<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[_] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended June 30, 1996
-------------
Commission file number 0-24476
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South Carolina Community Bancshares, Inc.
-------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 22-0999615
--------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
110 S. Congress Street
Winnsboro, South Carolina 29180
--------------------------------- -----------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Telephone Number: (803) 635-5536
--------------
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No _______
-----
Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common
Stock
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained to the
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 nonaffiliates of the
registrant, computed by reference to the average of the closing bid and ask
price of such stock on the NASDAQ Small-cap Market on September 24, 1996 was
approximately $9,116,016.
The Registrant's revenues for the fiscal year ended June 30, 1996 were
$3,441,000.
The number of shares outstanding of the registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of September 24, 1996
was 735,410.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-KSB:
I. Portions of the South Carolina Community Bancshares, Inc. Proxy Statement
for the 1996 Annual Meeting of Shareholders are incorporated by reference
into certain items of Part III.
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I..................................................................... 1
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 22
Item 3. Legal Proceedings................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.............. 22
PART II.................................................................... 22
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.......................................................... 22
Item 5-A. Selected Financial Data.......................................... 22
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 24
Item 7. Financial Statements............................................. 35
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 63
PART III................................................................... 63
Item 9. Directors and Officers of the Registrant......................... 63
Item 10. Executive Compensation........................................... 63
Item 11. Security Ownership of Certain Beneficial Owners and Management... 63
Item 12. Certain Relationships and Related Transactions................... 64
Item 13. Exhibits and Reports on Form 8-K................................. 64
(a) Exhibits Required by Securities and Exchange Commission
Regulation S-B.............................................. 64
(b) Reports on Form 8-KSB....................................... 64
</TABLE>
(i)
<PAGE>
PART I
ITEM 1. BUSINESS
- ------------------
The Company was organized in March, 1994 at the direction of the Board of
Directors of Community Federal Savings and Loan Association (the "Association")
for the purpose of acquiring all of the capital stock to be issued by the
Association in the Conversion of the Association from the mutual to the stock
form of organization. The Company received approval from the OTS to become a
savings and loan holding company and as such is subject to regulation by the
OTS. The Conversion was completed as of July 7, 1994, the Company issued 780,275
shares of Common Stock, and retained approximately fifty-percent of the net cash
proceeds of the offering, or $3.6 million (the balance of the proceeds was
transferred to the Association in exchange for the capital stock of the
Association). In connection with the Conversion, the Company loaned
approximately $624,000 to the Community Federal Savings and Loan Association
Employee Stock Ownership Plan ("ESOP") to enable the ESOP to purchase 62,422
shares of the Company's Common Stock. The primary business activity of the
Company consists of the operations of its wholly-owned subsidiary, the
Association.
The Company is a savings and loan holding company and the owner of all of
the issued and outstanding shares of capital stock of the Association. At June
30, 1996 the assets of the Company consisted of its ownership of the capital
stock of the Association, the loan to the ESOP, $400,000 of interest earning
deposits, and $1.4 million of investment securities. Community Federal Savings
and Loan Association is a federally chartered savings and loan association that
conducts its operations from a single facility located in Winnsboro, South
Carolina. The Association's deposits are insured by the FDIC. The Association
was chartered originally in 1934. The Association is a member of the FHLB of
Atlanta. At June 30, 1996, the Company had total assets of $44.2 million, total
deposits of $31.3 million, and stockholders' equity of $12.3 million.
On May 2, 1996, the Company entered into an agreement with First Palmetto
Savings Bank ("Seller") to purchase certain assets and assume certain deposits
and other liabilities associated with the operations of the Seller's branch
office in Winnsboro, South Carolina. The assets to be purchased will consist of
branch loans, cash on hand, premises and equipment, safe deposit contracts and
records. It is anticipated that total assets acquired will be approximately $4
million based on preliminary information. The liabilities assumed will consist
of branch deposits and assumption of assignable leases and operating contracts.
The closing of the transaction contemplated by the Agreement shall take
place at an agreed upon time within thirty (30) days following the first date on
which both regulatory approvals and consents have been received and all waiting
periods required by law and regulation have expired. the purchase price will be
established based on the assets and liabilities outlined in the Agreement at or
near the closing date. The anticipated closing of the transaction is second
quarter of fiscal 1997.
<PAGE>
The Association is a community-oriented savings institution that is
primarily engaged in the business of attracting deposits from the general public
in the Association's market area, and investing such funds in fixed-rate
mortgage loans secured by one- to four-family residences, and, to a lesser
extent, investment securities. At June 30, 1996, mortgage loans secured by one-
to four-family residential real estate totalled $31.4 million, or 91.6%, of the
total loan portfolio, loans secured by commercial and other property totalled
$1.5 million, or 4.3%, of the total loan portfolio, loans secured by unimproved
land totalled $1.1 million, or 3.3%, of the total loan portfolio, and passbook
loans totalled $282,000, or .8%, of the total loan portfolio. The Company also
invests in United States Government and agency obligations, which investments
totalled $4.7 million, or 10.8%, of total assets at June 30, 1996, and interest-
earning deposits in other financial institutions, which totalled $4.2 million,
or 9.4%, of total assets at June 30, 1996.
The Association's principal sources of funds are deposits and principal and
interest payments on loans and investment securities. Principal sources of
income are interest received from loans and investment securities. The
Association's principal expense is interest paid on deposits, compensation and
related costs, SAIF insurance premiums, and other noninterest expenses.
LENDING
Loan Portfolio Composition. The principal components of the loan portfolio
are fixed-rate conventional first mortgage loans secured by one- to four-family
residential real estate, and, to a much lesser extent loans collateralized by
unimproved land and commercial and other real estate, and passbook loans. At
June 30, 1996, total loans receivable were $34.3 million, of which $31.4
million, or 91.6% were fixed-rate one- to four-family residential real estate
mortgage loans, $1.1 million, or 3.3%, were unimproved land loans, $1.5 million,
or 4.3%, were commercial and other real estate loans, and $282,000, or .8%, were
passbook loans.
2
<PAGE>
The following table sets forth selected data relating to the composition of
the mortgage and other loan portfolios in dollar amounts and in percentages at
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1994 1995 1996
--------------------------------- -------- --------
Amount Percent Amount Percent Amount Percent
------------ --------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $31,097 92.19% $31,630 92.65% $31,417 91.58%
Multifamily........................ 38 .11 30 .09 21 .06
Commercial and other property...... 1,205 3.57 1,195 3.50 1,464 4.27
Unimproved land.................... 1,179 3.50 1,081 3.16 1,121 3.27
------- ------- ------- ------- ------- ------
Total mortgage loans......... 33,519 99.37 33,936 99.40% 34,023 99.18
Other loans:
Loans on savings accounts.......... 214 .63 204 .60 282 .82
------- ------- ------- ------- ------- ------
Total loans receivable....... 33,733 100.00% 34,140 100.00% 34,305 100.00%
======= ======= ======
Less:................................
Loans in process................... (649) (480) (377)
Unearned loan fees, net of
deferred loan costs (345) (319) (297)
Allowance for loan losses.......... (294) (294) (293)
------- ------- -------
Net loans receivable......... $32,445 $33,047 $33,338
======= ======= =======
</TABLE>
3
<PAGE>
Loan Maturity Schedule. The following table shows the maturity of the loan
portfolio at June 30, 1996. The table does not reflect anticipated prepayments
or scheduled principal amortization.
