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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1999
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to ________
Commission file no. 33-95562
RHBT FINANCIAL CORPORATION
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(Name of Small Business Issuer in Its Charter)
South Carolina 58-2482426
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
315 East Main Street
Rock Hill, South Carolina 29730
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(Address of Principal Executive Offices) (Zip Code)
(843) 324-2500
Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes [X] No[ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 2000 was $8,507,591. This calculation is based
upon $14.25, the last trade price of the common stock of which the Company is
aware. There is no active trading market for the common stock and trades are
limited and sporadic.
There were 1,720,938 shares of the Company's common stock issued and
outstanding as of the record date, March 15, 2000.
Transitional Small Business Disclosure Format. (Check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Company's 1999 Annual Report and Proxy Statement for the 2000
Annual Meeting of Shareholders.
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ITEM 1. DESCRIPTION OF BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements are based on many
assumptions and estimates and are not guarantees of future performance. Our
actual results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words "may," "would,"
"could," "will," "expect," "anticipate," "believe," "intend," "plan," and
"estimate," as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to:
- - significant increases in competitive pressure in the banking and
financial services industries;
- - changes in the interest rate environment which could reduce anticipated
or actual margins;
- - changes in political conditions or the legislative or regulatory
environment;
- - general economic conditions, either nationally or regionally and
especially in primary service area, becoming less favorable than
expected resulting in, among other things, a deterioration in credit
quality;
- - changes occurring in business conditions and inflation;
- - changes in technology;
- - changes in monetary and tax policies;
- - changes in the securities markets; and
- - other risks and uncertainties detailed from time to time in our filings
with the Securities and Exchange Commission.
GENERAL
RHBT Financial Corporation was organized in 1999 to serve as a bank
holding company for Rock Hill Bank & Trust. The bank commenced business on May
20, 1996 as a South Carolina state-chartered bank headquartered in Rock Hill,
South Carolina. The principal business activity of the company is to provide
banking services to domestic markets, principally in York County, South
Carolina. In addition to providing traditional banking services, the company has
a trust department that offers a full range of trust services and a mortgage
loan division. The mortgage loan division originates loans to purchase existing
or construct new homes and to refinance existing mortgages. The company opened
two additional branches in 1999. The Ebenezer office opened in January 1999, and
the Fort Mill/Tega Cay office opened in September 1999.
On July 16, 1999, our board of directors declared a five-for-four stock
split effected in the form of a 25% stock dividend payable on September 10, 1999
to stockholders of record on August 1, 1999. This resulted in the issuance of
344,063 shares of common stock. On November 8, 1999, our common stock began
trading on The Nasdaq Stock Market under its previous symbol "RHBT."
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Our stockholders voted on April 16, 1998, to amend the Articles of
Incorporation to eliminate the two classes of common stock known as Class A and
Class B. A new class of common stock known simply as common stock was created,
and the number of authorized shares was increased to 10,000,000. Prior to this
vote, Bailey Financial Corporation owned all of the Class B shares, or 51% of
the total outstanding common stock. On June 19, 1998, the change in classes of
stock became effective. Bailey exchanged its Class B shares for common shares
and terminated its right of first refusal agreements and its right to elect
separate directors.
Our significant growth during the first two years of operations led to
the need for additional capital. On July 28, 1998, we sold, through an
underwritten public offering, 675,000 shares of common stock at a public
offering price of $13.25 per share. On August 3, 1998, we sold an additional
101,250 common shares, also at a public offering price of $13.25 per share,
pursuant to an underwriters over-allotment provision.
Our primary source of revenue is interest income and fees, which we
earn by lending and investing our capital and the funds which are held on
deposit. Because loans generally earn higher rates of interest than investments,
the bank seeks to employ as many of its deposit funds as possible in the form of
loans to individuals and businesses. To ensure sufficient liquidity, we also
maintain a portion of the bank's deposits in cash, government securities,
deposits with other financial institutions, and overnight loans of excess
reserves (known as "federal funds sold") to correspondent banks. The revenue
which the bank earns (prior to deducting its overhead expenses) is essentially a
function of the amount of the bank's loans and deposits, as well as the profit
margin ("interest spread") and fee income. Our bank also is the only locally
owned community bank in the Rock Hill area that provides trust services and has
a mortgage loan division.
MARKETING FOCUS
Our bank primarily serves the city of Rock Hill and the surrounding
area of York County, South Carolina. The bank's extended market area also
includes the south side of Charlotte in Mecklenburg County, North Carolina, and
Lancaster and Chester Counties in South Carolina. Rock Hill is the fifth largest
city in South Carolina and is located in the eastern central area of York
County, South Carolina, approximately 25 miles southwest of Charlotte, North
Carolina and on the outskirts of the Charlotte/Mecklenburg metropolitan area.
Rock Hill is approximately 70 miles north of Columbia, South Carolina, and 95
miles northeast of Greenville, South Carolina. The area has experienced steady
growth over the past ten years and the bank expects the area, as well as the
service industries needed to support it, to continue to grow. According to the
U.S. Census Bureau, York County is one of the fastest growing counties in South
Carolina, with a population of 150,000 in 1997, reflecting a 14.5% increase
since 1990. York County also boasts one of the highest per capita incomes in
South Carolina, with a median household income in 1997 of $47,300, compared to
$29,000 for South Carolina as a whole.
BANKING SERVICES
The bank strives to provide its customers with the breadth of products
and services comparable to those offered by large regional banks, while
maintaining the quick response and personal service of a locally owned and
managed bank. In addition to offering a full range of deposit services and
commercial and personal loans, our bank offers trust services and products such
as mortgage loan originations and accounts receivable financing.
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- - Deposit Services. The bank offers a full range of deposit services that
are typically available in most banks and savings and loan
associations, including checking accounts, NOW accounts, savings
accounts, and other time deposits of various types, ranging from daily
money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to our
principal market area at rates competitive to those offered by other
banks in the area. In addition, we offer certain retirement account
services, such as Individual Retirement Accounts (IRAs). All deposit
accounts are insured by the Federal Deposit Insurance Corporation (the
"FDIC") up to the maximum amount allowed by law. The bank solicits
these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
- - Loan Products. The bank offers a full range of commercial and personal
loans. Commercial loans include both secured and unsecured loans for
working capital (including loans secured by inventory and accounts
receivable), business expansion (including acquisition of real estate
and improvements), and purchase of equipment and machinery. Consumer
loans include equity lines of credit and secured and unsecured loans
for financing automobiles, home improvements, education, and personal
investments. The bank also makes real estate construction and
acquisition loans. The bank's lending activities are subject to a
variety of lending limits imposed by federal law. While differing
limits apply in certain circumstances based on the type of loan or the
nature of the borrower (including the borrower's relationship to us),
in general we are subject to a loans-to-one-borrower limit of an amount
equal to 15% of the bank's unimpaired capital and surplus. We may not
make any loans to any director, officer, employee, or 10% shareholder
of the bank unless the loan is approved by our board of directors and
is made on terms not more favorable to such a person than would be
available to a person not affiliated with us.
- - Mortgage Loan Division. The bank recently established a mortgage loan
division through which it has broadened the range of services that it
offers to its customers, and we are now the only locally-owned bank in
Rock Hill with a separate mortgage division. The mortgage loan division
originates loans to purchase existing or construct new homes and to
refinance existing mortgages. The bank anticipates generating
additional fee income by selling most of these loans in the secondary
market and cross-selling its other products and services to its
mortgage customers.
- - Trust Services. The bank is the only locally managed bank in the Rock
Hill area that has a trust department, through which we offer a full
range of trust services, including personal trusts, testamentary
trusts, investment management, custodian services, income tax
assistance and counseling, and retirement and estate planning.
- - Accounts Receivable Financing. The bank provides accounts receivable
financing to businesses through an agreement with an outside vendor,
using software licensed from the vendor to handle the billing and
collection of these receivables. Because accounts receivable-based
loans typically carry a higher rate of risk than many other types of
loans, the bank also has default and fraud insurance and customarily
obtains a personal guarantee from the small business owner.
- - Other Services. Other bank services include cash management services,
safe deposit boxes, travelers checks, direct deposit of payroll and
social security checks, and automatic drafts for various accounts. The
bank is associated with Honor and Plus networks of automated teller
machines that may be used by our customers throughout South Carolina
and other regions. The bank also offers VISA credit card services
through a correspondent bank as an agent for us.
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COMPETITION
Banks generally compete with other financial institutions through the
selection of banking 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 the personal manner in which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. As of December 31,
1999, there were approximately eight commercial banks, no savings and loan
institutions, and four credit unions in the same area as Rock Hill Bank & Trust.
Many large banking organizations currently operate in the Bank's market area,
several of which are controlled by out-of-state ownership. In addition,
competition between commercial banks and thrift institutions (savings
institutions and credit unions) has been intensified significantly by 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 which 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
almost total elimination of practical distinctions between a commercial bank and
a thrift institution. Consequently, competition among financial institutions of
all types is largely unlimited with respect to legal authority to provide most
financial services.
Competition among financial institutions in the Rock Hill area is
particularly intense because of the strong credit union base resulting from the
large number of textile and other industrial companies in the area; Rock Hill's
proximity to Charlotte, North Carolina, which is home to large regional and
national banks such as Bank of America (formerly known as NationsBank), First
Union, and Wachovia; and the establishment of two other new community banks in
Rock Hill in the last several years.
SUPERVISION AND REGULATION
Both the company and the bank are subject to extensive state and
federal banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight of virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summary is qualified by
reference to the statutory and regulatory provisions discussed. Changes in
applicable laws or regulations may have a material effect on our business and
prospects. Beginning with the enactment of the Financial Institution Report
Recovery and Enforcement Act in 1989 and following with the FDIC Improvement Act
in 1991, numerous additional regulatory requirements have been placed on the
banking industry in the past several years, and additional changes have been
proposed. Our operations may be affected by legislative changes and the policies
of various regulatory authorities. We cannot predict the effect that fiscal or
monetary policies, economic control, or new federal or state legislation may
have on our business and earnings in the future.
GRAMM-LEACH-BLILEY ACT
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton on
November 12, 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily provided list of
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financial activities, including insurance and securities underwriting and agency
activities, merchant banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are "complementary" to
financial activities.
The Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies.
In fact, it is not possible to predict the full effect that the Act will have on
us. From time to time other changes are proposed to laws affecting the Banking
industry, and these changes could have a material effect on our business and
prospects. We cannot predict the nature or the extent of the effect on our
business and earnings of fiscal or monetary policies, economic controls, or new
federal or state legislation.
RHBT FINANCIAL CORPORATION
Because it owns the outstanding capital stock of the bank, the company
is a bank holding company under the federal Bank Holding Company Act of 1956 and
the South Carolina Banking and Branching Efficiency Act.
The Bank Holding Company Act. Under the Bank Holding Company Act, the
company is subject to periodic examination by the Federal Reserve and required
to file periodic reports of its operations and any additional information that
the Federal Reserve may require. Our activities at the bank and holding company
level are limited to:
- banking and managing or controlling banks;
- furnishing services to or performing services for its
subsidiaries; and
- engaging in other activities that the Federal Reserve
determines to be so closely related to banking and managing or
controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
- acquiring substantially all the assets of any bank;
- acquiring direct or indirect ownership or control of any
voting shares of any bank if after the acquisition it would
own or control more than 5% of the voting shares of such bank
(unless it already owns or controls the majority of such
shares); or
- merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with regulations
thereunder, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. The
company's common stock is
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registered under the Securities Exchange Act of 1934. The regulations provide a
procedure for challenge of the rebuttable control presumption.
Under the Bank Holding Company Act, a bank holding company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
than 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve Board, by order or regulation, has found those
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Federal
Reserve Board has determined by regulation to be proper incidents to the
business of a bank holding company include:
- making or servicing loans and certain types of leases;
- engaging in certain insurance and discount brokerage
activities;
- performing certain data processing services;
- acting in certain circumstances as a fiduciary or investment
or financial adviser;
- owning savings associations; and
- making investments in certain corporations or projects
designed primarily to promote community welfare.
The Federal Reserve Board imposes certain capital requirements on the
company under the Bank Holding Company Act, including a minimum leverage ratio
and a minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Regulations." Subject to its
capital requirements and certain other restrictions, the company is able to
borrow money to make a capital contribution to the bank, and these loans may be
repaid from dividends paid from the bank to the company. Our ability to pay
dividends is subject to regulatory restrictions as described below in "Rock Hill
Bank & Trust - Dividends." The company is also able to raise capital for
contribution to the bank by issuing securities without having to receive
regulatory approval, subject to compliance with federal and state securities
laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the company is expected to act as a source of financial strength
to the bank and to commit resources to support the bank in circumstances in
which the company might not otherwise do so. Under the Bank Holding Company Act,
the Federal Reserve Board may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Board's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank's holding
company. Further, federal bank regulatory authorities have additional discretion
to require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition.
South Carolina State Regulation. As a bank holding company registered
under the South Carolina Banking and Branching Efficiency Act, we are subject to
limitations on sale or merger and to regulation by the South Carolina Board of
Financial Institutions. We must receive the Board's approval prior to engaging
in the acquisition of banking or nonbanking institutions or assets, and we must
file periodic reports with respect to our financial condition and operations,
management, and intercompany relationships between the company and its
subsidiaries.
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ROCK HILL BANK & TRUST
The bank operates as a South Carolina state bank and is subject to
examination by the South Carolina Board of Financial Institutions. Deposits in
the bank are insured by the FDIC up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.
The South Carolina Board of Financial Institutions and the FDIC
regulate or monitor virtually all areas of the bank's operations, including:
- - security devices and procedures;
- - adequacy of capitalization and loss reserves;
- - loans;
- - investments;
- - borrowings;
- - deposits;
- - mergers;
- - issuances of securities;
- - payment of dividends;
- - interest rates payable on deposits;
- - interest rates or fees chargeable on loans;
- - establishment of branches;
- - corporate reorganizations;
- - maintenance of books and records; and
- - adequacy of staff training to carry on safe lending and deposit
gathering practices.
The South Carolina Board of Financial Institutions requires the bank to
maintain specified capital ratios and imposes limitations on the bank's
aggregate investment in real estate, bank premises, and furniture and fixtures.
The FDIC requires the bank to prepare quarterly reports on the bank's financial
condition and to conduct an annual audit of its financial affairs in compliance
with its minimum standards and procedures.
