entertainment ............................................................................ 15,041
Telephone, postage and supplies ..................................................................... 23,057
Organizational and pre-opening ...................................................................... -
Other operating ..................................................................................... 8,998
-----------
Total noninterest expenses ...................................................................... 379,148
Loss before income taxes ........................................................................ (223,596)
INCOME TAX BENEFIT ..................................................................................... 75,996
-----------
Net loss ........................................................................................ $ (147,600)
===========
NET LOSS PER COMMON SHARE .............................................................................. $ (.14)
===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ........................................................................... 1,047,987
</TABLE>
42
<PAGE>
SOUTHCOAST COMMUNITY BANK
STATEMENT OF CASH FLOWS
For the quarter ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net loss .......................................................................................... $ (147,600)
Adjustments to reconcile net loss to net cash provided by
operating activities
Deferred income taxes ........................................................................... (75,996)
Provisions for loan losses ...................................................................... 225,000
Depreciation and amortization ................................................................... 25,563
Increase in other assets ........................................................................ (94,737)
Increase in other liabilities ................................................................... 101,073
-----------
Net cash provided by operating activities ................................................... 33,303
-----------
INVESTING ACTIVITIES
Purchase of investment securities ................................................................. (516,153)
Increase in federal funds sold .................................................................... (920,000)
Increase in loans, net ............................................................................ (7,165,339)
Purchase of property and equipment ................................................................ (995,368)
-----------
Net cash used for investing activities ............................................................... (9,596,860)
-----------
FINANCING ACTIVITIES
Increase in FHLB borrowings ....................................................................... 50,000
Sale of stock, net ................................................................................ -
Net increase in deposits .......................................................................... 9,723,582
-----------
Net cash provided by financing activities ................................................... 9,773,582
Net increase in cash and cash equivalents ................................................... 210,025
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ......................................................... 1,211,451
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................................... $ 1,421,476
===========
CASH PAID FOR
Interest .......................................................................................... $ 84,022
===========
</TABLE>
43
<PAGE>
SOUTHCOAST COMMUNITY BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common stock other Total
------------ Paid-in Retained comprehensive shareholders'
Shares Amount capital deficit income equity
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 .................. 1,047,987 $5,239,935 $5,280,118 $(451,147) $ 5,678 $ 10,074,584
------------
Net loss ................................. - - - (147,600) - (147,600)
Other comprehensive loss (net of income
taxes of $9,473) ....................... - - - - (18,388) (18,388)
---------- ---------- ---------- --------- -------- ------------
Comprehensive loss ....................... (165,988)
------------
BALANCE, MARCH 31, 1999 ..................... 1,047,987 $5,239,935 $5,280,188 $(598,747) $(12,710) $ 9,908,596
========== ========== ========== ========= ======== ============
</TABLE>
44
<PAGE>
Notes to Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance in generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and item 310(b) of Regulation
SB of the Securities Exchange Commission. Accordingly, they do not contain all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, please refer to the financial
statements and footnotes thereto for the Bank's fiscal year ended December 31,
1998.
Note 2. Summary of organization
The Bank was incorporated June 16, 1998 under the laws of the State of
South Carolina for the purpose of operating as a de novo bank. The Bank sold
952,713 shares of common stock to the public under an initial public offering
price of $12 per share. The Bank also obtained regulatory approval to operate as
a South Carolina chartered bank and opened for business on July 20, 1998, with a
total capitalization of $10.5 million. The Bank provides full commercial banking
services to customers and is subject to regulation by the Federal Deposit
Insurance Corporation and the South Carolina Board of Financial Institutions.
45
<PAGE>
PART III
Item 1. Index to Exhibits
See Exhibit Index
Item 1. Description of Exhibits
Exhibit No. Description
*2.1 Articles of Incorporation of Registrant
*2.2 Bylaws of Registrant
27 Financial Data Schedule
*Previously Filed
46
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Southcoast Financial Corporation
s/L. Wayne Pearson
June 29, 1999 By:----------------------------------------
L. Wayne Pearson
President and Chief Executive Officer
47
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
*2.1 Articles of Incorporation of Registrant
*2.2 Bylaws of Registrant
27 Financial Data Schedule
*Previously Filed
48
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at March 31, 1999 and the Statement of Income for the quarter Ended March
31, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,421
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,140
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,231
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 17,762
<ALLOWANCE> 550
<TOTAL-ASSETS> 30,391
<DEPOSITS> 19,283
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 200
<LONG-TERM> 0
0
0
<COMMON> 5,240
<OTHER-SE> 4,669
<TOTAL-LIABILITIES-AND-EQUITY> 30,391
<INTEREST-LOAN> 336
<INTEREST-INVEST> 47
<INTEREST-OTHER> 49
<INTEREST-TOTAL> 462
<INTEREST-DEPOSIT> 133
<INTEREST-EXPENSE> 140
<INTEREST-INCOME-NET> 332
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 379
<INCOME-PRETAX> (224)
<INCOME-PRE-EXTRAORDINARY> (147)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (147)
<EPS-BASIC> (.14)<F1>
<EPS-DILUTED> (.14)<F1>
<YIELD-ACTUAL> 1.54
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 325
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 550
<ALLOWANCE-DOMESTIC> 550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> An 11 for 10 stock split was effective March 26, 1999. Prior Financial
Data Schedules have not been restated for the recapitalization.
</FN>
</TABLE>