<TABLE>
<CAPTION>
At June 30, 1996
-------------------------------------------------------------------------
Mortgage Loans
--------------------------------------------------
One- To Commercial
Four- and Other Other
Family Multifamily Property Loans Total
-------- ----------- --------- ----- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amount due:
Within 1 year...................... $ 90 $ -- $ 4 $282 $ 376
------- -- ------- ------- -------
After 1 year:
1 to 3 years..................... 322 4 68 -- 394
3 to 5 years..................... 916 -- 134 -- 1,050
5 to 10 years.................... 5,864 -- 563 -- 6,427
10 to 20 years................... 16,355 17 1,597 -- 17,969
Over 20 years.................... 7,870 -- 219 -- 8,089
------- -- ------- ------- -------
Total due after one year..... 31,327 21 2,581 -- 33,929(1)
------- -- ------ ------- -------
Total amounts due............ $31,417 $ 21 $2,585 $ 282 34, 305
======= == ====== =======
Loans in process..................... (377)
Deferred loan fees, net of deferred
loan costs...................... (297)
Allowance for loan losses............ (293)
-------
Loans receivable, net........ $33,338
=======
</TABLE>
_____________________________
(1) All loans in the portfolio are fixed rate.
One- to Four-Family Residential Real Estate Loans. The primary lending
activity currently consists of the origination of fixed rate one- to four-family
owner-occupied residential mortgage loans, virtually all of which are
collateralized by properties located in Fairfield County, South Carolina. The
Association does not originate adjustable-rate first mortgage loans. At June 30,
1996, $31.4 million, or 91.6% of the total loan portfolio, consisted of fixed-
rate one- to four-family residential real estate loans. The Association also
originates one- to four-family construction loans that convert to permanent
loans after the initial construction period which generally does not exceed six
months. The Association is a portfolio lender. It has not sold loans in the
secondary mortgage market and does not intend to conduct secondary market sales
in the foreseeable future. One- to four-family loans are underwritten and
originated according to policies approved by the Board of Directors. In the
current lending environment, savings deposits and loan repayments have exceeded
demand for loans.
The Association currently offers fixed rate one- to four-family residential
mortgage loans with terms ranging up to 25 years. One- to four-family
residential real estate loans often remain
4
<PAGE>
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option. The average
length of time that the Association's one-to four-family residential mortgage
loans remain outstanding varies significantly depending upon trends in market
interest rates and other factors. In recent years, the average maturity of the
Association's mortgage loans has decreased significantly due to unprecedented
volume of refinancing activity.
Originations of fixed rate mortgage loans are monitored on an ongoing basis
and are affected significantly by the level of market interest rates, the
Association's interest rate gap position, and loan products offered by the
Association's competitors. The Association's mortgage loans amortize on a
monthly basis with principal and interest due each month. To make the
Association's loan portfolio more interest rate sensitive, the Association
currently emphasizes the origination of loans with terms of 15 years or less.
The Association's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Association the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes of the
underlying real property serving as security for the loan. Due-on-sale clauses
are an important means of adjusting the rates on the Association's fixed-rate
mortgage loan portfolio, and the Association has generally exercised its rights
under these clauses.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Association's lending policies limit the maximum loan-to-value
ratio on fixed rate loans without private mortgage insurance to 80% of the
lesser of the appraised value or the purchase price of the property to serve as
collateral for the loan. The Association makes one- to four-family real estate
loans with loan-to-value ratios of up to 90%; however, for one- to four-family
real estate loans with loan-to-value ratios of between 80% and 90%, the
Association requires the amount of the loan that exceeds 80% of the appraised
value to be covered by private mortgage insurance. The Association requires fire
and casualty insurance, as well as a certificate of title, on all properties
securing real estate loans made by the Association.
Commercial and Other Real Estate Loans. The Association originates
commercial and other real estate loans on a limited basis. Association lending
policies require that all commercial loans be secured solely by real estate,
with no security interest allowed in furniture and fixtures, inventory,
goodwill, or other assets of the business. At June 30, 1996, such loans had an
aggregate balance of $1.5 million, or 4.3%, of the total loan portfolio. The
commercial and other real estate loans are generally collateralized by, among
others, real estate used by small businesses, church property, convenience
stores, and small manufacturing operations. The Association generally does not
solicit such loans, and originates such loans selectively and on a case-by-case
basis. The Association rarely originates multifamily residential real estate
loans, and has purchased only one such loan, a participation interest with an
aggregate remaining principal balance of $4,500 at June 30, 1996. Multi-family
loans totalled $21,000, or .06% of
5
<PAGE>
the loan portfolio, at June 30, 1996. All of the commercial real estate loans
have fixed rates of interest. The Association offers such loans with loan-to-
value ratios of up to 75% and terms of up to 15 years. To compensate the
Association for the increased credit risk associated with commercial loans,
interest rates are maintained at a level above that charged for one- to four-
family residential properties. Because of the increased credit risk associated
with such loans and the low level of demand for such loans in the Association's
primary market area, the Association does not expect commercial and multifamily
real estate lending to constitute a significant part of loan originations in the
foreseeable future.
Loans collateralized by commercial and multifamily residential real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans. This increased credit risk is a result of several
factors, including the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
and multifamily residential real estate is typically dependent upon the
successful operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
Unimproved Land Loans. The Association also offers loans secured by
unimproved land, such as woodlands, pasture land, agricultural land,
recreational land, and other undeveloped land. In recent years the Association
has reduced its originations of such loans. Such loans totalled $1.1 million, or
3.3%, of the total loan portfolio at June 30, 1996. All of the Association's
unimproved land loans have fixed rates of interest. The Association offers such
loans with loan to value ratios of up to 75% on tracts of 15 acres or less, and
loan to value ratios of up to 70% on tracts of land larger than 15 acres. The
Association considers the credit risks associated with large acreage to be
greater than normal, and will charge a higher rate of interest for such loans.
The maximum term allowed for all land loans is 15 years. The Board of Directors
reserves the right to disregard the value of any timber that may be on the
subject property, and may require a review by a recognized forester, in addition
to the appraisal, if it is deemed necessary. The borrower may be required to
negotiate a release of timber rights prior to the harvesting of any timber from
the subject property.
Loans collateralized by undeveloped land generally involve greater credit
risk than one-to four-family real estate loans. The increased credit risk is the
result of several factors, including the dependency of repayments on the
successful operation or management of the real estate collateralizing the loan.
In turn, the success of the management and operations frequently depends on
general economic conditions, climate, and in the case of agricultural property,
prevailing prices of commodities.
Passbook Loans. To a much lesser extent, the Association also originates
fixed-rate loans secured by deposit accounts ("passbook loans"), primarily as a
service to its customers. Such loans totalled $282,000, or 0.8% of the total
loan portfolio at June 30, 1996.
6
<PAGE>
DELINQUENCIES AND CLASSIFIED ASSETS
Collection Procedures. The Association's policies provide for a 30-day
grace period on all payments. The Association's collection procedures provide
that if a payment is not received within the grace period, a computer-generated
delinquent notice is sent to the borrower requesting payment plus a late charge.
If delinquency continues 15 days past the end of the grace period, a second
delinquent notice is mailed requesting payment in full of the delinquency or
that the borrower contact the Association immediately to provide satisfactory
arrangements for the repayment of the debt. If a loan becomes 60 days past due
(inclusive of the 30 day grace period), the borrower is contacted personally, if
possible, by Association personnel to negotiate satisfactory arrangements for
the repayment of the debt. If a loan becomes 90 days past due, the Association's
President is authorized to send a right-to-cure notice to the borrower advising
him of the delinquency and providing a 30-day period for repayment prior to the
initiation of legal action to collect on the collateral. At the end of this
period, if satisfactory arrangements have not been made for repayment, the
President may then forward the account to the Association's attorney for further
collection. The Attorney will provide notice to the borrower of pending legal
action, and allow a seven-day period for resolution prior to the commencement of
foreclosure. It is sometimes necessary and desirable to arrange special
repayment schedules with mortgagors to prevent foreclosure or filing for
bankruptcy. The mortgagors are required to submit a written repayment schedule
which is closely monitored for compliance.