Under the FDIC Improvement Act, all insured institutions must undergo
regular on site examinations by their appropriate banking agency. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate agency against each institution or affiliate as it
deems necessary or appropriate. Insured institutions are required to submit
annual reports to the FDIC, their federal regulatory agency, and their state
supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop
a method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. The FDIC
Improvement Act also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating, among other things, to the
following:
- - internal controls;
- - information systems and audit systems;
- - loan documentation;
- - credit underwriting;
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- - interest rate risk exposure; and
- - asset quality.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund and Savings Association Insurance Fund are
maintained for commercial banks and savings associations with insurance premiums
from the industry used to offset losses from insurance payouts when banks and
thrifts fail. In 1993, the FDIC adopted a rule which establishes a risk-based
deposit insurance premium system for all insured depository institutions. Under
this system, until mid-1995 depository institutions paid to Bank Insurance Fund
or Savings Association Insurance Fund from $0.23 to $0.31 per $100 of insured
deposits depending on its capital levels and risk profile, as determined by its
primary federal regulator on a semiannual basis. Once the Bank Insurance Fund
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually eliminating premiums for
well-capitalized banks, with a minimum semiannual assessment of $1,000. However,
in 1996 Congress enacted the Deposit Insurance Funds Act of 1996, which
eliminated even this minimum assessment. It also separated the Financial
Corporation assessment to service the interest on its bond obligations. The
amount assessed on individual institutions by the Financial Corporation
assessment is in addition to the amount paid for deposit insurance according to
the risk-related assessment rate schedule. Increases in deposit insurance
premiums or changes in risk classification will increase the bank's cost of
funds, and we may not be able to pass these costs on to our customers.
Transactions With Affiliates and Insiders. The bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which places limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and, as to all affiliates combined, to 20% of
the bank 's capital and surplus. Furthermore, within the foregoing limitations
as to amount, each covered transaction must meet specified collateral
requirements. Compliance is also required with certain provisions designed to
avoid the taking of low quality assets.
The bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibits an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies. The bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Dividends. The bank is subject to regulatory restrictions on the
payment of dividends, including a prohibition of payment of dividends from its
capital. All dividends must be paid out of the undivided profits then on hand,
after deducting expenses, including losses and bad debts. The bank must also
obtain approval from the South Carolina Board of Financial Institutions prior to
the payment of any dividends. In addition, under the FDIC Improvement Act, the
bank may not pay a dividend if, after paying the dividend, the bank would be
undercapitalized. See "Capital Regulations" below.
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Branching. Under current South Carolina law, we may open bank branch
offices throughout South Carolina with the prior approval of the South Carolina
Board of Financial Institutions. In addition, with prior regulatory approval,
the bank may acquire existing banking operations in South Carolina. Furthermore,
federal legislation has recently been passed which permits interstate branching.
The new law permits out-of-state acquisitions by bank holding companies,
interstate branching by banks if allowed by state law, interstate merging by
banks, and de novo branching by banks if allowed by state law. North Carolina
has passed legislation that, in effect, prohibits de novo branching by South
Carolina banks into North Carolina.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, a financial institution's primary federal regulator
(this is the FDIC for our bank) shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on the bank.
Other Regulations. Interest and other charges collected or contracted
for by the bank are subject to state usury laws and federal laws concerning
interest rates. The bank's loan operations are also subject to federal laws
applicable to credit transactions, such as:
- the federal Truth-In-Lending Act, governing disclosures of
credit terms to consumer borrowers;
- the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution
is fulfilling its obligation to help meet the housing needs of
the community it serves;
- the Equal Credit Opportunity Act, prohibiting discrimination
on the basis of race, creed or other prohibited factors in
extending credit;
- the Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
- the Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies; and
- the rules and regulations of the various federal agencies
charged with the responsibility of implementing such federal
laws.
The deposit operations of the bank also are subject to:
- the Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative
subpoenas of financial records; and
- the Electronic Funds Transfer Act and Regulation E issued by
the Federal Reserve Board to implement that act, which governs
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.
Capital Regulations. The federal bank regulatory authorities have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital
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requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. We have not received any notice indicating that either the
company or the bank is subject to higher capital requirements. The current
guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and excludes the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
The FDIC Improvement Act established a new capital-based regulatory
scheme designed to promote early intervention for troubled banks which requires
the FDIC to choose the least expensive resolution of bank failures. The new
capital-based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%, and
the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. Currently, we
qualify as "well capitalized."
Under the FDIC Improvement Act regulations, the applicable agency can
treat an institution as if it were in the next lower category if the agency
determines (after notice and an opportunity for hearing) that the institution is
in an unsafe or unsound condition or is engaging in an unsafe or unsound
practice. The degree of regulatory scrutiny of a financial institution
increases, and the permissible activities of the institution decreases, as it
moves downward through the capital categories. Institutions that fall into one
of the three undercapitalized categories may be required to do some or all of
the following:
10
<PAGE> 12
- submit a capital restoration plan;
- raise additional capital;
- restrict their growth, deposit interest rates, and other
activities;
- improve their management;
- eliminate management fees; or
- divest themselves of all or a part of their operations.
Bank holding companies controlling financial institutions can be called upon to
boost the institutions' capital and to partially guarantee the institutions'
performance under their capital restoration plans.
These capital guidelines can affect us in several ways. If we grow at a
rapid pace, our capital may be depleted too quickly, and a capital infusion from
the holding company may be necessary which could impact our ability to pay
dividends. Our capital levels currently are adequate; however, rapid growth,
poor loan portfolio performance, poor earnings performance, or a combination of
these factors could change our capital position in a relatively short period of
time.
Failure to meet these capital requirements would mean that a bank would
be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time.
Enforcement Powers. The Financial Institution Report Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs. These practices can include the failure of an institution
to timely file required reports or the filing of false or misleading information
or the submission of inaccurate reports. Civil penalties may be as high as
$1,000,000 a day for such violations. Criminal penalties for some financial
institution crimes have been increased to 20 years. In addition, regulators are
provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, banking agencies'
power to issue cease-and-desist orders were expanded. Such orders may, among
other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected by
domestic economic conditions and the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve Bank's monetary policies
have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The monetary policies of the Federal Reserve Board have major effects
upon the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
11
<PAGE> 13
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact
of future changes in monetary and fiscal policies.
EMPLOYEES
As of March 1, 2000, we had 36 full-time employees and two part-time
employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank's main office is located in an 11,000 square foot facility
at 315 East Main Street in the city of Rock Hill, South Carolina. On January
7, 1999, the Bank opened its second office at 1746 Ebenezer Road in Rock Hill
near the intersection of Ebenezer and Herlong roads. This office is located
in a 2,700 square foot facility and is located approximately 2.9 miles north
west of the Main Office. The Bank opened a third office in September 1999 in
the Fort Mill/ Tega Cay area on Highway 160. The address is 100 Stone Village
Drive, Fort Mill, South Carolina. The Bank occupies approximately 4,000
square feet on the first floor of the two-story facility. Rock Hill Bank &
Trust maintains drive-up automated teller machines at each office.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
In response to this Item, the information contained on page 41 of the
company's Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information contained on pages 3 through
18 of the company's Annual Report to Shareholders for the year ended December
31, 1999 is incorporated herein by reference.
12
<PAGE> 14
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 19 through
40 of the company's Annual Report to Shareholders for the year ended December
31, 1999 is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
In response to this Item, the information contained on page 8 of the
company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 2000 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 4 through
6 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 27, 2000 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on pages 6 through
7 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 27, 2000 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 8 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 2000 is incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
3(a) Articles of Incorporation (incorporated by reference to the
Bank's Registration Statement on Form 10-SB filed July 30,
1998).
3(b) Bylaws (incorporated by reference to the Bank's Registration
Statement on Form 10-SB filed July 30, 1998).
13
<PAGE> 15
4 Form of Certificate of Common Stock (incorporated by reference
to the Bank's Registration Statement on Form 10-SB filed July
30, 1998).
5.1 Opinion Regarding Legality (incorporated by reference to the
Bank's Registration Statement on Form 10-SB filed July 30,
1998).
10.1 Right of First Refusal Agreement dated May 16, 1998 with
Bailey Financial Corporation and the Bank. (incorporated by
reference to the Bank's Registration Statement on Form 10-SB
filed July 30, 1998).
10.2 Share Exchange Agreement dated April 6, 1998 with Bailey
Financial Corporation and the Bank. (incorporated by reference
to the Bank's Registration Statement on Form 10-SB filed July
30, 1998).
13.1. Annual Report of Shareholders for the year ended December 31,
1999
21.1 Subsidiaries of the Company
27.1. Financial Data Schedule. (for SEC use only).
- ------------------
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter of 1999.
14
<PAGE> 16
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROCK HILL BANK & TRUST
Date: March 24, 2000 By: /s/ J. A. Ferguson, Jr.
---------------------- ------------------------------
J. A. Ferguson, Jr.
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. A. Ferguson, Jr., his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-KSB, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
----- ----
<S> <C> <C>
/s/ Edwin L. Barnes
- --------------------------------
Edwin L. Barnes Director 03/24/00
/s/ William C. Beaty, Jr.
- --------------------------------
William C. Beaty, Jr. Director 03/24/00
/s/ Claude W. Burns, III
- --------------------------------
Claude W. Burns, III Director 03/24/00
/s/ J. A. Ferguson, Jr.
- --------------------------------
J. A. Ferguson, Jr. President; 03/24/00
Chief Executive
Officer and
Director
/s/ Jean M. Gaillard
- --------------------------------
Jean M. Gaillard Director 03/24/00
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C> <C>
/s/ Hugh L. Harrelson, Sr.
- --------------------------------
Hugh L. Harrelson, Sr. Director 03/24/00
/s/ Jerry H. Padgett
- --------------------------------
Jerry H. Padgett Director 03/24/00
/s/ Richard S. Powell
- --------------------------------
Richard S. Powell Director 03/24/00
/s/ Elvin F. Walker
- --------------------------------
Elvin F. Walker Director 03/24/00
/s/ Patricia M. Stone Chief Financial Officer 03/24/00
- --------------------------------
Patricia M. Stone
</TABLE>
16
<PAGE> 18
INDEX TO EXHIBITS
(a) The following documents are filed as part of this report:
3(a) Articles of Incorporation (incorporated by reference
to the Bank's Registration Statement on Form 10-SB
filed July 30, 1998).
3(b) Bylaws (incorporated by reference to the Bank's
Registration Statement on Form 10-SB filed July 30,
1998)
4 Form of Certificate of Common Stock (incorporated by
reference to the Bank's Registration Statement on
Form 10-SB filed July 30, 1998).
5.1 Opinion Regarding Legality (incorporated by reference
to the Bank's Registration Statement on Form 10-SB
filed July 30, 1998).
10.1 Right of First Refusal Agreement dated May 16, 1998
with Bailey Financial Corporation and the Bank.
(incorporated by reference to the Bank's Registration
Statement on Form 10-SB filed July 30, 1998).
10.2 Share Exchange Agreement dated April 6, 1998 with
Bailey Financial Corporation and the Bank.
(incorporated by reference to the Bank's Registration
Statement on Form 10-SB filed July 30, 1998).
13.1. Annual Report of Shareholders for the year ended
December 31, 1999
21.1 Subsidiaries of the Company
27.1. Financial Data Schedule. (for SEC use only).
- --------------------
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter of 1999.
17
<PAGE> 1
EXHIBIT 13.1
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Selected Financial Data 2
Management's Discussion and Analysis 3-18
Independent Auditors' Report 19
Consolidated Balance Sheets 20
Consolidated Statements of Income 21
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income 22
Consolidated Statements of Cash Flows 23
Notes to Financial Statements 24-40
Corporate Data 41
</TABLE>
<PAGE> 2
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1999,
1998 and 1997 and for the period May 20, 1996 to December 31, 1996 are derived
from the financial statements and other data of the Company. The financial
statements for the years ended December 31, 1999, 1998 and 1997 and for the
period May 20, 1996 to December 31, 1996, were audited by Tourville, Simpson &
Caskey, L.L.P, independent auditors. The selected financial data should be read
in conjunction with the financial statements of the Company, including the
accompanying notes, included elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 10,174 $ 6,334 $ 2,998 $ 820
Interest expense 5,057 3,398 1,556 449
-------- -------- -------- --------
Net interest income 5,117 2,936 1,442 371
Provision for loan losses 430 489 209 126
-------- -------- -------- --------
Net interest income after provision for loan losses 4,687 2,447 1,233 245
Net securities gains (losses) -- -- (1) --
Noninterest income 561 330 146 26
Noninterest expense 3,099 1,742 1,291 1,091
-------- -------- -------- --------
Income (loss) before income taxes 2,149 1,035 87 (820)
Income tax expense (benefit) 761 383 32 (293)
-------- -------- -------- --------
Net income (loss) $ 1,388 $ 652 $ 55 $ (527)
======== ======== ======== ========
BALANCE SHEET DATA:
Assets $149,448 $107,062 $ 52,324 $ 28,207
Earning assets 142,966 101,896 47,797 26,603
Securities (1) 7,832 7,414 7,009 10,025
Loans (2) 118,709 69,977 35,777 12,618
Allowance for loan losses 1,226 812 334 127
Deposits 107,826 77,740 45,281 22,599
Shareholders' equity 16,913 15,578 5,516 5,474
PER SHARE DATA:
Earnings (losses) per share $ .81 $ .38 $ .03 $ (.31)
Diluted earnings (losses) per share .79 .38 .03 (.31)
Book value (period end) 9.83 9.05 3.21 3.18
Tangible book value (period end) 9.82 9.03 3.17 3.13
PERFORMANCE RATIOS:
Return on average assets 1.06% .81% .15% (4.22)%
Return on average equity 8.51 6.57 1.01 (15.52)
Net interest margin (3) 4.09 3.83 4.10 3.20
Efficiency (4) 54.58 53.34 81.29 274.76
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets 12.50% 12.35% 14.69% 27.19%
Leverage (4.00% required minimum) 11.48 15.29 11.25 20.20
Risk-based capital
Tier 1 14.37 20.89 14.47 32.56
Total 15.41 21.99 15.35 33.56
Average loans to average deposits 93.90 87.01 77.64 38.46
</TABLE>
- ----------------------
1. All securities are available for sale and are stated at fair value.
2. Loans are stated at gross amounts before allowance for loan losses.
3. Net interest income divided by average earning assets.
4. Noninterest expense divided by the sum of net interest income and
noninterest income, net of gains and losses on sales of assets.
2
<PAGE> 3
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion should be read in conjunction with the preceding
"Selected Financial Data" and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Annual Report.
The financial information provided below has been rounded in order to simplify
its presentation. However, the ratios and percentages provided below are
calculated using the detailed financial information contained in the Financial
Statements, the Notes thereto and the other financial data included elsewhere in
this Annual Report.
GENERAL
RHBT Financial Corporation (the Company) was organized in 1999 to serve as a
bank holding company for Rock Hill Bank & Trust (the Bank). The Bank commenced
business on May 20, 1996 as a South Carolina state-chartered bank headquartered
in Rock Hill, South Carolina. The principal business activity of the Company is
to provide banking services to domestic markets, principally in York County,
South Carolina. In addition to providing traditional banking services, the
Company has a trust department that offers a full range of trust services and a
mortgage loan division. The mortgage loan division originates loans to purchase
existing or construct new homes and to refinance existing mortgages. The Company
opened two additional offices in 1999. The Ebenezer office opened in January
1999, and the Fort Mill/Tega Cay office opened in September 1999.
On July 16, 1999, the Company's Board of Directors declared a five-for-four
stock split effected in the form of a 25% stock dividend payable on September
10, 1999 to stockholders of record on August 1, 1999. This resulted in the
issuance of 344,063 shares of common stock. On November 8, 1999, the Company's
common stock began trading on The Nasdaq Stock Market under its previous symbol
"RHBT."
The stockholders of the Company voted on April 16, 1998, to amend the Articles
of Incorporation to eliminate the two classes of common stock known as Class A
and Class B. A new class of common stock known simply as common stock was
created, and the number of authorized shares was increased to 10,000,000. Prior
to this vote, Bailey Financial Corporation (Bailey) owned all of the Class B
shares, or 51% of the total outstanding common stock. On June 19, 1998, the
change in classes of stock became effective. Bailey exchanged its Class B shares
for common shares and terminated its right of first refusal agreements and its
right to elect separate directors.
The significant growth of the Company during its first two years of operations
led to the need for additional capital. On July 28, 1998, the Company sold,
through an underwritten public offering, 675,000 shares of common stock at a
public offering price of $13.25 per share. On August 3, 1998, the Company sold
an additional 101,250 common shares, also at a public offering price of $13.25
per share, pursuant to an underwriters over-allotment provision.
QUARTERLY OPERATING RESULTS
The following table summarizes selected operating results and balance sheet
averages for the quarters ended in 1999 and 1998.
<TABLE>
<CAPTION>
1999 Quarter ended 1998 Quarter ended
--------------------------------------------- -----------------------------------------
(Dollars in thousands, Fourth Third Second First Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ----------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income $ 1,479 $ 1,374 $ 1,255 $ 1,009 $ 1,092 $ 744 $ 579 $ 521
Provision for loan losses 152 91 106 81 239 130 60 60
Noninterest income 167 163 133 98 100 107 66 57
Noninterest expense 1,001 772 699 626 592 451 370 329
Net income 355 414 367 252 228 170 135 119
Net income per share .17 .25 .21 .18 .13 .10 .08 .07
SELECTED AVERAGE BALANCES:
Total assets $ 147,552 $ 134,142 $ 126,523 $ 112,461 $ 101,634 $ 87,092 $ 72,282 $ 59,780
Earning assets 134,683 129,169 120,657 107,246 93,199 83,042 69,040 57,051
Investment securities 7,916 8,445 8,317 7,454 5,265 5,738 4,649 6,701
Loans 108,689 98,530 87,368 74,546 64,887 54,240 44,373 39,220
Deposits 111,039 103,333 96,637 83,106 67,290 60,890 53,260 46,874
</TABLE>
3
<PAGE> 4
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 1999, compared with year ended December 31, 1998
Net interest income increased $2,181,278, or 74.3%, to $5,117,428 in 1999 from
$2,936,150 in 1998. The increase in net interest income was due primarily to an
increase in average earning assets. Average earning assets increased
$48,445,254, or 63.26%, due to continued growth by the Company. This growth was
partially attributable to the addition of two full-service offices in 1999.
The Ebenezer office opened in January and the Fort Mill/Tega Cay office in
September 1999.
The Company's net interest spread and net interest margin were 3.21% and 4.09%,
respectively, in 1999 compared to 3.04% and 3.83% in 1998. The increases in net
interest spread and net interest margin were primarily the result of a decrease
in the cost of funds. Yields on interest-bearing liabilities decreased from
5.23% in 1998 to 4.94% in 1999.
The provision for loan losses was $430,000 in 1999 compared to $489,176 in 1998.
The Company continues to maintain the allowance for loan losses at a level
sufficient to cover known and inherent losses in the loan portfolio. The
secondary stock offering in 1998 allowed an increase in the Company's legal
lending limit which resulted in the ability to make much larger loans than the
Company had been making.
Noninterest income increased $230,955, or 69.89%, to $561,423 in 1999 from
$330,468 in 1998, primarily attributable to increased service charges on deposit
accounts and increased fees from fiduciary activities. Service charges increased
$87,527, or 62.30%, to $228,017 for the year ended December 31, 1999. The
increase in service charges on deposit accounts was attributable to the increase
in the number of deposit accounts from the growth of the Company. As the Company
continued to expand its trust department, fees of $205,882 were generated from
these activities for the year ended December 31, 1999, compared to $111,604 for
the year ended December 31, 1998.
Noninterest expense increased $1,356,463, or 77.85%, to $3,098,912 in 1999 from
$1,742,449 in 1998. The primary component of noninterest expense is salaries and
benefits, which increased $516,763, or 68.74%, to $1,268,507 in 1999 from
$751,744 in 1998. The increase is attributable to the hiring of additional
employees to assist with the growth of the Company and to staff the Ebenezer and
Fort Mill/Tega Cay offices. Net occupancy expense was $456,489 in 1999 compared
to $304,174 in 1998. The additional costs to maintain the Ebenezer office for a
full year and the Fort Mill/Tega Cay office for 3.5 months contributed to this
increase. Advertising and marketing expense increased to $125,756 in 1999
compared to $28,032 in 1998. The increase was due to the Company's marketing
efforts in the new office locations. The Company's efficiency ratio was 54.58%
in 1999 compared to 53.34% in 1998.
Net income was $1,388,015 in 1999 compared to net income of $652,043 in 1998.
The increase in net income was due primarily to increases in net interest income
and noninterest income that resulted from the significant growth in assets and
deposits during 1999. In addition, the Company's operational efficiency improved
drastically in 1999 as compared to the prior year. Return on average assets
during 1999 was 1.06% compared to .81% during 1998, and return on average equity
was 8.51% during 1999 compared to 6.57% during 1998.
4
<PAGE> 5
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
Year ended December 31, 1998, compared with year ended December 31, 1997
Net interest income increased $1,494,327, or 103.6%, to $2,936,150 in 1998 from
$1,441,823 in 1997. The increase in net interest income was due primarily to an
increase in average earning assets. Average earning assets increased
$43,129,915, or 115.8%, due to continued growth by the Company and as a result
of the secondary stock offering.
The Company's net interest spread and net interest margin were 3.04% and 3.83%,
respectively, in 1998 compared to 3.13% and 4.10% in 1997. The decreases in net
interest spread and net interest margin were primarily the result of the growth
in the volume of federal funds sold, typically lower yielding assets than loans,
as a percentage of average earning assets. Proceeds from the stock offering were
invested in federal funds and investment securities. A portion has remained in
federal funds as a source of funds for loan growth and for funding the
construction of branches.
The provision for loan losses was $489,176 in 1998 compared to $209,475 in 1997.
The increase in the provision was primarily the result of the growth in the loan
portfolio and the Company's efforts to maintain the allowance for loan losses at
a level sufficient to cover known and inherent losses in the loan portfolio. The
secondary stock offering allowed an increase in the Company's legal lending
limit which resulted in the ability to make much larger loans than the Company
had been making.
Noninterest income increased $184,489, or 126.38%, to $330,468 in 1998 from
$145,979 in 1997, primarily attributable to increased service charges on deposit
accounts and increased fees from fiduciary activities. The increase in service
charges on deposit accounts was attributable to the increase in the number of
deposit accounts from the growth of the Company. As the Company continued to
expand its trust department, fees of $111,604 were generated from these
activities for the year ended December 31, 1998, compared to $32,404 for the
year ended December 31, 1997.
Noninterest expense increased $451,689, or 35.0%, to $1,742,449 in 1998 from
$1,290,760 in 1997. The primary component of noninterest expense is salaries and
benefits, which increased $222,886, or 42.14%, to $751,744 in 1998 from $528,858
in 1997. The increase is attributable to the hiring of additional employees to
assist with the growth of the Company and to staff the new Ebenezer office. The
Company also started a mortgage loan origination department in 1998 and hired
several employees to staff this area. Net occupancy expense was $304,174 in 1998
compared to $279,069 in 1997. Advertising and marketing expense decreased to
$28,032 in 1998 compared to $65,829 in 1997. The decrease was due to less
emphasis on advertising in 1998 as the Company became more established. The
Company's efficiency ratio was 53.34% in 1998 compared to 81.29% in 1997.
Net income was $652,043 in 1998 compared to net income of $55,167 in 1997. The
increase in net income was due primarily to increases in net interest income and
noninterest income that resulted from the significant growth in assets and
deposits during 1998. In addition, the Company's operational efficiency improved
drastically in 1998 as compared to the prior year. Return on average assets
during 1998 was .81% compared to .15% during 1997, and return on average equity
was 6.57% during 1998 compared to 1.01% during 1997.
5
<PAGE> 6
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME
General. The largest component of the Company's net income is its net interest
income, which is the difference between the income earned on assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the yields earned on the Company's interest-earning assets and
the rates paid on its interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities, and the degree of
mismatch and the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities. Net interest income divided by average
interest-earning assets represents the Company's net interest margin.
Average Balances, Income and Expenses and Rates. The following table sets forth,
for the periods indicated, certain information related to the Company's average
balance sheet and its average yields on assets and average costs of liabilities.
Such yields are derived by dividing income or expense by the average balance of
the corresponding assets or liabilities. Average balances have been derived from
the daily balances throughout the periods indicated.
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
----------------------------------- -----------------------------
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
--------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning Assets
Loans (1) $ 92,597 $ 8,559 9.24% $51,173 $4,976 9.72%
Securities, taxable (2) 8,035 443 5.51 6,124 371 6.06
Federal funds sold and securities
purchased under agreements to resell 24,393 1,172 4.80 19,283 987 5.12
--------- -------- ------- ------
Total earning assets 125,025 10,174 8.14 76,580 6,334 8.27
--------- -------- ------- ------
Cash and due from banks 3,624 2,740
Premises and equipment 1,431 610
Other assets 1,467 928
Allowance for loan losses (981) (477)
--------- -------
Total assets $ 130,566 $80,381
========= =======
LIABILITIES:
Interest-Bearing Liabilities
Interest-bearing transaction accounts $ 26,128 $ 998 3.82% $16,995 $ 716 4.21%
Savings deposits 4,054 197 4.86 2,767 144 5.20
Time deposits 57,255 3,197 5.58 33,819 1,987 5.88
Federal funds purchased and
securities sold under
agreements to repurchase 13,223 576 4.36 11,362 551 4.85
Advances from Federal Home Loan Bank 1,808 89 4.92 -- -- --
--------- -------- ------- ------
Total interest-bearing liabilities 102,468 5,057 4.94 64,943 3,398 5.23
--------- -------- ------- ------
Demand deposits 11,180 5,221
Accrued interest and other liabilities 580 287
Stockholders' equity 16,338 9,930
--------- -------
Total liabilities and stockholders' equity $ 130,566 $80,381
========= =======
Net interest spread 3.20% 3.04%
Net interest income $ 5,117 $2,936
======== ======
Net interest margin 4.09% 3.83%
</TABLE>
(1) There were no loans in nonaccrual status and the effect of fees
collected on loans is not significant to the computations. All loans
and deposits are domestic.
(2) Average investment securities exclude the valuation allowance on
securities available for sale.
6
<PAGE> 7
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - CONTINUED
Analysis of Changes in Net Interest Income. The following tables set forth the
effect which the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 1998 to 1999 and 1997 to 1998.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1999 Compared With 1998
Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total
---------- -------- ------
<S> <C> <C> <C>
Earning Assets
Loans $3,840 $(257) $3,583
Securities, taxable 108 (36) 72
Federal funds sold and securities
purchased under agreements to resell 249 (64) 185
------ ----- ------
Total interest income 4,197 (357) 3,840
------ ----- ------
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts 354 (72) 282
Savings deposits 63 (10) 53
Time deposits 1,313 (103) 1,210
------ ----- ------
Total interest-bearing deposits 1,730 (185) 1,545
Federal funds purchased and securities sold
under agreements to repurchase 85 (60) 25
Advances from the Federal Home Loan Bank 89 -- 89
------ ----- ------
Total interest expense 1,904 (245) 1,659
------ ----- ------
Net interest income $2,293 $(112) $2,181
====== ===== ======
</TABLE>
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
<TABLE>
<CAPTION>
1998 Compared With 1997
Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total
----------- -------- -------
<S> <C> <C> <C>
EARNING ASSETS
Loans $ 2,631 $ (2) $ 2,629
Securities, taxable (56) (11) (67)
Federal funds sold and securities
purchased under agreements to resell 779 (5) 774
------- ---- -------
Total interest income 3,354 (18) 3,336
------- ---- -------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest-bearing transaction accounts 229 (27) 202
Savings deposits 56 (8) 48
Time deposits 1,093 (33) 1,060
------- ---- -------
Total interest-bearing deposits 1,378 (68) 1,310
Securities sold under agreements to repurchase 533 (1) 532
------- ---- -------
Total interest expense 1,911 (69) 1,842
------- ---- -------
Net interest income $ 1,443 $ 51 $ 1,494
======= ==== =======
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
</TABLE>
7
<PAGE> 8
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - CONTINUED
Interest Sensitivity. The Company monitors and manages the pricing and maturity
of its assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on its net interest income. The
principal monitoring technique employed by the Company is the measurement of the
Company's interest sensitivity "gap", which is the positive or negative dollar
difference between assets and liabilities that are subject to interest rate
repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities available for
sale, replacing an asset or liability at maturity, or adjusting the interest
rate during the life of an asset or liability. Managing the amount of assets and
liabilities repricing in this same time interval helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.