7
<PAGE>
Delinquent Loans. At June 30, 1994, 1995 and 1996 delinquencies in the
loan portfolio were as follows:
<TABLE>
<CAPTION>
At June 30, 1994 At June 30, 1995 At June 30, 1996
--------------------- --------------------- -------------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans
------- -------- -------- -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Period delinquent:
Loans 60-89 days delinquent......... 29 $ 798 12 $582 9 $238
Loans 90 days or more
delinquent........................ 24 679 10 273 15 480
---- ------ ---- ------ ----- ----
Total loans delinquent 60 days
or more....................... 53 $1,477 22 $855 24 $718
==== ====== ==== ====== ----- ----
Delinquent loan principal to
total gross loans:
Loans 60-89 days delinquent to
total gross loans............... 2.36% 1.70% 0.69%
Loans 90 days or more delinquent
to total gross loans............ 2.01 .80 1.40
</TABLE>
Nonperforming Assets. The following table sets forth information with
respect to non-performing assets for the periods indicated. During the periods
shown, there were no restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1994 1995 1996
------------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual
basis................................... $ 503 $ 144 $ 480
Accruing loans which are
contractually past due 90 days or more.. 176 129 0
----- ----- -----
Total of nonaccrual and accruing
loans 90 days or more past due.......... 679 273 480
Foreclosed real estate, net of related
valuation allowance..................... 145 171 156
----- ----- -----
Total nonperforming assets........ $ 824 $ 444 $ 636
===== ===== =====
Nonperforming loans to total gross loans.. 2.01% .80% 1.40%
Nonperforming assets to total assets...... 1.74% 1.01% 1.44%
</TABLE>
$19,495 in interest income was recognized during the year ended June 30,
1996 on loans accounted for as non-accrual on that date. An additional $19,411
in interest income would have been recognized had those loans remained current
throughout the period.
8
<PAGE>
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is deemed real estate owned ("REO") until such time as it is sold.
In general, collateral for a loan is considered to be in-substance foreclosed
if: (i) the borrower has little or no equity in the collateral; (ii) proceeds
for repayment of the loan can be expected to come only from the operation or
sale of the collateral; and (iii) the borrower has either formally or
effectively abandoned control of the collateral to the Association, or retained
control of the collateral but is unlikely to be able to rebuild equity in the
collateral or otherwise repay the loan in the foreseeable future. Cash flow
attributable to in-substance foreclosures is used to reduce the carrying value
of the collateral.
When REO is acquired or otherwise deemed REO, it is recorded at the lower
of cost or its estimated fair value, less estimated selling expenses. Valuations
are periodically performed by management, and any subsequent decline in fair
value is charged to operations. At June 30, 1994, 1995, 1996, REO totalled
$145,000, $171,000, and $156,000, respectively.
Classification of Assets. OTS regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets. An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are designated "special mention" by management. Loans designated as
special mention are generally loans that, while current in required payments,
have exhibited some potential weaknesses that, if not corrected, could increase
the level of risk in the future. At June 30, 1996, classified assets totalled
$480,000, all of which were classified substandard. In addition to such
classified assets, at June 30, 1996, there were $238,000 of assets designated
special mention.
Allowance for Loan Losses. The Association provides a valuation allowance
for estimated losses from uncollectible loans. Management's periodic evaluation
of the adequacy of the allowance for loan losses is based on loss experience,
known and inherent risk in the portfolio, prevailing market conditions, and
management's judgment as to collectibility. The allowance for loss on loans is
increased by charges to income and decreased by charge-offs (net of recoveries).
During the year ended June 30, 1994, the Association added $151,000 to the
allowance for loan losses; no additions were made during the years ended June
30, 1995 and 1996. The allowance for loan losses totalled $294,000 at June 30,
1994 and 1995 and $293,000 at June 30, 1996.
9
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
the allowance for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
--------------------------------
1994 1995 1996
------- -------------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period....................... $ 166 $ 294 $ 294
Provision for loan losses............................ 151 -- --
Charge-offs (1)...................................... (23) -- (1)
Recoveries........................................... -- -- --
------ ------- ------
Balance at end of period........................... $ 294 $ 294 $ 293
====== ======= ======
Ratio of charge-offs during the period to
average loans outstanding during the period........ .07% -- --
Ratio of allowance for loan losses to nonperforming
loans at end of period............................. 43.30% 107.69% 61.04%
Ratio of allowance for loan losses to total
nonperforming assets at end of period.............. 35.68% 66.22% 46.07%
Ratio of allowance for loan losses to net loans
receivable at end of period........................ .90% .89% .88%
</TABLE>
____________________________
(1) All charge-offs related to loans secured by one- to four-family residential
real estate.
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the allowance for loan losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1994 1995 1996
----------------- -------------------- -----------------
% of % of % of
Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1)
------ --------- ------ ----------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family residential.. $271 92.2% $256 92.65% $ 252 91.6%
Multifamily residential.......... 1 .1 1 .09 -- --
Unimproved land.................. 10 3.5 18 3.16 18 3.3
Commercial and other............. 10 3.6 19 3.50 23 4.3
Passbook loans................... 2 .6 -- .60 -- .8
---- ----- ---- ----- ----- -----
Total allowance for
loan losses................ $294 100.0% $294 100.0% $ 293 100.0%
==== ===== ==== ===== ===== =====
</TABLE>
__________________________
(1) Represents the percent of the Association's total loan portfolio that is
composed of loans in each specific loan category.
10
<PAGE>
INVESTMENT ACTIVITIES
Investment Portfolio. The following table sets forth certain information
regarding the carrying and estimated market values of the investment securities
of the Company at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1994 1995 1996
------------------- ----------------- ----------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----------- ------ -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Investment securities:
U.S. Government and federal
agency obligations............... $4,580 $4,520 $6,183 $6,225 $4,749 $4,774
FHLB stock......................... 429 429 429 429 429 429
------ ------ ------ ------ ------ ------
Total investment securities $5,009 $4,949 $6,612 $6,654 $5,178 $5,203
====== ====== ====== ====== ====== ======
</TABLE>
11
<PAGE>
Investment Portfolio Maturities. The following table sets forth
information regarding the carrying value, weighted average yields, and
maturities of the investment securities of the Company at June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- --------------------- -------------------- ---------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield (1) Value Yield (1) Value Yield (1) Value Yield
-------------------- --------------------- -------------------- -----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations.. $1,500 5.89% $2,490 6.50% $ -- --% $ -- --%
Federal Home Loan Bank
obligations.............. 100 7.69 200 7.16 259 7.48 -- --
Federal National Mortgage
Association obligations.. -- -- 200 5.30 -- -- -- --
Federal Home Loan Bank
stock (2)................ -- -- -- -- -- -- 429 --
------ ------ ------ -----
Total investments.. $1,600 $2,890 $ 259 $ 429
====== ====== ====== =====
<CAPTION>
--------------------------------------
Total Investment Securuties
-------------------------------------------
Annualized
Average Weighted
Carrying Market Life Average
Value Value Years Yield (1)
--------- ------- -------- ------------
<C> <C> <C> <C>
U.S. Treasury obligations.. $3,990 $4,014 1.20 6.27%
Federal Home Loan Bank
obligations.............. 559 563 4.28 7.40
Federal National Mortgage
Association obligations.. 200 197 1.70 5.30
Federal Home Loan Bank
stock (2)................ 429 429 10.00 7.25
------ ------
Total investments.. $5,178 $5,203 2.27 6.44
====== ======
</TABLE>
__________________________
(1) Annualized interest return as a percentage of acquisition cost.
(2) Federal Home Loan Bank stock has no stated maturity, and is assumed for
these purposes to be held ten years.
12
<PAGE>
SOURCES OF FUNDS
General. The Company's sources of funds are the net proceeds retained by
it in connection with the Conversion, and dividends from the Association. To
date, there has been no need for dividends from the Association. Deposits are
the major source of funds for lending and other investment purposes of the
Association. The Association's deposit-gathering activities are currently
conducted from the Association's facility in Winnsboro, South Carolina. In
addition to deposits, the Association derives funds from the amortization and
prepayment of loans, the maturity of investment securities, and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
Deposits. Consumer and commercial deposits are attracted principally from
within the Association's market area through the offering of passbook savings,
money market deposit, term certificate accounts and individual retirement
accounts. Deposit account terms vary according to the minimum balance required,
the period of time during which the funds must remain on deposit, and the
interest rate, among other factors. The Association regularly evaluates its
internal cost of funds, surveys rates offered by competing institutions, reviews
the Association's cash flow requirements for lending and liquidity, and executes
rate changes when deemed appropriate. The Association has sought to decrease
the risk associated with changes in interest rates by offering competitive rates
on deposit accounts and by pricing certificates of deposit to provide customers
with incentives to choose certificates of deposit with longer terms. Due to
the current interest rate environment, however, longer terms are not attractive
to customers. The Association does not obtain funds through brokers or through
solicitations outside its market area.