The following table sets forth the Company's interest rate sensitivity at
December 31, 1999.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
After One After Three Greater Than
Within Through Through One Year
One Three Twelve Within or Non-
(Dollars in thousands) Month Months Months One Year sensitive Total
--------- ----------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans (1) $ 43,840 $ 1,472 $ 14,843 $ 60,155 $58,554 $118,709
Securities -- 2,146 1,759 3,905 3,928 7,833
Federal funds sold and securities
purchased under agreements
to resell 16,425 -- -- 16,425 -- 16,425
-------- ------- -------- --------- ------- --------
Total earning assets 60,265 3,618 16,602 80,485 62,482 142,967
-------- ------- -------- --------- ------- --------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Demand deposits 34,659 -- -- 34,659 -- 34,659
Savings deposits 4,427 -- -- 4,427 -- 4,427
Time deposits 10,773 450 47,830 59,053 3,132 62,185
-------- ------- -------- --------- ------- --------
Total interest-bearing
deposits 49,859 450 47,830 98,139 3,132 101,271
Advances from the Federal
Home Loan Bank 3,000 -- -- 3,000 7,000 10,000
Federal funds purchased 5,000 -- -- 5,000 -- 5,000
Securities sold under agreements
to repurchase 9,105 -- -- 9,105 -- 9,105
Total interest-bearing
liabilities 66,964 450 47,830 115,244 10,132 125,376
-------- ------- -------- --------- ------- --------
Period gap $ (6,699) $ 3,168 $(31,228) $ (34,759) $52,350
======== ======= ======== ========= ========
Cumulative gap $ (6,699) $(3,531) $(34,759) $ (34,759) $17,591
======== ======= ======== ========= ========
Ratio of cumulative gap to total earning
assets (4.69)% (2.47)% (24.31)% (24.31)% 12.30%
</TABLE>
(1) Excludes nonaccrual loans.
8
<PAGE> 9
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME - CONTINUED
The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Securities purchased
under agreements to resell are reflected at the maturity date of each agreement
which ranges from seven to thirty days. Debt securities are reflected at each
instrument's ultimate maturity date. Scheduled payment amounts of fixed rate
amortizing loans are reflected at each scheduled payment date. Scheduled payment
amounts of variable rate amortizing loans are reflected at each scheduled
payment date until the loan may be repriced contractually; the unamortized
balance is reflected at that point. Interest-bearing liabilities with no
contractual maturity, such as savings deposits and interest-bearing transaction
accounts, are reflected in the earliest repricing period due to contractual
arrangements which give the Company the opportunity to vary the rates paid on
those deposits within a thirty-day or shorter period. Fixed rate time deposits,
principally certificates of deposit, are reflected at their contractual maturity
date. Securities sold under agreements to repurchase are reflected at the
maturity date of each repurchase agreement which ranges from one to thirty days.
Advances from the Federal Home Loan Bank are reflected at their contractual
maturity dates.
The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap position and generally would benefit from
decreasing market rates of interest when it is liability-sensitive. The Company
is cumulative liability-sensitive over the one month to twelve month time frame.
However, the Company's gap analysis is not a precise indicator of its interest
sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities equally. For
example, rates paid on a substantial portion of core deposits may change
contractually within a relatively short time frame, but those rates are viewed
by management as significantly less interest-sensitive than market-based rates
such as those paid on non-core deposits. Accordingly, management believes a
liability-sensitive gap position is not as indicative of the Company's true
interest sensitivity as it would be for an organization which depends to a
greater extent on purchased funds to support earning assets. Net interest income
may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
General. The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. On a quarterly basis, the Company's Board of
Directors reviews and approves the appropriate level for the Company's allowance
for loan losses based upon management's recommendations, the results of the
internal monitoring and reporting system, and an analysis of economic conditions
in its market. The objective of management has been to fund the allowance for
loan losses at approximately 1% of total loans outstanding until a history is
established.
Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on the Company's income statement, are made periodically to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. Loan losses and recoveries are charged
or credited directly to the allowance. The amount of the provision is a function
of the level of loans outstanding, the level of nonperforming loans, historical
loan loss experience, the amount of loan losses actually charged against the
reserve during a given period, and current and anticipated economic conditions.
The Company's allowance for loan losses is based upon judgments and assumptions
of risk elements in the portfolio, future economic conditions, and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process
and specific reviews and evaluations of significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquency, charge-offs, and general and economic conditions in the
service area. The adequacy of the allowance for loan losses and the
effectiveness of the Company's monitoring and analysis system are also reviewed
periodically by the banking regulators and the Company's independent auditors.
9
<PAGE> 10
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
Based on present information and an ongoing evaluation, management considers the
allowance for loan losses to be adequate to meet presently known and inherent
risks in the loan portfolio. Management's judgment about the adequacy of the
allowance is based upon a number of assumptions about future events which 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 allowance for loan losses
will not be required. The Company does not allocate the allowance for loan
losses to specific categories of loans but evaluates the adequacy on an overall
portfolio basis utilizing a risk grading system.
The following table sets forth certain information with respect to the Company's
allowance for loan losses and the composition of charge-offs and recoveries for
the years ended December 31, 1999, 1998 and 1997.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Total loans outstanding at end of period $118,709 $69,977 $35,777
======== ======= =======
Average loans outstanding $ 92,597 $51,173 $24,116
======== ======= =======
Balance of allowance for loan losses at beginning of period $ 812 $ 334 $ 127
-------- ------- -------
Loan losses:
Real estate - construction -- -- --
Real estate - mortgage -- -- --
Commercial and industrial -- -- --
Consumer 16 11 6
-------- ------- -------
Total loan losses 16 11 6
-------- ------- -------
Recoveries of previous loan losses:
Real estate - construction -- -- --
Real estate - mortgage -- -- --
Commercial and industrial -- -- --
Consumer -- -- 4
-------- ------- -------
Total recoveries -- -- 4
-------- ------- -------
Net loan losses 16 11 2
Provision for loan losses 430 489 209
-------- ------- -------
Balance of allowance for loan losses at end of period $ 1,226 $ 812 $ 334
======== ======= =======
Allowance for loan losses to period end loans 1.03% 1.16% .93%
Net charge-offs to average loans .02 .02 .01
</TABLE>
NONPERFORMING ASSETS
Nonperforming Assets. The following table sets forth the Company's nonperforming
assets for the dates indicated.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Nonaccrual loans $ -- $ -- $ --
Restructured or impaired loans -- -- --
------------ ----------- -----------
Total nonperforming loans -- -- --
Other real estate owned -- -- --
------------ ----------- -----------
Total nonperforming assets $ -- $ -- $ --
============ =========== ===========
Loans 90 days or more past due and still accruing interest $ -- $ 2 $ --
Nonperforming assets to period end loans and foreclosed property --% --% -- %
</TABLE>
10
<PAGE> 11
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONPERFORMING ASSETS - CONTINUED
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. When a loan is placed in nonaccrual status,
all interest which has been accrued on the loan but remains unpaid is reversed
and deducted from current earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain. When a problem loan is
finally resolved, there may ultimately be an actual writedown or charge-off of
the principal balance of the loan which would necessitate additional charges to
earnings. For all periods presented, the additional interest income which would
have been recognized into earnings if the Company's nonaccrual loans had been
current in accordance with their original terms is immaterial.
There were no nonperforming assets at December 31, 1999, 1998, or 1997.
Potential Problem Loans. At December 31, 1999, the Company reviewed its loan
portfolio to identify any criticized or classified loans through its internal
review mechanisms. The results of this internal review process are considered in
determining management's assessment of the adequacy of the allowance for loan
losses. Loans to one borrower totaling $1,687,985 were identified in a recent
regulatory examination as criticized assets. Loans to this borrower are well
secured but certain risks involving repayment do exist. Management is carefully
monitoring the status of this credit. The overall objective of the Company has
been to maintain the allowance for loan losses at approximately 1% of total
loans to provide for potential problem loans.
Noninterest Income and Expense
Noninterest Income. The largest component of noninterest income is service
charges on deposit accounts, which totaled $228,017 in 1999, a 62.3% increase
over the 1998 amount of $140,490. The increase in service charges and other
noninterest income was primarily attributable to an increase in the customer
base as a result of the opening of the Ebenezer office in January 1999 and the
Fort Mill/Tega Cay office in September 1999.
Service charges on deposit accounts totaled $140,490 in 1998, a 69.7% increase
over the 1997 amount of $82,774. The increase in service charges and other
noninterest income was primarily attributable to an increase in the customer
base as a result of the growth allowed from the secondary stock offering in
July, 1998.
The following table sets forth the principal components of noninterest income
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Service charges on deposit accounts $ 228 $ 140 $ 83
Securities gains (losses) -- -- (1)
Income from fiduciary activities 206 112 32
Other 127 78 32
------ ------ ------
Total noninterest income $ 561 $ 330 $ 146
====== ====== ======
</TABLE>
Noninterest Expense. Salaries and employee benefits increased $516,763, or
68.74%, to $1,268,507 in 1999 from $751,744 in 1998, primarily as a result of
the hiring of employees to staff the two new offices (which opened in January
and September 1999) and to assist personnel at the main office with the
continuing growth of the Company. The cost of operating two additional offices
also resulted in increases in net occupancy expense and other operating
expenses. One of the primary factors for the increase in other operating
expenses was due to an increase in data processing charges of approximately
$120,226 from 1998 to 1999. This increase was due to several factors. One was
the increase in charges as a result of the volume of transactions processed and
also charges relating to the conversion of the data processing to a new service
provider. The Company's efficiency ratio, which is noninterest expense as a
percentage of the total of net interest income plus noninterest income, net of
gains and losses on the sale of assets, was 54.57% in 1999 compared to 53.34% in
1998.
11
<PAGE> 12
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME AND EXPENSE - CONTINUED
Salaries and employee benefits increased $222,886, or 42.1%, to $751,744 in 1998
from $528,858 in 1997, primarily as a result of the hiring of employees to staff
the new office (which opened in January 1999) and to assist personnel at the
main office with the continuing growth of the Company. In addition, several
employees were hired in 1998 to staff the mortgage loan department. The
continued growth of the Company also resulted in increases in net occupancy
expense and other operating expenses. One of the primary factors for the
increase in other operating expenses was due to an increase in data processing
charges of approximately $78,000 from 1997 to 1998 that resulted from a new data
processing agreement that became effective in May 1998. The Company's efficiency
ratio, which is noninterest expense as a percentage of the total of net interest
income plus noninterest income, net of gains and losses on the sale of assets,
was 53.34% in 1998 compared to 81.29% in 1997.
The following table sets forth the primary components of noninterest expense for
the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Salaries and employee benefits $1,269 $ 752 $ 529
Net occupancy expense 456 304 279
Advertising and marketing expense 126 28 66
Office supplies, forms and stationery 139 89 58
Data processing 256 135 58
Professional fees 69 27 39
Telephone 104 61 39
Other 680 346 223
------ ------ ------
Total noninterest expense $3,099 $1,742 $1,291
====== ====== ======
Efficiency ratio 54.57% 53.34% 81.29%
</TABLE>
EARNING ASSETS
Loans. Loans are the largest category of earning assets and typically provide
higher yields than the other types of earning assets. Associated with the higher
loan yields are the inherent credit and liquidity risks which management
attempts to control and counterbalance. Loans averaged $92,597,518 in 1999
compared to $51,173,369 in 1998, an increase of $41,424,149, or 80.9%. At
December 31, 1999, total loans were $118,709,167 compared to $69,977,496 at
December 31, 1998.
The increase in loans during 1999 was primarily due to the growth of the Company
during its fourth year of operations and the additional branches opened during
1999. The following table sets forth the composition of the loan portfolio by
category at the dates indicated and highlights the Company's general emphasis on
commercial and mortgage lending.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
1999 1998
---------------------------- --------------------------
Percent Percent
(Dollars in thousands) Amount of Total Amount of Total
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Commercial and industrial $ 49,569 41.76% $ 26,768 38.25%
Real estate
Construction 5,420 4.57 1,298 1.86
Mortgage-residential 24,142 20.34 13,919 19.89
Mortgage-nonresidential 33,855 28.52 25,187 36.00
Consumer 5,245 4.41 2,795 3.99
Other 478 .40 10 .01
---------- ------ --------- ------
Total loans 118,709 100.00% 69,977 100.00%
====== ======
Allowance for loan losses 1,226 812
---------- ---------
Net loans $ 117,483 $ 69,165
========== =========
</TABLE>
12
<PAGE> 13
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNING ASSETS - CONTINUED
The Company's loan portfolio is largely comprised of real estate mortgage
loans. At December 31, 1999, real estate mortgage loans totaled $57,996,758 and
represented 48.9% of the total loan portfolio, compared to $39,106,586, or
55.89%, at December 31, 1998.
In the context of this discussion, a "real estate mortgage loan"is defined as
any loan, other than loans for construction purposes, secured by real estate,
regardless of the purpose of the loan. It is common practice for financial
institutions in the Company's market area to obtain a security interest in real
estate whenever possible, in addition to any other available collateral. This
collateral is taken to reinforce the likelihood of the ultimate repayment of
the loan and tends to increase the magnitude of the real estate loan portfolio
component.
Residential mortgage loans increased $10,222,348, or 73.44%, to $24,141,774 at
December 31, 1999, from $13,919,426 at December 31, 1998. Residential real
estate loans consist of first and second mortgages on single or multi-family
residential dwellings. Nonresidential mortgage loans, which include commercial
loans and other loans secured by multi-family properties and farmland,
increased $9,868,837, or 41.14%, to $33,854,984 at December 31, 1999, from
$23,986,147 at December 31, 1998. This increase in real estate lending was
attributable to the continued demand for residential and commercial real estate
loans in the Rock Hill market and continued loan growth at the Company. The
Company has been able to compete favorably for residential mortgage loans with
other financial institutions by offering fixed rate products having three and
five year call provisions.
Commercial and industrial loans increased $22,801,634, or 85.2%, to $49,569,153
at December 31, 1999, from $26,767,519 at December 31, 1998. This category of
loans also includes discounted accounts receivable loans that totaled
$10,092,894 at December 31, 1999, an increase of $3,972,010, or 64.9%, from
December 31, 1998.
Consumer loans decreased $614,214, or 16.6%, to $3,094,697 at December 31,
1999, from $3,708,911 at December 31, 1998. The Company continues to focus on
real estate and commercial lending rather than consumer lending.
The Company's loan portfolio reflects the diversity of its market. The
Company's three office locations are in York County, South Carolina. The
economy of Rock Hill contains elements of medium and light manufacturing,
higher education, regional health care, and distribution facilities. Due to its
proximity to a major interstate highway and Winthrop University, a
state-supported university, management expects the area to remain stable with
continued growth. The diversity of the economy creates opportunities for all
types of lending. The Company does not engage in foreign lending.
The repayment of loans in the loan portfolio as they mature is also a source of
liquidity for the Company. The following table sets forth the Company's loans
maturing within specified intervals at December 31, 1999.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
Over One Year
One Year Through Over Five
(Dollars in thousands) or Less Five Years Years Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
Commercial and industrial $ 31,966 $ 4,723 $ 15,031 $ 51,720
Real estate 26,970 16,982 19,464 63,416
Consumer and other 906 1,532 1,135 3,573
-------- ------- -------- --------
59,842 23,237 35,630 118,709
-------- ------- -------- --------
Loans maturing after one year with: $58,867
Fixed interest rates --
--------
Floating interest rates $58,867
========
</TABLE>
The information presented in the above table is based on the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval as well as modification of terms upon their
maturity. Consequently, management believes this treatment presents fairly the
maturity and repricing structure of the loan portfolio shown in the above
table.