The weighted-average interest rate on savings deposits was approximately
4.49% in 1995 and 5.17% in 1996. Balances are tabulated as follows:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
1994(1) 1995 1996
------------------ ---------------- ---------------
% of % of % of
Amount Total Amount Total Amount Total
------------ ------ ------- ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Regular passbook....... $ 2,239 6.53% $ 2,293 7.62% $ 2,323 7.43%
Money-market passbook.. 5,508 16.08 4,223 14.03 4,214 13.47
Certificates:
3.99% and lower...... 16,531 48.24 4 .01 -- --
4.00% - 4.99%........ 6,746 19.69 5,777 19.19 502 1.61
5.00% - 5.99%........ 3,058 8.92 7,520 24.98 20,056 64.13
6.00% - 6.99%........ 43 .13 9,093 30.20 4,178 13.36
7.00% - 7.99%........ 2 .01 1,196 3.97 -- --
8.00% - 8.99%........ 138 .40 -- -- -- --
------- ------- -------
Total.............. $34,265 $30,106 $31,273
======= ======= =======
</TABLE>
_____________________________
(1) Does not include $6,705 in escrow deposits received in connection with the
initial public offering.
13
<PAGE>
At June 30, 1996 the Association had savings accounts in amounts of
$100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- ------
(In Thousands)
<S> <C>
One month through three months..................................................... $2,764
Three through six months........................................................... 2,479
Six through 12 months.............................................................. 1,379
Over 12 months..................................................................... 844
------
Total.......................................................................... $7,466
======
</TABLE>
REGULATION AND SUPERVISION
GENERAL
The Association is subject to extensive regulation, examination and
supervision by the OTS, and the FDIC as the deposit insurer. The Association is
a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the SAIF, which is managed by the FDIC. The Association
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and the
FDIC to test the Association's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on the Company, the Association and their operations. The
Company, as a savings and loan holding company, is also required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS.
Certain of the regulatory requirements applicable to the Association and to the
Company are referred to below or elsewhere herein.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
PENDING DEPOSIT INSURANCE LEGISLATION
The FDIC board has reduced the insurance premium assessed on deposits
insured by the Bank Insurance Fund ("BIF"). The FDIC reduced the BIF premiums
from a range of 23 to 31 basis points, which is the range of premiums currently
paid on deposits insured by the Savings Association Insurance Fund ("SAIF"), to
a range of 0 to 31 basis points. The FDIC estimated that in excess of 90% of the
banks whose deposits are insured through the BIF would be assessed at the lowest
premium rate. Due to the reserve levels of the SAIF, the FDIC has not proposed
14
<PAGE>
a reduction in the SAIF insurance premiums and it is not expected that, absent
legislative developments, the insurance premiums assessed on SAIF deposits could
be reduced until the end of the decade. The deposits held by the Bank are
insured through the SAIF and, although the Bank currently pays the lowest
premium assessed on SAIF deposits, the reduction in BIF premiums, without a
similar reduction in SAIF premiums, places the Bank at a competitive
disadvantage since BIF insured institutions can either: (1) pass through to
depositors in the form of higher rates the reduction in deposit premiums, which
would cause the Bank to increase rates on its deposits without an offsetting
reduction in premium expense; (2) increase BIF insured institutions
profitability, which may not be available to the Bank; or (3) a combination of
both. Management continues to monitor the situation and is working with the
various trade associations the Bank is affiliated with to achieve equality in
the insurance premium assessment.
Legislation has been proposed in Congress to recapitalize the SAIF fund and
possibly consolidate the BIF and SAIF funds. One feature of this proposal calls
for a special one-time assessment on all SAIF-insured institutions of up to 80
basis points to bring the SAIF fund up to its required level of capitalization.
It is assumed that after this assessment takes place, that the on-going level of
insurance premium assessments for the SAIF-insured institutions would be reduced
to the same range as that of the BIF-insured institutions. Based upon the Bank's
deposit base at June 30, 1996, the special assessment could cause a charge to
earnings of approximately $250,000, while a reduction in the insurance premium
assessment rate from 23 basis points to 4 basis points would reduce annual
premium expenses by approximately $59,400. It is not known at this time when and
if this legislation will be approved and implemented.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and Federal Deposit Insurance Corporation Improvement Act
("FDICIA") (1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of non-
subsidiary savings institutions or savings and loan holding companies without
prior approval, and (5) permit bank holding companies to acquire healthy savings
institutions.
The description of statutory provisions and regulations applicable to
savings associations set forth in this annual report does not purport to be a
complete description of such statutes and regulations and their effect on the
Association. Moreover, because some of the provisions of FDICIA are still in the
process of being implemented through the adoption of regulations by the various
federal banking agencies, the Association cannot yet fully assess the impact of
these provisions on its operations.
15
<PAGE>
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of unimpaired capital and surplus. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan
is secured by readily marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate. At June 30,
1996, the Association was in compliance with its loans to one borrower
limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (I) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months. A savings association
that fails the QTL test must either convert to a bank charter or operate under
certain restrictions. As of June 30, 1996, the Association satisfied the QTL
test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. As of June 30, 1996, the Association would qualify as
a Tier 1 Association. In addition, the OTS could prohibit any proposed capital
distribution by the Association, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity. The Association is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, bankers' acceptances, specified
U.S. Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net withdrawable
deposit accounts plus short-term borrowings. This liquidity requirement which is
currently 5%, may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings flow
of member institutions. The Association's liquidity ratio averaged 22.8% during
the month end of June 30, 1996. OTS regulations also require each savings
institution to maintain an average daily balance of short-term
16
<PAGE>
liquid assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. During the month end of June 30 1996, the Association's short-
term liquidity ratio averaged 16.2%. At June 30, 1996, the Association was in
compliance with its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. Based on its assets
at March 31, 1996, the Association is required to pay a semi-annual assessment
of approximately $7,000.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA rating system identifies four levels of performance
that may describe an institution's record of meeting community needs:
outstanding, satisfactory, needs to improve and substantial non-compliance. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. The CRA regulations were recently revised. Effective July 1, 1995, the
OTS will assess the CRA performance of a savings institution under lending,
service and investment tests, and based on such assessment, will assign an
institution in one of the four above-referenced ratings. The Association
received an "outstanding" CRA rating under the current CRA regulations in its
most recent federal examination by the OTS.
Transactions with Related Parties. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate
17
<PAGE>
other than a subsidiary. At June 30, 1996, the Association was in compliance
with the transactions with affiliates rules governed by Sections 23A and 23B.
The Association's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to such persons based, in part, on the Association's capital position, and
requires certain approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
The federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted a proposed rule which proposes asset quality and earnings standards
which, if adopted, would be added to the Guidelines. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other
18
<PAGE>
than certain qualifying supervisory goodwill and certain purchased mortgage
servicing rights ("PMSRs"). The OTS regulations also require that, in meeting
the tangible ratio, leverage and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. At June 30, 1996, the Association's ratio of
tangible capital to total assets, and its ratio of core (leverage) capital to
total assets, was 27.9%.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital. At June 30, 1996, the Association's ratio of core capital to total
adjusted assets was 24.0%, and its ratio of total capital to risk-weighted
assets was 53.1%.
OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the difference between the institution's
measured interest rate risk and 2%, multiplied by the estimated economic value
of the institution's assets. A savings association with assets of less than $300
million and risk-based capital ratios in excess of 12% is not subject to the
interest rate risk component, unless the OTS determines otherwise. The rule also
provides that the Director of the OTS may waive or defer an institution's
interest rate risk component on a case-by-case basis.
At June 30, 1996, the Association was in compliance with all of its capital
requirements.
19
<PAGE>
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital ratio of less than 6.0%, a Tier 1 core risk-based capital
ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered
to be "significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date
an institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based deposit insurance system that assesses
deposit insurance premiums based on the level of risk involved in an
institution's activities. An association's risk category is based on whether an
association is "well capitalized," "adequately capitalized" or
"undercapitalized," and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Based on its capital and supervisory subgroups, each BIF
member and each SAIF member is assigned an annual FDIC assessment rate between
23 basis points for an institution in the highest category (i.e., well-
capitalized and healthy) to 31 basis points for an institution in the lowest
category (i.e., undercapitalized and substantial supervisory concern). The FDIC
is authorized to raise the assessment rates in certain circumstances. If such
action is taken by the FDIC, it could have an adverse effect on the earnings of
the Association. Recent proposals, if adopted, may lower assessment rates for
BIF members while retaining the current assessment rate for SAIF members. The
Association's assessment rate for the fiscal year ended June 30, 1996, was .23%
of deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association has no knowledge of any practice,
condition or violation that might lead to termination of deposit insurance.
20
<PAGE>
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB, is required to acquire
and hold shares of capital stock in that FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement with an investment in FHLB-Atlanta stock, at
June 30, 1996, of $429,000.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Association is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements imposed by the OTS.
HOLDING COMPANY REGULATION
The Company is a non-diversified savings and loan holding company within
the meaning of the HOLA, as amended. As such, the Company is registered with the
OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. The Association is required
to notify the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Association continues to be a QTL. Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings institution
by the OTS, the Company would become a multiple savings and loan holding
21
<PAGE>
company (if the acquired institution is held as a separate subsidiary) and would
be subject to extensive limitations on the types of business activities in which
it could engage. The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and
activities authorized by OTS regulation. The OTS is prohibited from approving
any acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
22
<PAGE>
ITEM 2. PROPERTIES
- --------------------
The Company conducts its business through a single facility located in
Winnsboro, Fairfield County, South Carolina. The facility opened and has been
owned by the Association since 1970. At June 30, 1996, the net book value of the
Company's property and equipment was $415,000.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- -------------------------------------------------------------------------------
As of June 30, 1996, the Company had 735,410 shares of common stock issued
and outstanding. At such date, the Company had 344 shareholders of record. The
Company's common stock is traded on the NASDAQ Small-Cap market under the symbol
"SCCB." Set forth below are the quarterly high and low bid prices for the Common
Stock, as reported on the NASDAQ Small Cap Market, for the last eight quarters
of trading.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Quarter ended September 30, 1994........ $13.25 $11.75
Quarter ended December 31, 1994......... 13.50 12.75
Quarter ended March 31, 1995............ 14.50 13.00
Quarter ended June 30, 1995............. 15.00 14.50
Quarter ended September 30, 1995........ 17.00 15.00
Quarter ended December 31, 1995......... 17.50 17.00
Quarter ended March 31, 1996............ 17.50 17.00
Quarter ended June 30, 1996............. 17.00 16.25
</TABLE>
During 1995, the Company declared semi-annual cash dividends of $.15 per
share. During 1995, the Company paid a special cash dividend of $.10 per share.
During 1996, the Company declared semi-annual cash dividends of $.30 per share.
For a discussion of limitations on the Company's ability to pay cash dividends,
see Item 1. Business--Regulation and Supervision--Limitation on Capital
Distributions; and Notes 9 and 18 to the Notes to Consolidated Financial
Statements.
ITEM 5-A. SELECTED FINANCIAL DATA
- ---------------------------------
Set forth below are selected financial and other data of the Company.
23
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................... $39,200 $39,885 $47,341 $43,947 $44,172
Loans receivable, net...................... 32,332 31,869 32,445 33,047 33,338
Interest-earning deposits.................. 3,359 2,991 8,307 2,836 4,171
Investment securities...................... 2,009 3,531 5,009 6,612 5,178
Foreclosed real estate, net................ 156 188 145 171 156
Deposits................................... 34,131 34,119 34,265 30,106 31,273
Stockholders equity........................ 4,721 5,500 6,152 13,350 12,309
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............................ $ 3,800 $ 3,465 $ 3,196 $ 3,429 $ 3,406
Interest expense on savings accounts
and borrowed money........................ 2,360 1,748 1,442 1,351 1,643
------- ------- ------- ------- -------
Net interest income...................... 1,440 1,717 1,754 2,078 1,763
Provision for loan losses................. 73 11 151 0 0
------- ------- ------- ------- -------
Net interest income after
provision for loan losses............... 1,367 1,706 1,603 2,078 1,763
Noninterest income......................... 88 47 42 110 35
Noninterest expense........................ 455 481 530 705 991
------- ------- ------- ------- -------
Income before income taxes and
effect of change in accounting principle.. 1,000 1,272 1,115 1,483 807
Income tax expense......................... 354 493 411 556 319
------- ------- ------- ------- -------
Income before change
in accounting principle................... 646 779 704 927 488
Cumulative effect of change in
accounting for income taxes............... -- -- (52) -- --
------- ------- ------- ------- -------
Net income................................. $ 646 $ 779 $ 652 $ 927 $ 488
======= ======= ======= ======= =======
Net income per share (1)................... N/A N/A N/A $1.28 $.67
======= =======
</TABLE>
_____________________________________
(1) There were no shares outstanding prior to the Company's initial offering
of July 7, 1994
24
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets................... 1.60% 1.96% 1.60% 2.10% 1.11%
Return on average stockholders' equity..... 14.69 15.24 11.11 7.07 3.77
Average equity to average assets........... 10.88 12.83 14.39 29.80 29.38
Total equity to total assets............... 12.05 13.79 13.00 30.38 27.87
Operating expenses to average assets....... 1.13 1.21 1.30 1.60 2.25
Net interest income to operating expenses.. 316.48 356.96 330.94 294.75 177.90
Nonperforming loans to total loans (1)..... 2.72 3.07 2.01 .80 1.40
Nonperforming assets to total assets (2)... 2.70 3.01 1.74 1.01 1.44
</TABLE>
________________________________
(1) Nonperforming loans consist of non-accruing loans past due 90 days or more
and accruing loans past due 90 days or more.
(2) Nonperforming assets consist of nonperforming loans and real estate
acquired through foreclosure.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets, consisting primarily of mortgage loans, interest-
bearing deposits at other institutions, and investment securities, and the
interest paid on interest-bearing liabilities consisting primarily of savings
deposits. Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to
interest-bearing liabilities. The Company's earnings also are affected by its
level of noninterest income including loan origination fees, gain on sale of
investment securities, and other noninterest income, and noninterest expense,
including primarily compensation and related costs, occupancy and equipment,
SAIF insurance premiums, data processing and other noninterest expense. Earnings
of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Company.
The Company has not experienced significant growth in assets or deposits
during the last five years. At June 30, 1996, total assets were $44.2 million,
compared to total assets of $40.5 million at June 30, 1991, an increase of 9%.
Savings deposits totalled $31.3 million at June 30, 1995, compared to $33.6
million at June 30, 1991, a decrease of 7%, inclusive of interest credited.
On May 2, 1996, the Company entered into an agreement with First Palmetto
Savings Bank ("Seller") to purchase certain assets and assume certain deposits
and other liabilities associated with the operations of the Seller's branch
office in Winnsboro, South Carolina. The
25
<PAGE>
assets to be purchased will consist of branch loans, cash on hand, premises and
equipment, safe deposit contracts and records. It is anticipated that total
assets acquired will be approximately $4 million based on preliminary
information. The liabilities assumed will consist of branch deposits and
assumption of assignable leases and operating contracts.