13
<PAGE> 14
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNING ASSETS - CONTINUED
Investment Securities. The investment securities portfolio is also a component
of the Company's total earning assets. Total securities averaged $8,035,691 in
1999, compared to $6,123,501 in 1998. At December 31, 1999, the total
securities portfolio was $7,832,559. All securities were designated as
available for sale and were recorded at their estimated fair market value. A
number of U.S. Treasury securities matured in 1999 and those funds were
invested in slightly higher-yielding securities of U.S. Government agencies.
The following table sets forth the book value of the securities held by the
Company at the dates indicated.
BOOK VALUE OF SECURITIES
<TABLE>
<CAPTION>
December 31,
1999 1998
--------- ---------
<S> <C> <C>
(Dollars in thousands)
U.S. Treasury $ -- $ 1,504
U.S. Government agencies 7,833 5,910
--------- ---------
Total securities $ 7,833 $ 7,414
========= =========
</TABLE>
The following table sets forth the scheduled maturities and average yields of
securities held at December 31, 1999.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
<TABLE>
<CAPTION>
After One But After Five But
Within One Within Five Within Ten
Year Years Years Total
-------------------- -------------------- -------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Government agencies $ 3,905 5.32% $ 3,436 5.69% $ 492 7.50% $ 7,833 5.63%
========= ========= ======== =========
</TABLE>
Other attributes of the securities portfolio, including yields and maturities,
are discussed above in "---Net Interest Income--- Interest Sensitivity."
Short-Term Investments. Short-term investments, which consist primarily of
federal funds sold and securities purchased under agreements to resell,
averaged $24,393,182 in 1999, compared to $19,282,856 in 1998. At December 31,
1999, short-term investments totaled $16,425,000. These funds are an important
source of the Company's liquidity. Federal funds are generally invested in an
earning capacity on an overnight basis. Securities purchased under agreements
to resell are invested on a one to thirty day period, depending on the terms of
each agreement.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing liabilities increased $35,843,620, or 57.8%, to
$102,468,236 in 1999, from $64,942,616 in 1998. Average interest-bearing
deposits increased $33,872,408, or 63.2%, to $87,437,455 in 1999, from
$53,581,047 in 1998. These increases resulted from increases in most categories
of interest-bearing liabilities, primarily as a result of the continued growth
of the Company.
Deposits. Average total deposits increased $39,814,804, or 67.7%, to
$98,617,427 during 1999, from $58,802,623 during 1998. At December 31, 1999,
total deposits were $107,826,073 compared to $77,739,725 a year earlier, an
increase of 38.7%.
14
<PAGE> 15
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES - CONTINUED
The following table sets forth the deposits of the Company by category at the
dates indicated.
DEPOSITS
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------------- -------------------
Percent Percent
(Dollars in thousands) of of
Amount Deposits Amount Deposits
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 6,555 6.08% $ 6,158 7.92%
NOW accounts 7,420 6.88 8,410 10.82
Money market accounts 27,240 25.26 14,810 19.05
Savings accounts 4,427 4.11 3,176 4.08
Time deposits less than $100,000 32,749 30.37 27,062 34.81
Time deposits of $100,000 or over 29,435 27.30 18,124 23.32
---------- ------- -------- ------
Total deposits $ 107,826 100.00% $ 77,740 100.00%
========== ======= ======== ======
</TABLE>
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits increased $18,775,092 in 1999
due to the continued growth of the Company.
Deposits, and particularly core deposits, have been the Company's primary
source of funding and have enabled the Company to meet successfully both its
short-term and long-term liquidity needs. Management anticipates that such
deposits will continue to be the Company's primary source of funding in the
future. The Company also purchases brokered deposits from time to time. At
December 31, 1999, certificates of deposit included brokered deposits totaling
$12,094,139. Ten of these accounts had current balances of $100,000 or more and
totaled $1,900,049 at December 31, 1999. All remaining accounts had balances of
$99,000. The Company's loan-to-deposit ratio was 110.1% at December 31, 1999,
and 90.0% at the end of 1998; and the ratio averaged 93.9% during 1999. The
maturity distribution of the Company's time deposits over $100,000 at December
31, 1999, is set forth in the following table:
Maturities of Certificates of Deposit of $100,000 or More
<TABLE>
<CAPTION>
After Three After Six
Within Through Through After
Three Six Twelve Twelve
(Dollars in thousands) Months Months Months Months Total
--------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Certificates of deposit of $100,000 or more $ 5,071 $ 8,848 $ 15,046 $ 470 $ 29,435
</TABLE>
Approximately 17.23% of the Company's time deposits over $100,000 had scheduled
maturities within three months, and 47.3% had maturities within six months.
Large certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding
for liquidity planning purposes than core deposits.
Borrowed Funds. Borrowed funds consist of short-term borrowings in the form of
federal funds purchased and securities sold under agreements to repurchase. The
Company also has advances from the Federal Home Loan Bank.
Average short-term borrowings were $13,223,781 in 1999, compared to $11,361,569
in 1998. At December 31, 1999, federal funds purchased totaled $5,000,000 and
securities sold under agreements to repurchase totaled $9,105,000. The average
balance in 1999 related mostly to securities sold under agreements to
repurchase with several customers. These agreements typically range from one to
thirty days. Federal funds purchased were obtained in December for liquidity
purposes relating to Year 2000 issues. Although management may from time to
time use short-term borrowings as a secondary funding source, core deposits
will continue to be the Company's primary funding source. Advances from the
Federal Home Loan Bank averaged $1,808,219 in 1999. At December 31, 1999,
advances from the Federal Home Loan Bank totaled $10,000,000. Of these
advances, $7,000,000 mature in 2009 and $3,000,000 mature in 2000. These
advances are used as a secondary funding source.
15
<PAGE> 16
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and the Bank's
capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios of Tier 1 and total
capital as a percentage of assets and off-balance-sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Tier 1 capital of the Company and the
Bank consists of common stockholders' equity, excluding the unrealized gain or
loss on securities available-for-sale, minus certain intangible assets. The
Company's and the Bank's Tier 2 capital consists of the allowance for loan
losses subject to certain limitations. Total capital for purposes of computing
the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based
capital.
The Company is also required to maintain capital at a minimum level based on
quarterly average assets, which is known as the leverage ratio. Only the
strongest banks are allowed to maintain capital at the minimum requirement of
3%. All others are subject to maintaining ratios 1% to 2% above the minimum.
The Company is required to maintain certain risk-based and leverage ratios. The
Company exceeded these regulatory capital ratios at December 31, 1999 and 1998
as set forth in the following table.
<TABLE>
<CAPTION>
ANALYSIS OF CAPITAL AND CAPITAL RATIOS The Company The Bank
(Dollars in thousands) 1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C> <C>
Tier 1 capital $ 16,939 $ 16,888 $ 15,532
Tier 2 capital 1,226 1,226 812
--------- --------- ---------
Total qualifying capital $ 18,165 $ 18,114 $ 16,344
========= ========= =========
Risk-adjusted total assets (including off-balance sheet exposures) $ 117,882 $ 117,872 $ 74,388
========= ========= =========
Tier 1 risk-based capital ratio 14.37% 14.33% 20.89%
Total risk-based capital ratio 15.41 15.37 21.99
Tier 1 leverage ratio 11.48 11.45 15.29
</TABLE>
LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES
Liquidity management involves monitoring the Company's sources and uses of
funds in order to meet its day-to-day cash flow requirements while maximizing
profits. Liquidity represents the ability of the Company to convert assets into
cash or cash equivalents without significant loss and to raise additional funds
by increasing liabilities. Without proper liquidity management, the Company
would not be able to perform the primary function of a financial intermediary
and would, therefore, not be able to meet the needs of the communities it
serves.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control at the time investment decisions are made.
However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control.
16
<PAGE> 17
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING AND FINANCIAL REPORTING ISSUES
In February 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards (SFAS) 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." SFAS 132 amends SFAS 87, 88, and
106 and revises employer's disclosures about pensions and other post-retirement
benefit plans. It does not change the measurement or recognition of those
plans. At December 31, 1999, the Company was not affected by this Statement.
In June 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair values. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Company generally does not
purchase derivative instruments or enter into hedging activities. This
Statement was effective for fiscal years beginning after June 15, 1999, but was
amended by SFAS 137.
The Company was not affected by Financial Accounting Standards Board Statements
134, 135 or 136.
In 1999, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." As stated, this Statement delays the effective date for the
implementation of SFAS 133. This Statement is effective for fiscal years
beginning after June 15, 2000.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company are primarily monetary in nature. Therefore,
interest rates have a more significant effect on the Company's performance than
do the effects of changes in the general rate of inflation and change in
prices. In addition, interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services. As
discussed previously, management seeks to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
INDUSTRY DEVELOPMENTS
On November 4, 1999, the U.S. Senate and House of Representatives each passed
the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton in
November 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new "financial holding company"
under the Bank Holding Company Act, which will permit holding companies to
engage in a statutorily provided list of financial activities, including
insurance and securities underwriting and agency activities, merchant banking,
and insurance company portfolio investment activities. The Act also authorizes
activities that are "complementary" to financial activities. The Act is
intended to grant to community banks certain powers as a matter of right that
larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act
may have the result of increasing the amount of competition that the Company
faces from larger institutions and other types of companies. In fact, it is not
possible to predict the full effect that the Act will have on the Company.
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would
affect the Company.
THE MERGERS OF BAILEY AND ANCHOR AND ANCHOR AND CAROLINA FIRST
As of December 31, 1998, Bailey owned 22.2% of the Company. In March 1999,
Bailey was acquired by Anchor Financial Corporation (Anchor). Upon the
acquisition, Anchor made a number of commitments to the Company, which include
not exercising or attempting to exercise influence over the Company and not to
acquire additional stock. In January 2000, Anchor executed a definitive
agreement to merge with Carolina First Corporation (Carolina First). The
commitments made by Anchor will transfer to Carolina First once this merger is
consummated.
17
<PAGE> 18
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE YEAR 2000
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts were concerned that on
January 1, 2000, some computers would not be able to interpret the new year
properly, causing computer malfunctions. Although this did not happen, some
experts remain concerned that computer malfunctions may occur on other key
dates during 2000, such as October 10, 2000.
In accordance with bank regulatory guidelines, we developed and executed a plan
to ensure that our computer and telecommunication systems do not have these
Year 2000 problems. We rely on third party vendors to supply our computer and
telecommunication systems and other office equipment, and to process our data
and account information. Because we commenced operations in 1996, we had the
ability to choose vendors which we believed to be ready for the Year 2000. Our
Year 2000 plan extends to all of our vendors, including our vendors for core
data processing system, ATM hardware, account origination software, telephone
systems, and suppliers of office equipment, such as copy and fax machines.
Under our plan, we reviewed the test results, assurances, and warranties of all
of these vendors, and we believe that all these systems are Year 2000
compliant. Our technology and processing vendors work with many other financial
institutions, all of which, like us, are required by their bank regulators to
be Year 2000 compliant. Because our systems are substantially similar to those
used in many other banks, we believe that the scrutiny imposed by our
regulators and the banking industry in general have significantly reduced the
Year 2000 related risks we might otherwise have faced.
We incurred approximately $200,000 in costs through December 31, 1999 to
implement our Year 2000 plan. The majority of these costs were associated with
purchasing upgrades for computer hardware and software. Under our plan, we will
continue to monitor the situation throughout 2000. We are executing this plan
under the supervision of our chief financial officer, with oversight from our
board of directors.
Our agreements with each of our primary vendors include contractual assurances
and warranties regarding Year 2000 compliance. Some of these warranties are
limited by disclaimers of liability which specifically exclude special,
incidental, indirect, and consequential damages. These limitations could limit
our ability to obtain recourse against a vendor who is not Year 2000 compliant
by excluding damages for things such as lost profits and customer lawsuits.
We have also evaluated our worst case scenario and developed contingency plans
in case Year 2000 issues do arise. In the worst case, our systems would be down
for a period of time and we would be required to complete all transactions and
keep all records manually. We will have all required forms and procedures in
place for manual processing, and believe we can do this for at least a week
without serious disruption of our business. We do not believe we will encounter
any issues that cannot be resolved within this period. Any affected systems
which cannot be fixed will be replaced with alternatives, although this is
unlikely to be necessary.
The Year 2000 issue may also negatively affect the business of our customers,
but to date we are not aware of any material Year 2000 issues affecting them.
We include Year 2000 readiness in our lending criteria to minimize risk.
However, this will not eliminate the issue, and any financial difficulties our
customers' experience caused by Year 2000 issues could impair their ability to
repay loans to the bank.
We did not have any significant Year 2000 problems on January 1, 2000, and we
do not expect to experience any significant Year 2000 problems. We also believe
that we will be able to continue to operate the business if one or more of our
vendors experience unanticipated Year 2000 problems.
18
<PAGE> 19
[LETTERHEAD]
POST OFFICE BOX 1769
COLUMBIA, SOUTH CAROLINA 29202
TELEPHONE (803) 252-3000
FAX (803)252-2226
WILLIAM E. TOURVILLE, CPA MEMBER AICPA SEC AND
HARRIET S. SIMPSON, CPA, CISA, CCP PRIVATE COMPANIES
R. JASON CASKEY, CPA PRACTICE SECTIONS
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RHBT Financial Corporation
Rock Hill, South Carolina
We have audited the accompanying consolidated balance sheets of RHBT Financial
Corporation (formerly Rock Hill Bank & Trust) as of December 31, 1999 and 1998
and the related consolidated statements of income, changes in stockholders'
equity and comprehensive income and cash flows for the years ended December 31,
1999, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RHBT Financial Corporation
(formerly Rock Hill Bank & Trust) as of December 31, 1999 and 1998 and the
results of their operations and cash flows for the years ended December 31,
1999, 1998 and 1997 in conformity with generally accepted accounting
principles.
/s/ Tourville, Simpson & Casky, L.L.P.
Tourville, Simpson, & Caskey, L.L.P.