The closing of the transaction contemplated by the Agreement shall take
place at an agreed upon time within thirty (30) days following the first date on
which both regulatory approvals and consents have been received and all waiting
periods required by law and regulation have expired. The purchase price will be
established based on the assets and liabilities outlined in the Agreement at or
near the closing date. The anticipated closing of the transaction is second
quarter of fiscal 1997.
During fiscal 1996, the Company repurchased 76,076 shares of its Common
Stock at an aggregate cost of $1,358,000. Of these shares, 31,211 were purchased
for the purpose of providing awards granted and to be granted under the
Recognition and Retention Plans.
26
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's consolidated statement of financial condition at June 30, 1994, 1995
and 1996, and its consolidated statement of income for the years ended those
dates. It reflects the average yield on assets and the average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of related assets or
liabilities for the periods shown. Average loan and savings account balances are
derived from month-end balances as opposed to daily balances; management does
not believe that the use of month-end balances resulted in any material effect
on the information presented. Loan interest includes fees which are considered
yield adjustments; average loan balances include non-accruing loans.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1994 1995
---------------------------- --------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- --------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable and mortgage-backed
securities............................. $32,212 $ 2,928 9.09% $33,216 $ 2,884 8.68%
Investment securities.................... 4,176 180 4.31 6,992 388 5.55
Interest-earning deposits................ 2,327 88 3.78 2,825 157 5.56
------- ------- ------- -------
Total interest-earning assets.......... 38,715 3,196 8.26 43,033 3,429 7.97
------- -------
Noninterest-earning assets................. 1,866 1,058
------- -------
Total assets......................... $40,581 $44,091
======= =======
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts................ $ 2,047 73 3.57 $ 2,154 70 3.25
Certificates and money market
savings accounts....................... 32,015 1,361 4.25 28,438 1,281 4.50
Escrow deposits.......................... 228 8 3.51 -- -- --
------- ------- ------- -------
Total interest-bearing liabilities.. 34,290 1,442 4.21 30,592 1,351 4.42
------- -------
Noninterest-bearing liabilities............ 465 380
------- -------
Total liabilities...................... 34,755 30,972
Equity..................................... 5,826 13,119
------- -------
Total liabilities and stockholders'
equity earnings.................... $40,581 $44,091
======= =======
Net interest income/net interest
rate spread (1)............................ $ 1,754 4.05% $ 2,078 3.55%
======= ======= ======= =====
Net earning assets/net interest
margin (2)................................. $ 4,425 4.53% $12,441 4.83%
======= ======= ======= =====
Ratio of interest-earning assets to
interest-bearing liabilities............... 112.90% 140.67%
======= =======
<CAPTION>
1996
------------------------------------------
Average
Average Yield/
Balance Interest Cost
--------- ---------- ---------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable and mortgage-backed
securities............................. $33,075 $ 2,817 8.52%
Investment securities.................... 5,188 333 6.42
Interest-earning deposits................ 4,615 256 5.55
------- -------
Total interest-earning assets.......... 42,878 3,406 7.94
------- -------
Noninterest-earning assets................. 1,189
-------
Total assets......................... $44,067
=======
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts................ $ 2,385 71 2.98
Certificates and money market
savings accounts....................... 28,331 1,572 5.55
Escrow deposits.......................... -- -- --
-------
Total interest-bearing liabilities.. 30,716 1,643 5.35
Noninterest-bearing liabilities............ 406
-------
Total liabilities...................... 31,122
Equity..................................... 12,945
-------
Total liabilities and stockholders'
equity earnings.................... $44,067
=======
Net interest income/net interest
rate spread (1)............................ $ 1,763 2.59%
======= =====
Net earning assets/net interest
margin (2)................................. $11,733 4.12%
======= =====
Ratio of interest-earning assets to
interest-bearing liabilities............... 138.20%
=======
</TABLE>
________________________________________________
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income before the provision for
loan losses divided by total interest-earning assets.
27
<PAGE>
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
the changing volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
current volume), and (iii) the net change. Changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ending June 30,
----------------------------------------------------------------
1995 vs. 1994 1996 vs. 1995
-------------------------------- -----------------------------
Incease/(Decrease) Increase/(Decrease)
Due to Due to
-------------------- ---------------------
Volume Rate Net Volume Rate Net
-------- ---------- ------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans and mortgage-backed
securities........................................ $ 91 $(135) $(44) (13) (54) (67)
Investment securities................................. 121 87 208 (100) 45 (55)
Interest-earning deposits............................. 19 50 69 100 (1) 99
----- ----- ---- ------ ------ ------
Total interest-earning assets..................... $ 231 $ 2 $233 $ (13) $ (10) $ (23)
===== ===== ==== ====== ====== ======
Interest-bearing liabilities:
Savings accounts...................................... $(148) $ 65 $(83) $ 6 $ 286 $ 292
Escrow deposits....................................... (8) -- (8) -- -- --
----- ----- ---- ----- ----- -----
Total interest-bearing liabilities................ $(156) $ 65 $(91) $ 6 $ 286 $ 292
===== ===== ==== ===== ===== =====
Net change in net interest income....................... $ 387 $ (63) $324 $ (19) $(286) $(315)
===== ===== ==== ===== ===== =====
</TABLE>
__________________________________
(1) All interest-earning assets are disclosed net of loans in process,
unamortized yield adjustments, and valuation allowances.
(2) FHLB stock and interest-earning deposits in other financial institutions are
included in investment securities.
(3) Escrow accounts are noninterest-bearing and are included in noninterest-
bearing liabilities.
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when
28
<PAGE>
the amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap would
tend to positively affect net interest income. Similarly, during a period of
falling interest rates, a negative gap would tend to positively affect net
interest income while a positive gap would tend to adversely affect net interest
income.
At June 30, 1996, and based on certain assumptions as to loan repayments
and deposit decay rates, the Association's total interest-bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $14.4 million, representing a
cumulative one-year gap ratio of a negative 32.7%. The Association's gap
measures indicate that net interest income is moderately exposed to increases in
interest rates. In a rising interest rate environment, the Association's net
interest income could be adversely affected as liabilities would reprice to
higher market rates more quickly than assets. This effect would be compounded,
because the prepayment speeds of the Association's long-term fixed-rate assets
would decrease in a rising interest rate environment.
29
<PAGE>
The table below sets forth the approximate amounts of interest-earning
assets and interest-bearing liabilities to be repriced, or expected to reprice
based on certain assumptions, as of June 30, 1996 for the Association. The
amounts of assets or liabilities which mature or reprice during a particular
period were determined in accordance with certain assumptions as to repayments
of loans and deposit decay rates adjusted for scheduled loan amortization, which
assumptions were based on national industry data. The interest rate sensitivity
of the Association's assets and liabilities could vary substantially if
different assumptions were used.
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------------------------------
More than Three More than
Three Months Months to One Year to More than
or Less Twelve Months Five Years Five Years Total
------------- -------------- ---------------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1)......................... $ 1,119 $ 3,330 $13,647 $15,447 $33,543
Other loans................................ 282 -- -- -- 282
Deposit and investment securities.......... 4,223 1,218 1,669 -- 7,110
------- -------- ------- ------- -------
Total rate-sensitive assets.......... $ 5,624 $ 4,548 $15,316 $15,447 $40,935
======= ======== ======= ======= =======
Interest-bearing liabilities:
Passbook savings accounts.................. $ 221 $ 545 $ 1,243 $ 314 $ 2,323
Money market savings accounts.............. 1,396 1,976 841 1 4,214
Certificate savings accounts............... 7,787 12,694 4,255 -- 24,736
------- -------- ------- ------- -------
Total rate-sensitive liabilities....... $ 9,404 $ 15,215 $ 6,339 $ 315 $31,273
======= ======== ======= ======= =======
Interest sensitivity gap for period.......... $(3,780) $(10,667) $ 8,977 $15,132 $ 9,662
======= ======== ======= ======= =======
Cumulative interest sensitivity gap.......... $(3,780) $(14,447) $(5,470) $ 9,662 $ 9,662
======= ======== ======= ======= =======
Cumulative interest sensitivity gap as a
percentage of total assets................. (8.6)% (32.7)% (12.4)% 21.9%
======= ======== ======= =======
Cumulative net interest-earning assets as a
percentage of cumulative interest-bearing
liabilities................................ 59.8% 41.3% 82.3% 131.9%
======= ======== ======= =======
</TABLE>
____________________________________
(1) Excludes nonaccruing loans.