Columbia, South Carolina
January 21, 2000
19
<PAGE> 20
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 3,680,173 $ 3,491,891
Federal funds sold and securities purchased
under agreements to resell 16,425,000 24,505,000
------------- -------------
20,105,173 27,996,891
Securities available-for-sale 7,832,559 7,414,072
Loans receivable 118,709,167 69,977,496
Less allowance for loan losses (1,226,442) (812,174)
------------- -------------
Loans, net 117,482,725 69,165,322
Premises and equipment, net 1,672,998 1,252,001
Accrued interest receivable 825,111 607,753
Other assets 1,529,614 625,682
------------- -------------
Total assets $ 149,448,180 $ 107,061,721
============= =============
LIABILITIES
Deposits:
Non-interest bearing transaction accounts $ 6,555,078 $ 6,157,776
Interest bearing transaction accounts 34,659,500 23,220,435
Savings 4,426,598 3,175,902
Time deposits $100,000 and over 29,434,939 18,123,683
Other time deposits 32,749,958 27,061,929
------------- -------------
107,826,073 77,739,725
Securities sold under agreements to repurchase 9,105,000 13,250,000
Federal funds purchased 5,000,000 --
Advances from the Federal Home Loan Bank 10,000,000 --
Accrued interest payable 483,114 316,981
Other liabilities 120,539 177,069
------------- -------------
Total liabilities 132,534,726 91,483,775
------------- -------------
Commitments and contingencies (Notes 5 and 15)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value at December 31, 1999
and 1998; 10,000,000 shares authorized,
1,720,813 and 1,720,313 shares issued and outstanding
at December 31, 1999 and 1998, respectively 17,208 13,763
Capital surplus 15,383,930 15,376,185
Retained earnings 1,564,652 180,077
Accumulated other comprehensive income (loss) (52,336) 7,921
------------- -------------
Total stockholders' equity 16,913,454 15,577,946
------------- -------------
Total liabilities and stockholders' equity $ 149,448,180 $ 107,061,721
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
20
<PAGE> 21
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
INTEREST INCOME 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Loans, including fees $ 8,559,099 $ 4,975,776 $ 2,347,311
Investment securities, taxable 443,593 371,516 438,192
Federal funds sold and securities purchased
under agreements to resell 1,171,709 986,611 212,885
----------- ----------- -----------
10,174,401 6,333,903 2,998,388
----------- ----------- -----------
INTEREST EXPENSE
Time deposits $100,000 and over 1,215,869 709,218 304,180
Other deposits 3,175,623 2,137,947 1,233,173
Securities sold under agreements to repurchase 572,756 550,588 19,212
Federal funds purchased 3,014 -- --
Advances from the Federal Home Loan Bank 89,711 -- --
----------- ----------- -----------
5,056,973 3,397,753 1,556,565
----------- ----------- -----------
NET INTEREST INCOME 5,117,428 2,936,150 1,441,823
Provision for loan losses 430,000 489,176 209,475
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,687,428 2,446,974 1,232,348
----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 228,017 140,490 82,774
Other service charges, commissions and fees 127,524 78,374 31,275
Income from fiduciary activities 205,882 111,604 32,404
Gain (loss) on sales of securities available-for-sale -- -- (474)
----------- ----------- -----------
561,423 330,468 145,979
----------- ----------- -----------
OTHER EXPENSE
Salaries and employee benefits 1,268,507 751,744 528,858
Occupancy expense 456,489 304,174 279,069
Advertising and marketing expense 125,756 28,032 65,829
Other operating expense 1,248,160 658,499 417,004
----------- ----------- -----------
3,098,912 1,742,449 1,290,760
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,149,939 1,034,993 87,567
Income tax expense 761,924 382,950 32,400
----------- ----------- -----------
NET INCOME $ 1,388,015 $ 652,043 $ 55,167
=========== =========== ===========
BASIC EARNINGS PER SHARE $ .81 $ .38 $ .03
DILUTED EARNINGS PER SHARE $ .79 $ .38 $ .03
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
21
<PAGE> 22
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Accumulated
Stock Amount Retained Other
Common ------------------------- Capital Earnings Comprehensive
Stock Class A Class B Surplus (Deficit) Income (loss) Total
---------- ------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1996 $ $ 2,940 $ 3,060 $ 5,968,025 $ (527,133) $ 26,757 $ 5,473,649
Net income 55,167 55,167
Other comprehensive
income, net of tax of $7,669 (13,059) (13,059)
---------
Comprehensive income 42,108
---------- ------------ ------------ ------------- ------------ ----------- ------------
BALANCE,
DECEMBER 31, 1997 2,940 3,060 5,968,025 (471,966) 13,698 5,515,757
Net income 652,043 652,043
Other comprehensive
income, net of tax of $3,393 (5,777) (5,777)
---------
Comprehensive income 646,266
---------
Conversion of stock 6,000 (2,940) (3,060)
Proceeds from issuance of
stock, net of direct costs 7,763 9,408,160 9,415,923
---------- ------------ ------------ ------------- ------------ ----------- ------------
BALANCE,
DECEMBER 31, 1998 13,763 15,376,185 180,077 7,921 15,577,946
Net income 1,388,015 1,388,015
Other comprehensive income,
net of tax of $35,390 (60,257) (60,257)
---------
Comprehensive income 1,327,758
---------
Five-for-four stock split
effected in the form of a
25% stock dividend
declared July 16, 1999 3,440 (3,440)
Exercise of stock options 5 7,745 7,750
------------ ------------ ------------ ------------- ------------ ----------- ------------
BALANCE,
DECEMBER 31, 1999 $ 17,208 $ -- $ -- $ 15,383,930 $ 1,564,652 $ (52,336) $ 16,913,454
============ ============ ============ ============= ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 1,388,015 $ 652,043 $ 55,167
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 430,000 489,176 209,475
Depreciation and amortization 179,260 90,968 73,411
Accretion and premium amortization 24,510 (10,623) (15,325)
Amortization of net loan fees and costs 52,654 36,925 19,858
Amortization of organizational costs 19,033 19,033 19,033
Deferred income tax provision (benefit) (122,731) (14,074) 29,385
Loss on securities available-for-sale -- -- 474
Gain on disposal of premises and equipment -- (6,983) --
Increase in interest receivable (217,358) (345,374) (55,019)
Increase in interest payable 166,133 99,413 119,547
(Increase) decrease in other assets (174,612) 120,472 22,150
Increase (decrease) in other liabilities (51,878) 9,574 6,816
------------ ------------ ------------
Net cash provided by operating activities 1,693,026 1,140,550 484,972
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (6,083,643) (10,403,158) (3,984,375)
Maturities and calls of securities available-for-sale 5,545,000 10,000,000 4,500,000
Proceeds from sales of securities available-for-sale -- -- 2,493,750
Net increase in loans made to customers (48,800,057) (34,248,121) (23,180,894)
Purchases of premises and equipment (600,257) (962,482) (12,687)
Proceeds from disposal of premises and equipment -- 11,500 --
Purchase of Community Financial Services, Inc. stock (251,885) -- (99,910)
Purchase of Federal Home Loan Bank stock (343,000) (157,000) --
------------ ------------ ------------
Net cash used by investing activities (50,533,842) (35,759,261) (20,284,116)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest
bearing transaction accounts and savings accounts 13,087,063 12,804,452 6,118,150
Net increase in certificates of deposit
and other time deposits 16,999,285 19,654,403 16,563,505
Net increase in securities sold under agreements
to repurchase 855,000 11,975,000 1,275,000
Advances from Federal Home Loan Bank 10,000,000 -- --
Issuance of common stock, net of direct costs -- 9,415,923 --
Exercise of stock options 7,750 -- --
------------ ------------ ------------
Net cash provided by financing activities 40,949,098 53,849,778 23,956,655
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,891,718) 19,231,067 4,157,511
CASH AND CASH EQUIVALENTS, BEGINNING 27,996,891 8,765,824 4,608,313
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 20,105,173 $ 27,996,891 $ 8,765,824
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 24
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION - RHBT Financial Corporation (the
Company), a bank holding company, and its subsidiary, Rock Hill Bank & Trust
(the Bank), provide banking services to domestic markets, principally in York
County, South Carolina. The consolidated financial statements include the
accounts of the parent company and its wholly-owned subsidiary after
elimination of all significant intercompany balances and transactions.
MANAGEMENT'S ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans, including
valuation allowances for impaired loans and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties. Management must also make estimates in determining the
estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's
activities are with customers located within York County in South Carolina. The
types of securities in which the Company invests are discussed in Note 3. The
types of lending that the Company engages in are discussed in Note 4. The
Company does not have any significant concentrations to any one industry or
customer.
SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale are carried at
amortized cost and adjusted to estimated fair value by recognizing the
aggregate unrealized gains or losses in a valuation account. Aggregate market
valuation adjustments are recorded in stockholders' equity net of deferred
income taxes. Reductions in market value considered by management to be other
than temporary are reported as a realized loss and a reduction in the cost
basis of the security. The adjusted cost basis of investments
available-for-sale is determined by specific identification and is used in
computing the gain or loss upon sale.
LOANS - Loans are stated at their unpaid principal balance. Interest income is
computed using the simple interest method and is recorded in the period earned.
When serious doubt exists as to the collectibility of a loan or when a loan
becomes 90 days past due as to principal or interest, interest income is
generally discontinued unless the estimated net realizable value of collateral
exceeds the principal balance and accrued interest. When interest accruals are
discontinued, income earned but not collected is reversed.
Impaired loans are measured based on the present value of discounted expected
cash flows. When it is determined that a loan is impaired, a direct charge to
bad debt expense is made for the difference between the net present value of
expected future cash flows based on the contractual rate and discount rate and
the Company's recorded investment in the related loan. The corresponding entry
is to a related valuation account. Interest is discontinued on impaired loans
when management determines that a borrower may be unable to meet payments as
they become due.
LOAN FEES AND COSTS - Loan origination and commitment fees and certain direct
loan origination costs (principally salaries and employee benefits) are
deferred and amortized to income over the contractual life of the related loans
or commitments, adjusted for prepayments, using the level yield method. Net
deferred fees and costs associated with the origination of home equity lines of
credit are amortized to income over the contractual life of the lending
agreement using the straight-line method.
24
<PAGE> 25
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ALLOWANCE FOR LOAN LOSSES - An allowance for possible loan losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. The allowance is based upon a continuing
review of past loan loss experience, current and future economic conditions
which may affect the borrowers' ability to pay and the underlying collateral
value of the loans. Loans which are deemed to be uncollectible are charged off
and deducted from the allowance. The provision for possible loan losses and
recoveries of loans previously charged off are added to the allowance.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method, based on the estimated useful lives for buildings of 40
years and furniture and equipment of 5 to 10 years. Leasehold improvements are
being amortized over 20 years. The cost of assets sold or otherwise disposed
of, and the related allowance for depreciation is eliminated from the accounts
and the resulting gains or losses are reflected in the income statement when
incurred. Maintenance and repairs are charged to current expense. The costs of
major renewals and improvements are capitalized.
COMMUNITY FINANCIAL SERVICES, INC. STOCK AND FEDERAL HOME LOAN BANK STOCK -
Other assets include the Company's investment in the stock of Community
Financial Services, Inc. and the Federal Home Loan Bank. These stocks are
carried at cost because no quoted market value and no ready market exist. At
December 31, 1999 and 1998, the investment in Community Financial Services,
Inc. stock was $351,794 and $99,910, respectively. At December 31, 1999 and
1998, the investment in Federal Home Loan Bank stock was $500,000 and $157,000,
respectively.
INCOME TAXES - Income taxes are the sum of amounts currently payable to taxing
authorities and the net changes in income taxes payable or refundable in future
years. Income taxes deferred to future years are determined utilizing a
liability approach. This method gives consideration to the future tax
consequences associated with differences between financial accounting and tax
bases of certain assets and liabilities which are principally the allowance for
loan losses and depreciable premises and equipment.
RETIREMENT PLAN - The Company has a contributory 401(K) plan covering
substantially all employees. Under the plan, participants are permitted to make
discretionary contributions up to 15% of annual compensation. The Company
contributed $.50 per one dollar up to 6% of the employee's annual compensation
in 1999. Expenses charged to earnings for this plan for the year ended December
31, 1999 were $13,874. The Company waived its option of matching employee
contributions in 1998 and 1997.
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows in the
financial statements, the Company considers certain highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents include amounts due from banks, federal funds
sold, and securities purchased under agreements to resell. Generally, federal
funds are sold for one day periods. Securities purchased under agreements to
resell mature from one to thirty days.
During 1999, 1998 and 1997, interest paid on deposits and other borrowings
totaled $4,890,840, $3,298,340 and $1,437,018, respectively.
During 1999 and 1998, income taxes paid totaled $1,090,420 and $261,200,
respectively. There were no income tax payments in 1997.
Changes in the valuation account of securities available-for-sale, including
the deferred tax effects, are considered noncash transactions for purposes of
the statement of cash flows and are presented in detail in the notes to the
financial statements.
In June 1998, the Company converted its Class A and Class B shares of common
stock into one class of stock known as common stock. This was considered a
noncash transaction for purposes of the statement of cash flows.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company enters into off-balance-sheet financial instruments consisting of
commitments to extend credit and letters of credit. These financial instruments
are recorded in the financial statements when they become payable by the
customer.
25
<PAGE> 26
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK COMPENSATION PLANS - Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, encourages all entities to
adopt a fair value based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock options
issued under the Company's stock option plan have no intrinsic value at the
grant date, and under Opinion No. 25 no compensation cost is recognized for
them. The Company has elected to continue with the accounting methodology in
Opinion No. 25 and, as a result, has provided pro forma disclosures of net
income and earnings per share and other disclosures, as if the fair value based
method of accounting had been applied.
EARNINGS PER COMMON SHARE - Basic earnings per share represents income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential common shares that may
be issued by the Company relate solely to outstanding stock options and are
determined using the treasury stock method.
COMPREHENSIVE INCOME - The Company adopted SFAS 130, Reporting Comprehensive
Income, as of January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains
and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income. The adoption of SFAS 130
had no effect on the Company's net income or stockholders' equity.
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Unrealized holding gains on
available-for-sale securities $ (95,647) $ (9,170) $ (20,254)
Reclassification adjustment for losses
(gains) realized in income -- -- (474)
--------- --------- ---------
Net unrealized gains (95,647) (9,170) (20,728)
Tax effect 35,390 3,393 7,669
--------- --------- ---------
Net-of-tax amount $ (60,257) $ (5,777) $ (13,059)
========= ========= =========
</TABLE>
NOTE 2 - CORPORATE REORGANIZATION
On April 15, 1999, the stockholders of Rock Hill Bank & Trust approved a plan
of corporate reorganization under which Rock Hill Bank & Trust became a wholly
owned subsidiary of RHBT Financial Corporation, which was organized at the
direction of the Company's management. The original authorized common stock of
RHBT Financial Corporation is 10,000,000 shares with a par value of $.01 per
share. Pursuant to the reorganization, the Company issued 1,376,250 shares of
its common stock in exchange for all of the 1,376,250 outstanding common shares
of the Bank. The effective date of the reorganization was June 4, 1999 and was
accounted for as if it were a pooling of interests. As a result, the financial
statements for the year ended December 31, 1999 are presented as if the
reorganization had occurred on January 1, 1999. The accompanying financial
statements for the years ended December 31, 1998 are unchanged from the amounts
previously reported by Rock Hill Bank & Trust, except for amounts affected by
the stock split.