RESULTS OF OPERATIONS
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage loans, investment securities, and
interest-bearing deposits at other institutions, and the interest paid on
interest-bearing liabilities, which consist primarily of savings deposits. Net
income totalled $927,000 and $488,000 for fiscal 1995 and 1996, respectively.
Interest Income. Total interest income was $3.4 million for the fiscal year
ended June 30, 1996, a decrease of $23,000, or 0.7%, compared to the fiscal year
ended June 30, 1995. The decrease in interest income resulted primarily from a
slight decrease in the average yield on interest-earning assets. The decrease in
average yield on interest-earning assets was caused primarily by a decline in
the average yield on loans and mortgage-backed securities. The average balance
of interest-earning assets also decreased slightly.
30
<PAGE>
Interest Expense. Total interest expense increased by $292,000, or 21.6%,
from $1.3 million for the fiscal year ended June 30, 1995, to $1.6 million for
the fiscal year ended June 30, 1996, primarily as a result of an increase in the
cost of deposits. Because the Association's liabilities are significantly more
sensitive than its assets to changes in interest rates, the general increase in
interest rates during 1996 increases interest expense even though changes in
interest income remained slight.
Net Interest Income. Net interest income decreased by $315,000, or 15.2%,
from $2,078,000 for the year ended June 30, 1995, to $1,763,000 for the year
ended June 30, 1996.
Provision for Loan Losses. The allowance for loss on loans is based upon
management's evaluation of risks in the loan portfolio, the past loan loss
experience, and current and expected future economic conditions. The Association
did not add to its allowance for loan losses during the fiscal years ended June
30, 1995 and 1996, respectively.
Management uses a systematic approach in determining the adequacy of its
loan loss allowance and the necessary provision for loan losses, through a
classification of assets program, whereby the loan portfolio is reviewed
generally and delinquent loan accounts are analyzed individually, on a quarterly
basis. Consideration is given to the account status, payment history, ability to
repay and probability of repayment, and loan-to-value percentages. As a result
of this review and analysis, loans are classified in the appropriate categories
applicable to their circumstances. After reviewing current economic conditions,
changes in delinquency status, and actual loan losses incurred, management
establishes an appropriate reserve percentage applicable to each category of
assets, and a provision for loan losses is recorded when necessary to bring the
allowance to a level consistent with this analysis. Historically, the
Association's ratio of nonperforming loans to total loans has been higher in
comparison to its peers, while the ratio of its allowance for loan losses to
nonperforming loans has been lower in comparison to its peers.
As a result of its analysis, no provision for loan losses was made during
fiscal 1995 and 1996.
Noninterest Income. Noninterest income decreased by $75,000 from $110,000
for the year ended June 30, 1995, to $35,000 for the year ended June 30, 1996.
The decrease in noninterest income resulted primarily from a reversion of
accumulated over-funding subsequent to the termination of the Association's
defined benefit retirement plan in fiscal 1995.
Noninterest Expenses. Noninterest expense increased by $286,000 from the
year ended June 30, 1995 to the year ended June 30, 1996, respectively, as
increases in compensation and related costs and SAIF insurance premiums were
partially offset by a decrease in other noninterest expense.
31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 5.0%. The
Association maintains liquidity levels significantly in excess of regulatory
requirements. The Association adjusts its liquidity levels in order to meet
funding needs of deposit outflows, payment of real estate taxes on mortgage
loans, repayment of borrowings and loan commitments. The Association also
adjusts liquidity as appropriate to meet its asset and liability management
objectives.
The Company's sources of funds are the net proceeds retained by it in
connection with the Conversion, and dividends from the Association. To date,
there has been no need for dividends from the Association. The Association's
primary sources of funds are deposits, amortization and prepayment of loans,
maturities of investment securities, and earnings and funds provided from
operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. The
Association manages the pricing of its deposits to maintain a desired deposit
balance. In addition, the Association invests in short-term interest-earning
assets, which provide liquidity to meet lending requirements. At June 30, 1996,
$1.0 million, or 29.8%, of the Association's investment portfolio was scheduled
to mature in one year or less, $2.1 million, or 62.4%, was scheduled to mature
in one to five years. For additional information about cash flows from the
Company's operating, financing, and investing activities, see Statements of Cash
Flows included in the Financial Statements.
A major portion of the Association's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income, principal repayments on
loans, and increases in deposit accounts. Liquidity management is both a daily
and long-term function of business management. If the Association requires funds
beyond its ability to generate them internally, borrowing agreements exist with
the FHLB which provide an additional source of funds.
At June 30, 1996, the Association had outstanding loan commitments of
$609,000. This amount does not include the unfunded portion of loans in process.
Savings certificates scheduled to mature in less than one year at June 30, 1996,
totalled $20.5 million. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Association.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation.
32
<PAGE>
The impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Because Community Federal originates only fixed-rate loans,
its net interest income is influenced significantly by the movement of interest
rates in general. Interest rates do not necessarily move in the same direction
or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Stock-Based Compensation. In October 1995, the Financial
----------------------------------------
Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-
Based Compensation," establishing financial accounting and reporting standards
for stock-based employee compensation plans. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated fair value of the award
at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if this statement
had been adopted. The accounting requirements of this statement are effective
for transactions entered into in fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management of the
Savings Bank has not completed an analysis of the potential effects of SFAS No.
123 on its financial condition or results of operations.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
---------------------------------------------------------------------
Assets to be Disposed Of. In March 1995, the FASB has issued SFAS No. 121,
- -------------------------
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
indentifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In evaluating
recoverability, if estimated future cash flows, undiscounted and without
interest charges, are less than the carrying amount of the asset, an impairment
loss is recognized. SFAS No. 121 also requires that certain long-lived assets
and certain identifiable intangibles to be disposed of be reported at the lower
of carrying amount or fair value less cost to sell. SFAS No. 121 applies
prospectively for fiscal years beginning after December 15, 1995. Management
does not expect that adoption of SFAS No. 121 will have a material impact on the
Savings Bank's financial statements.
Accounting for Transfers and Servicing of Financial Assets and
--------------------------------------------------------------
Extinguishment of Liabilities. In June 1995, the FASB issued SFAS 125,
- ------------------------------
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS 125 supersedes SFAS 122. SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and the
extinguishment of liabilities based on consistent application of a financial
components
33
<PAGE>
approach that focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings. Under the financial
components approach, after a transfer of financial assets, and entity recognizes
all financial and sevicing assets it controls and liabilities it has incurred
and derecognizes financial assets it no longer controls and liabilites that have
been extinguished. The financial components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with pledge of collateral.
SFAS 125 extends to the "available for sale" or "trading" approach in SFAS
115 to nonsecurity financial assets that can contractually be repaid or
otherwise settled in such a way that the holder of the assets would not recover
substantially all of its recorded investment. SFAS 125 also amends SFAS 115 to
prevent a security from being classified as held to maturity if the security can
be prepaid or otherwise settled in such a way that the holder of the security
would not recover substantially all of its recorded investment.