26
<PAGE> 27
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CORPORATE REORGANIZATION - CONTINUED
The following is a summary of Rock Hill Bank & Trust's operations and
stockholders' equity for the period January 1, 1999 through June 3, 1999.
<TABLE>
<S> <C>
Interest income $ 3,742,734
Interest expense 1,842,282
--------------
Net interest income 1,900,452
Provision for loan losses 156,000
--------------
Net interest income after provision for loan losses 1,744,452
Other income 183,067
Other expense 1,396,604
--------------
Net income $ 530,915
==============
Stockholders' equity, January 1, 1999 $ 15,577,946
Net income for the period 530,915
Change in fair value during the period (30,008)
--------------
Stockholders' equity, June 3, 1999 $ 16,078,853
==============
</TABLE>
NOTE 3 - CASH AND DUE FROM BANKS
The Company is required by regulation to maintain average reserve balances with
the Federal Reserve Bank computed as a percentage of deposits. At December 31,
1999 and 1998, the required cash reserve balances were approximately $310,000
and $50,000, respectively. These requirements were satisfied by vault cash.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available-for-sale
at December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government agencies and corporations $ 7,915,633 $ -- $ (83,074) $ 7,832,559
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 1,498,568 $ 5,807 $ -- $ 1,504,375
U.S. Government agencies and corporations 5,902,931 6,766 -- 5,909,697
------------ ------------ ------------ ------------
$ 7,401,499 $ 12,573 $ -- $ 7,414,072
============ ============ ============ ============
</TABLE>
There were no sales of securities in 1999 or 1998.
27
<PAGE> 28
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT SECURITIES - CONTINUED
The following is a summary of maturities of securities available-for-sale as of
December 31, 1999. The amortized cost and estimated fair values are based on
the contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due within one year or less $ 3,915,633 $ 3,904,752
Due after one year but within five years 3,500,000 3,435,348
Due after five years but within ten years 500,000 492,459
------------ ------------
$ 7,915,633 $ 7,832,559
============ ============
</TABLE>
At December 31, 1999 and 1998, securities having an amortized cost of
$1,125,000 and $3,848,546 and an estimated market value of $1,108,085 and
$3,907,743, respectively, were pledged as collateral for securities sold under
agreements to repurchase and for other purposes as required and permitted by
law.
NOTE 5 - LOANS
Major classifications of loans receivable at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Real estate - construction $ 5,419,664 $ 1,297,979
Real estate - mortgage 57,996,758 39,106,586
Commercial and industrial 49,569,153 26,767,519
Consumer and other 5,723,592 2,805,412
-------------- --------------
Total gross loans $ 118,709,167 $ 69,977,496
============== ==============
</TABLE>
Included in commercial and industrial loans are $10,092,894 and $6,120,884 in
accounts receivable loans at December 31, 1999 and 1998, respectively. These
loans are secured by the accounts receivable of the loan customers of the
Company.
There were no loans in nonaccrual status and no loans ninety days or more past
due at December 31, 1999.
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether
all outstanding principal and interest are expected to be collected. Loans are
not considered impaired if a minimal delay occurs and all amounts due including
accrued interest at the contractual interest rate for the period of delay are
expected to be collected. At December 31, 1999, management has determined that
no impairment of loans existed that would have a material effect on the
Company's financial statements.
While management has determined that no impaired loans existed at December 31,
1999, it has identified loans to one borrower totaling $1,687,985 as
potentially impaired. Management plans to carefully monitor the collectibility
of these credits.
28
<PAGE> 29
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS - CONTINUED
Transactions in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 812,174 $ 333,984 $ 126,500
Provision charged to operations 430,000 489,176 209,475
Recoveries on loans previously charged off -- 66 3,722
Loans charged off (15,732) (11,052) (5,713)
----------- ----------- -----------
Balance, end of year $ 1,226,442 $ 812,174 $ 333,984
=========== =========== ===========
</TABLE>
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. A commitment involves, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. The Company's exposure to credit loss
in the event of non-performance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Letters of credit are conditional
commitments issued to guarantee a customer's performance to a third party and
have essentially the same credit risk as other lending facilities.
Collateral held for commitments to extend credit and standby letters of credit
varies but may include accounts receivable, inventory, property, plant,
equipment and income-producing commercial properties.
The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Commitments to extend credit $ 30,001,091 $ 15,148,465
Letters of credit 240,679 --
</TABLE>
Management is not aware of any significant concentrations of loans to classes
of borrowers or industries that would be affected similarly by economic
conditions. Although the Company's loan portfolio is diversified, a substantial
portion of its borrowers' ability to honor the terms of their loans is
dependent on the economic conditions in York County and surrounding areas.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Buildings $ 633,533 $ --
Leasehold improvements 35,268 11,138
Furniture and equipment 1,369,281 725,250
Construction in progress -- 701,437
----------- -----------
2,038,082 1,437,825
Less, accumulated depreciation (365,084) (185,824)
----------- -----------
Premises and equipment, net $ 1,672,998 $ 1,252,001
=========== ===========
</TABLE>
No material commitments existed at December 31, 1999 to construct or purchase
additional premises and equipment.
29
<PAGE> 30
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<S> <C>
2000 $ 59,112,782
2001 2,820,438
2002 251,677
------------
$ 62,184,897
============
</TABLE>
At December 31, 1999 certificates of deposit included brokered deposits
totaling $12,094,139. Ten of these accounts had current balances of $100,000 or
more and totaled $1,900,049 at December 31, 1999. All remaining accounts have
balances of $99,000. The scheduled maturities of these deposits are as follows:
2000 - $11,205,120, and 2001 - $889,019.
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 1999 mature on a
one to thirty day basis. Information concerning securities sold under
agreements to repurchase at December 31, 1999 is summarized as follows:
<TABLE>
<S> <C>
Average balance during the year $ 13,223,192
Average interest rate during the year 4.33%
Maximum month-end balance during the year $ 14,000,000
</TABLE>
Under the terms of the agreements, the Company sells an interest in securities
issued by the United States Treasury and Government Agencies, and the Company
agrees to repurchase the same securities the following business day. The
securities sold under these agreements are the identical securities on the
Company's balance sheet captioned as securities purchased under agreements to
resell. As of December 31, 1999, the amortized cost and market value of the
securities held by the third-party for the underlying agreements were
$9,105,000 and $9,293,642, respectively.
NOTE 9 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank were $10,000,000 at December 31, 1999.
Of these advances, $7,000,000 is scheduled to mature on September 30, 2009 and
bears a fixed rate of interest at 5.07%, and $3,000,000 is a daily rate credit
scheduled to mature on December 29, 2000 and bears a variable rate of interest
of 4.55%.
As collateral, the Company has pledged certain one to four family residential
loans. One to four family residential mortgage loans totaled $23,720,030 at
December 31, 1999. In addition, the Company's Federal Home Loan Bank Stock is
pledged to secure the borrowings.
NOTE 10 - STOCKHOLDERS' EQUITY
As discussed in Note 2, the Company acquired all of the common stock of the
Bank on June 4, 1999. The par value of the Company's common stock is $.01,
compared to $1.00 for that of the Bank.
On July 16, 1999, the Company's Board of Directors declared a five-for-four
stock split effected in the form of a 25% stock dividend payable on September
10, 1999 to stockholders of record on August 1, 1999. This resulted in the
issuance of 344,063 additional shares of common stock.
All per share and weighted average share amounts in the accompanying financial
statements have been restated to reflect this stock split.
The stockholders of the Company voted on April 16, 1998, to amend the Articles
of Incorporation to eliminate the two classes of common stock known as Class A
and Class B. A new class of common stock known simply as common stock was
created, and the number of authorized shares was increased to 10,000,000. Prior
to this vote, Bailey Financial Corporation (Bailey) owned all of the Class B
shares or 51% of the total outstanding common stock. On June 19, 1998, the
change in classes of stock became effective. Bailey exchanged its Class B
shares for common shares and terminated its right of first refusal agreements
and its right to elect separate directors.
30
<PAGE> 31
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
On July 28, 1998, the Company sold, through an underwritten public offering,
675,000 shares of its common stock at a public offering price of $13.25 per
share. On August 3, 1998, an additional 101,250 common shares were sold, also
at a public offering price of $13.25 per share, pursuant to an underwriter's
over-allotment provision. The Company temporarily invested the $9,415,923 net
proceeds from the offering in federal funds sold to other institutions and
investment securities. The Company has also used the net proceeds to fund loan
growth and to purchase and construct additional branch locations.
As a result of the secondary stock offering, Bailey's investment in the Company
decreased to 22.2% effective August 3, 1998. In September 1998, Bailey entered
into a definitive agreement with Anchor Financial Corporation (Anchor) to merge
and this merger was completed in March 1999. Anchor owned 22.2% of the
Company's common stock but agreed not to exercise or attempt to exercise
influence over the Company and not to acquire additional stock. In January
2000, Anchor entered into a definitive agreement with Carolina First
Corporation (Carolina First) to merge. This proposed merger is expected to be
voted on by the shareholders of Anchor and Carolina First during the second
quarter of 2000. The percentage and terms of ownership will remain the same for
Carolina First.
NOTE 11 - OTHER OPERATING EXPENSE
Other operating expense for the year ended December 31, 1999, 1998 and 1997,
are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Professional fees $ 69,258 $ 27,481 $ 39,364
Telephone 104,001 60,594 39,117
Office supplies, forms and stationery 138,765 89,476 57,613
Data processing 255,670 135,443 57,501
Credit card expenses 60,393 42,490 19,203
Postage and freight 52,505 34,107 18,395
Other 567,568 268,908 185,811
---------- -------- --------
$1,248,160 $658,499 $417,004
========== ======== ========
</TABLE>
NOTE 12 - INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Currently payable
Federal $ 825,394 $370,405 $ --
State 73,999 29,581 --
---------- -------- --------
899,393 399,986 --
---------- -------- --------
Deferred income taxes
Federal (153,865) (20,984) 20,594
State (18,994) 555 4,100
---------- -------- --------
(172,859) (20,429) 24,694
---------- -------- --------
Income tax expense $ 726,534 $379,557 $ 24,694
========== ======== ========
Income tax expense is allocated as follows:
To continuing operations $ 761,924 $382,950 $ 32,400
To stockholders' equity (35,390) (3,393) (7,706)
---------- -------- --------
$ 726,534 $379,557 $ 24,694
========== ======== ========
</TABLE>
31
<PAGE> 32
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES - CONTINUED
The gross amounts of deferred tax assets and deferred tax liabilities as of
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 407,677 $263,886 $ 69,722
Net operating loss carryforward -- -- 165,008
Organization costs 34,331 38,826 50,614
Loans fees and costs 43,904 19,429 --
Available-for-sale securities 30,737 -- --
Other -- -- 2,074
---------- -------- --------
Total deferred tax assets 516,649 322,141 287,418
---------- -------- --------
Deferred tax liabilities:
Accumulated depreciation 76,886 47,417 24,414
Available-for-sale securities -- 4,652 8,045
Loan fees and costs -- -- 2,345
---------- -------- --------
Total deferred tax liabilities 76,886 52,069 34,813
---------- -------- --------
Net deferred tax asset $ 439,763 $270,072 $252,605
========== ======== ========
</TABLE>
Deferred tax assets represent the future tax benefit of deductible differences
and, if it is more likely than not that a tax asset will not be realized, a
valuation allowance is required to reduce the recorded deferred tax assets to
net realizable value. Management has determined that it is more likely than not
that the entire deferred tax asset at December 31, 1999 will be realized, and
accordingly, has not established a valuation allowance.
A reconciliation between the income tax expense and the amount computed by
applying the federal statutory rate of 34% to income before income taxes for
the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Tax expense at statutory rate $ 730,980 $351,898 $ 29,773
State income tax, net of federal
income tax benefit 29,846 10,246 4,100
Other, net 1,098 20,806 (1,473)
---------- -------- --------
$ 761,924 $382,950 $ 32,400
========== ======== ========
</TABLE>
NOTE 13 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
South Carolina banking regulations restrict the amount of dividends that can be
paid to shareholders. All of the Bank's dividends to RHBT Financial Corporation
are payable only from the undivided profits of the Bank. At December 31, 1999,
the Bank's undivided profits were $1,525,218. The Bank is authorized to pay
cash dividends up to 100% of net income in any calender year without obtaining
the prior approval of the Commissioner of Banking provided that the Bank
received a composite rating of one or two at the last Federal or State
regulatory examination. Under Federal Reserve Board regulations, the amounts of
loans or advances from the Bank to the parent company are also restricted.
32
<PAGE> 33
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - LEASES
The Company leases its main office building under an operating lease from the
Rock Hill Telephone Company. (See also Note 14). Rental expense for the years
ended December 31, 1999, 1998 and 1997 was $136,200, $136,200, and $136,200,
respectively. The initial lease term expires on May 12, 2001. The Company has
three successive options to renew the lease for a period of five years each, at
the then fair rental value of the property. There is no option to purchase the
building at the end of the lease. Currently, the monthly rental payment is
approximately $11,350. Future rental commitments for the years 2001 through
2004 are based on the assumption that at the end of the initial lease term, the
lease will be renewed under the same terms as the initial lease.
The Company leases the land for the Ebenezer office from a director. This
lease, which commenced on March 1, 1998, is for a term of twenty-five years and
expires on February 28, 2023. The Company has two successive options to renew
the lease for a period of five years each, at a rental rate to be determined by
both parties at that time. There is no option to purchase the land at the end
of the lease. Currently, the monthly rental payment is $1,628. Rental expense
for the years ended December 31, 1999, 1998 and 1997 was $19,536, $18,276 and
$5,000, respectively.
The Company also leases its Fort Mill/Tega Cay office building under an
operating lease from a third party. The February 8, 1999 lease has a
commencement date of July 1, 1999 and a term of fifteen years, expiring on
July 1, 2014. The Company has two successive options to renew the lease for a
period of five years each at the then fair rental value of the property. The
Company has the right of first refusal on the building. Currently, the monthly
rental payment is $8,094. Rental expense for the year ended December 31, 1999
was $40,470.
The estimated future minimum rental commitments under these noncancelable
leases for the next five years as of December 31, 1999 are:
<TABLE>
<S> <C>
2000 $ 252,864
2001 252,864
2002 252,864
2003 252,864
2004 252,864
------------
$ 1,264,320
============
</TABLE>
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain parties (principally certain directors and executive officers of the
Company, their immediate families and business interests) were loan customers
of and had other transactions in the normal course of business with the
Company. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. As of December 31, 1999 and 1998 the Company had
related party loans totaling $90,776 and $95,341, respectively. During 1999,
$58,000 of new loans were made to related parties and repayments totaled
$62,565.
As discussed in Note 13, the Company is leasing its main office building from
Rock Hill Telephone Company (the Telephone Company). In addition, the Telephone
Company sold communications equipment and provided telephone services to the
Company. Certain directors of the Company are also principal officers and
controlling shareholders of the Telephone Company. The amounts paid to the
Telephone Company for equipment and services for the years ended December 31,
1999, 1998 and 1997 were $190,122, $184,002, and $171,855, respectively.
33
<PAGE> 34
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS - CONTINUED
As discussed in Note 13, the Company is leasing the land on which the Ebenezer
office is located from a director. The amount paid to this director under the
operating lease was $19,536, $18,276, and $5,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
Data processing, trust data processing, and other various services for the
Company were being provided by Anchor (who acquired Bailey in March 1999).
Anchor Financial Corporation owned 22.2% of the Company's common stock at
December 31, 1999. As discussed in Note 10, Bailey owned 22.2% of the Company's
common stock at December 31, 1998 and 51% of the common stock of the Company at
December 31, 1997. In September 1999, the Company contracted with an
independent third party to provide data processing. Trust data processing was
still provided by Anchor throughout 1999. The amount paid to Bailey, and its
successor Anchor, for the years ended December 31, 1999, 1998 and 1997 for all
services was $137,682, $134,295 and $52,016, respectively.
The Company has repurchase agreements with several customers affiliated with
Rock Hill Telephone Company totaling $3,825,000 and $3,820,000 at December 31,
1999 and 1998, respectively. As stated, certain directors of the Company are
also principal officers and controlling shareholders of the Telephone Company.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may, from time to time, become
a party to legal claims and disputes. At December 31, 1999, management and
legal counsel are not aware of any pending or threatened litigation or
unasserted claims or assessments that could result in losses, if any, that
would be material to the financial statements.
NOTE 17 - REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's and Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios of Tier 1 and total
capital as a percentage of assets and off-balance-sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Tier 1 capital consists of common
stockholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of
the allowance for loan losses subject to certain limitations. Total regulatory
minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
The Company and the Bank are also required to maintain capital at a minimum
level based on quarterly average assets, which is known as the leverage ratio.
Only the strongest Banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above
the minimum.
As of December 31, 1999, the most recent notification from the Bank's primary
regulator categorized it as well-capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events that management
believes have changed the Company's or Bank's category.
34
<PAGE> 35
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - REGULATORY MATTERS - CONTINUED
The following table summarizes the capital amounts and ratios and the
regulatory minimum requirements for the Company and the Bank at December 31,
1999 and for the Bank at December 31, 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
THE COMPANY
Total capital
(to risk weighted assets) $18,165,267 15.41% $9,430,571 8.0% N/A --
Tier 1 capital
(to risk weighted assets) 16,938,825 14.37 4,715,286 4.0 N/A --
Tier 1 capital
(to average assets) 16,938,825 11.48 5,901,418 4.0 N/A --
THE BANK
Total capital
(to risk weighted assets) $18,114,643 15.37% $9,427,632 8.0% $11,784,540 10.0%
Tier 1 capital
(to risk weighted assets) 16,888,201 14.33 4,713,816 4.0 7,070,724 6.0
Tier 1 capital
(to average assets) 16,888,201 11.45 5,901,018 4.0 7,376,272 5.0
DECEMBER 31, 1998
THE BANK
Total capital
(to risk weighted assets) $16,344,122 21.99% $5,947,324 8.0% $ 7,434,155 10.0%
Tier 1 capital
(to risk weighted assets) 15,531,948 20.89 2,973,662 4.0 4,460,493 6.0
Tier 1 capital
(to average assets) 15,531,948 15.29 4,063,534 4.0 5,079,418 5.0
</TABLE>
35
<PAGE> 36
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - STOCK COMPENSATION PLAN
At the annual stockholders' meeting on April 15, 1999, the shareholders
approved the Company's 1999 Stock Incentive Plan which provides for the
granting of stock options and restricted stock of up to 247,725 shares,
adjusted for stock dividends of the Company's common stock, to officers,
employees, directors, advisers and consultants of the Company. The Company may
grant awards for a term of up to ten years from the effective date of grant.
The per-share exercise price will be determined by the Board of Directors, but
for incentive stock options the price will not be less than 100% of the fair
market value of a share of common stock on the date the option is granted. The
per-share exercise price of non-incentive stock options will not be less than
85% of the fair market value of a share on the effective date of grant. These
options each have a seven year vesting term, vesting 20% upon the date of grant
and 80% ratably over the remainder of the term.
As discussed in Note 1, the Company will continue to apply APB Opinion 25 and
related Interpretations in accounting for its stock compensation plan.
Accordingly, no compensation cost has been recognized for any options issued by
the Company. Had compensation cost for the Company's Stock Incentive Plan been
determined based on the fair value at the grant dates for awards under that
plan consistent with the method of FASB Statement 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Net Income:
As reported $ 1,388,015
Pro forma 1,019,036
Basic earnings per share:
As reported $ .81
Pro forma .59
Diluted earnings per share:
As reported $ .79
Pro forma .58
</TABLE>
In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black- Scholes option pricing model
with the following weighted-average assumptions used for grants in 1999:
dividend yield of 0 percent for the year; expected volatility of 21 percent;
risk-free interest rates of 5.23 percent; and expected life of 10 years.
The weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1999 is $5.98.
A summary of the status of the Company's stock option plan as of December 31,
1999 dates is presented below:
<TABLE>
<CAPTION>
1999
--------------------------------
Weighted-Average
Shares Exercise Price
------------ ----------------
<S> <C> <C>
Outstanding, at beginning of year -- $
Granted 207,658 12.80
Exercised 500 12.40
Canceled --
-----------
Outstanding, at end of year 207,158 12.80
===========
</TABLE>
Options exercisable at December 31, 1999 were 41,432.
At December 31, 1999 the outstanding stock options that were exercisable had a
weighted average remaining life of 9.20 years. All stock options that have been
issued by the Company have an average exercisable price of $12.80.
36
<PAGE> 37
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - UNUSED LINES OF CREDIT
As of December 31, 1999, the Company had unused lines of credit to purchase
federal funds from unrelated banks totaling $22,600,000. These lines of credit
are available on a one to fourteen day basis for general corporate purposes.
NOTE 20 - EARNINGS PER SHARE
Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding. Net income per share - diluted is
computed by dividing net income by the weighted average number of common shares
outstanding and dilutive common share equivalents using the treasury stock
method. Dilutive common share equivalents include common shares issuable upon
exercise of outstanding stock options.
<TABLE>
<CAPTION>
1999
------------
<S> <C>
NET INCOME PER SHARE - BASIC COMPUTATION:
Net income available to common shareholders $ 1,388,015
============
Average common shares outstanding - basic 1,720,527
============
Net income per share - basic $ .81
============
NET INCOME PER SHARE - DILUTED COMPUTATION:
Net income available to common shareholders $ 1,388,015
============
Average common shares outstanding - basic 1,720,527
Incremental shares from assumed conversions:
Stock options 26,780
------------
Average common shares outstanding - diluted 1,747,307
------------
Net income per share - diluted $ .79
============
</TABLE>
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Cash and Due from Banks - The carrying amount is a reasonable estimate of fair
value.
Federal Funds Sold and Securities Purchased Under Agreements to Resell -
Federal funds sold and securities purchased under agreements to resell are for
a term of one day and the carrying amount approximates the fair value.
Securities Available-for-Sale - The fair values equal the carrying amount which
is the quoted market price. If quoted market prices are not available, fair
values are based on quoted market prices of comparable securities.
37
<PAGE> 38
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Loans - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk and credit
card receivables, fair values are based on the carrying amounts. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market
accounts is the amount payable on demand at the reporting date. The fair values
of certificates of deposit are estimated using a discounted cash flow
calculation that applies current interest rates to a schedule of aggregated
expected maturities.
Securities Sold Under Agreements to Repurchase and Federal Funds Purchased -
The carrying amount is a reasonable estimate of fair value because these
instruments typically have terms of one to fourteen days.
Advances from the Federal Home Loan Bank - The carrying amounts of variable
rate borrowings are reasonable estimates of fair value because they can be
repriced frequently. The fair values of fixed rate borrowings are estimated
using a discounted cash flow calculation that applies the Company's current
borrowing rate from the FHLB.
Accrued Interest Receivable and Payable - The carrying value of these
instruments is a reasonable estimate of fair value.
Off-Balance Sheet Financial Instruments - The carrying amount for loan
commitments which are off-balance sheet financial instruments approximates the
fair value since the obligations are typically based on current market rates.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 3,680,173 $ 3,680,173 $ 3,491,891 $ 3,491,891
Federal funds sold and securities
purchased under agreements to resell 16,425,000 16,425,000 24,505,000 24,505,000
Securities available-for-sale 7,832,559 7,832,559 7,414,072 7,414,072
Loans 118,709,167 118,492,712 69,977,496 70,081,454
Allowance for loan losses (1,226,442) (1,226,442) (812,174) (812,174)
Accrued interest receivable 825,111 825,111 607,753 607,753
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing
transaction, and savings accounts 45,641,176 45,641,176 $ 32,554,113 $ 32,554,113
Certificates of deposit and other time deposits 62,184,897 62,586,217 45,185,612 45,475,428
Accrued interest payable 483,114 483,114 316,981 316,981
Securities sold under agreements to repurchase 9,105,000 9,105,000 13,250,000 13,250,000
Federal funds purchased 5,000,000 5,000,000 -- --
Advances from the Federal Home Loan Bank 10,000,000 9,313,818 -- --
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit $ 30,001,091 $ 30,001,091 $ 15,148,465 $ 15,148,465
Letters of credit 240,679 240,679 -- --
</TABLE>
38
<PAGE> 39
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - RHBT FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Presented below are the condensed financial statements for RHBT Financial
Corporation (Parent Company Only).
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
ASSETS
Cash $ 107,750
Investment in banking subsidiary 16,862,829
Other assets 36,472
-------------
Total assets $ 17,007,051
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to banking subsidiary $ 93,598
Stockholders' equity 16,913,453
-------------
Total liabilities and stockholders' equity $ 17,007,051
=============
</TABLE>
STATEMENT OF INCOME
FOR THE PERIOD JUNE 4, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
INCOME
Dividends from banking subsidiary $ 100,000
EXPENSES
Other expenses 93,598
-------------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY 6,402
Income tax benefit 36,472
Equity in undistributed earnings
of banking subsidiary 1,345,141
-------------
NET INCOME $ 1,388,015
=============
</TABLE>
39
<PAGE> 40
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - RHBT FINANCIAL CORPORATION (PARENT COMPANY ONLY) - CONTINUED
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 4, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,388,015
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings of
banking subsidiary (1,345,141)
Increase in other assets (36,472)
Increase in other liabilities 93,598
------------
Net cash provided by operating activities 100,000
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 7,750
------------
Net cash provided by financing activities 7,750
------------
INCREASE IN CASH 107,750
CASH, BEGINNING --
------------
CASH, ENDING $ 107,750
============
</TABLE>
40
<PAGE> 41
RHBT FINANCIAL CORPORATION
(FORMERLY ROCK HILL BANK & TRUST)
CORPORATE DATA
ANNUAL MEETING:
The Annual Meeting of Stockholders of RHBT Financial Corporation will be held
at 5:30 p.m. on Thursday, April 27, 2000 at the Rock Hill Country Club, 600
Country Club Drive, Rock Hill, South Carolina.
<TABLE>
<CAPTION>
CORPORATE OFFICE: GENERAL COUNSEL:
<S> <C>
315 East Main Street Nelson Mullins Riley & Scarborough, L.L.P.
Rock Hill, South Carolina 29730 First Union Plaza, Suite 1400
Phone (803) 324-2500 999 Peachtree Street, NE
Fax (803) 324-2599 Atlanta, Georgia, 30309
STOCK TRANSFER DEPARTMENT: INDEPENDENT AUDITORS:
First Citizens Bank & Trust Company of SC Tourville, Simpson & Caskey, L.L.P.
P.O. Box 29 500 Taylor Street, Suite 101
Columbia, South Carolina 29202 P.O. Box 1769
Columbia, S.C. 29202
</TABLE>
STOCK INFORMATION:
The Common Stock of RHBT Financial Corporation is listed on The Nasdaq Stock
Market and is traded under the symbol "RHBT." The stock was traded on the
Over-The Counter Bulletin Board under the same symbol from July 22, 1998
through November 5, 1999. Market makers of the Company's stock include: Edgar
M. Norris & Co. Inc.; Trident Securities; Hill, Thompson, and Magid & Co. There
were approximately 1,100 shareholders as of December 31, 1999.
FORM 10-K
The Company will furnish upon request, free of charge, copies of the Annual
Report and the Company's Report to the Securities & Exchange Commission (Form
10-K) by contacting Patricia M. Stone, Chief Financial Officer, RHBT Financial
Corporation, P.O. Box 12037, Rock Hill, South Carolina 29731.
This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT
furnished pursuant to Part 350 of the Federal Deposit Insurance Corporations
Rules and Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR
ACCURACY OR RELEVANCE BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
41
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Rock Hill Bank & Trust
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RHBT FINANCIAL CORPORATION FOR THE 12-MONTHS ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,680,173
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,425,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,832,559
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 118,709,167
<ALLOWANCE> 1,226,442
<TOTAL-ASSETS> 149,448,180
<DEPOSITS> 107,826,073
<SHORT-TERM> 9,105,000
<LIABILITIES-OTHER> 603,653
<LONG-TERM> 0
0
0
<COMMON> 17,208
<OTHER-SE> 16,896,246
<TOTAL-LIABILITIES-AND-EQUITY> 149,448,180
<INTEREST-LOAN> 8,559,099
<INTEREST-INVEST> 443,593
<INTEREST-OTHER> 1,171,709
<INTEREST-TOTAL> 10,174,401
<INTEREST-DEPOSIT> 4,391,492
<INTEREST-EXPENSE> 5,056,973
<INTEREST-INCOME-NET> 5,117,428
<LOAN-LOSSES> 430,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,098,912
<INCOME-PRETAX> 2,149,939
<INCOME-PRE-EXTRAORDINARY> 2,149,939
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,388,015
<EPS-BASIC> 0.81
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 4.09
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,687,985
<ALLOWANCE-OPEN> 812,174
<CHARGE-OFFS> 15,732
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,226,442
<ALLOWANCE-DOMESTIC> 1,226,442
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