SFAS 125 provides implementation guidance for accounting for (i)
securitizations, (ii) transfers of partial interests, (iii) servicing of
financial assets, (iv) securities lending transactions, (v) repurchase
agreements including "dollar rolls," (vi) loan syndications and participations,
(vii) risk participations in banker's acceptances, (viii) factoring
arrangements, (ix) transfers of receivables with recourse, (x) transfers of
sales type and direct financing lease receivables, and (xi) extinguishments of
liabilities.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1995, and is to be
applied prospectively. Earlier or retroactive application is not permitted. In
addition, the extension of the SFAS 125 approach to certain nonsecurity
financial assets and the amendment of SFAS 115 is effective for financial assets
held on or acquired after January 1, 1997. Reclassifications that are necessary
because of the amendment do not call into question an entity's ability to hold
other debt securities to maturity in the future. Management of the Company
does not expect the adoption of SFAS 125 will have a material effect on the
Company's financial position or results of operations.
Post-Retirement and Post-Employment Benefits. In December 1990, the FASB
--------------------------------------------
issued Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions" which
first applies to South Carolina Community Bancshares, Inc. with respect to
fiscal 1995. In November 1992, the FASB issued Statement of Financial Accounting
Standards No. 112 ("Statement 112") "Employers' Accounting for Post-Employment
Benefits," which first applied to the Company with respect to fiscal 1995.
These pronouncements basically require that the expected future cost of
providing any post-employment and post-retirement benefits be recognized as
expense over an employee's period of active service, as opposed to the
previously prevalent practice of accounting for such benefits on an as-paid
basis. The Company does not presently offer any such post-retirement
34
<PAGE>
or post-employment benefits and Management does not expect Statements Nos. 112
and 106 to have a material effect on the Company's financial position or results
of operations.
ITEM 7. FINANCIAL STATEMENTS
- -------------------------------
The following audited financial statements and related documents are
presented herein on the following pages:
<TABLE>
<S> <C>
Report of Independent Auditors.................................... 36
South Carolina Community Bancshares, Inc. and Subsidiary:
Consolidated Balance Sheets................................... 37
Consolidated Statements of Income............................. 38
Consolidated Statements of Stockholders' Equity............... 39
Consolidated Statements of Cash Flows......................... 40
Notes to Consolidated Financial Statements.................... 42
</TABLE>
35
<PAGE>
[LETTER HEAD OF CRISP HUGHES & CO., APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
South Carolina Community Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of South Carolina
Community Bancshares, Inc. and Subsidiary (the "Company") as of June 30, 1995
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1995 and 1996, and the results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Crisp Hughes & Co L.L.P.
Asheville, North Carolina
August 9, 1996
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
ASSETS 1995 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 313 $ 416
Interest earning deposits 2,836 4,171
Investment securities:
Held to maturity (market value of
$6,225 in 1995 and $4,774 in 1996) 6,183 4,749
Loans receivable, net 33,047 33,338
Mortgage-backed securities:
Held to maturity (market value of $79
in 1995 and $62 in 1996) 78 62
Premises and equipment, net 440 415
Federal Home Loan Bank stock 429 429
Interest receivable 364 347
Real estate 171 156
Prepaid expenses and other assets 86 89
------- -------
Total assets $43,947 $44,172
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $30,106 $31,273
Advance payments for taxes and insurance - 23
Accrued expenses and other liabilities 355 385
Income taxes:
Current 12 68
Deferred 124 114
------- -------
Total liabilities 30,597 31,863
------- -------
Stockholders' equity:
Preferred stock ($.01 par value, 200,000
shares authorized; none outstanding) - -
Common stock ($.01 par value, 1,400,000
shares authorized;
780,275 shares issued; 780,275
outstanding at June 30, 1995
and 735,410 at June 30, 1996) 8 8
Paid in capital 7,227 7,279
Retained earnings, substantially 6,704 6,769
restricted
Treasury stock at cost (44,865 shares - (790)
at June 30, 1996)
Unearned compensation:
Employee Stock Ownership Plan (589) (514)
Management Recognition Plan - (443)
------- -------
Total stockholders' equity 13,350 12,309
------- -------
Total liabilities and $43,947 $44,172
stockholders' equity ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands, except net income per share)
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------
<S> <C> <C>
1995 1996
---- ----
Interest income:
Loans $ 2,877 $ 2,810
Mortgage-backed securities 7 7
Investments 388 333
Interest earning deposits 157 256
------ ------
Total interest income 3,429 3,406
Interest expense:
Deposits 1,351 1,643
------ ------
less Net interest income 2,078 1,763
Provision for loan losses - -
------ ------
Net interest income after 2,078 1,763
provision for loan losses ------ ------
Noninterest income:
Gain on pension plan termination 69 -
Other 41 35
------ ------
Total noninterest income 110 35
------ ------
Noninterest expenses:
Compensation and employee benefits 331 585
Net occupancy expense 50 52
Deposit insurance premiums 78 69
Data processing 42 42
Other 204 243
------ ------
Total noninterest expenses 705 991
------ ------
Income before income taxes 1,483 807
Income tax expense 556 319
------ ------
Net income $ 927 $ 488
====== ======
Weighted average common equivalent 724 729
shares outstanding
Net income per share $1.28 $.67
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED TREASURY UNEARNED COMPENSATION
--------------------------
STOCK CAPITAL EARNINGS STOCK FOR ESOP FOR MRP TOTAL
------ ------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ - $ - $6,152 $ - $ - $ - $ 6,152
Net income - - 927 - - - 927
Cash dividends ($.50 per share) - - (375) - - - (375)
Net proceeds on common stock issued
in stock conversion (780,275 shares) 8 7,213 - - (624) - 6,597
ESOP compensation earned - 14 - - 35 - 49
------ ------- ------ -------- -------- ------- -------
Balance at June 30, 1995 8 7,227 6,704 - (589) - 13,350
Net income - - 488 - - - 488
Cash dividends ($.60 per share) - - (423) - - - (423)
Purchase of MRP shares - - - - - (568) (568)
ESOP and MRP compensation earned - 52 - - 75 125 252
Treasury stock purchased (44,865 shares) - - - (790) - - (790)
------ ------- ------ -------- -------- ------- -------
Balance at June 30, 1996 $ 8 $7,279 $6,769 $(790) $(514) $(443) $12,309
====== ======= ====== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
------------------
1995 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $ 927 $ 488
Adjustments to reconcile net income
to net cash
provided (used) by operating
activities:
Depreciation 27 26
Loss on sale of real estate owned 4 5
Deferred income taxes (benefit) 43 (10)
Amortization of premium (accretion
of discounts) on investment (36) (7)
securities
Purchase of MRP shares - (568)
Amortization of unearned 49 252
compensation
Net increase (decrease) in (26) (22)
deferred loan fees
(Increase) decrease in accrued (26) 17
interest receivable
(Increase) decrease in prepaid (34) (3)
expenses and other assets
Increase (decrease) in income - 56
taxes payable
Increase in accrued expenses and 34 4
other liabilities ------- ------
Net cash provided by operating
activities 962 238
------- ------
Investing activities:
Net increase in loans (707) (317)
Capitalized costs on real estate - (2)
owned
Proceeds from sale of real estate 102 60
owned
Proceeds from maturities of
investment securities 2,450 2,398
Purchases of investment securities (4,017) (957)
Net decrease in insured certificates 100 -
of deposit
Principal payments on 22 16
mortgage-backed securities
Purchases of premises and equipment (6) (1)
------- ------
Net cash provided (used) by (2,056) 1,197
investing activities ------- ------
</TABLE>
(continued)
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------
1995 1996
---- ----
<S> <C> <C>
Financing activities:
Net increase (decrease) in deposits $(10,864) $1,167
Acquisition of treasury stock - (790)
Increase in advance payments for - 23
taxes and insurance
Proceeds from issuance of common 6,834 -
stock
Dividends paid (180) (397)
-------- ------
Net cash provided (used) by (4,210) 3
financing activities -------- ------
Net increase (decrease) in cash and (5,304) 1,438
cash equivalents
Cash and cash equivalents at beginning 8,453 3,149
of year -------- ------
Cash and cash equivalents at end of year $ 3,149 $4,587
======== ======
Supplemental disclosures of cash flow
- -------------------------------------
information
-----------
Cash paid during the period for:
Interest $ 1,305 $1,657
Income taxes net of refunds 508 254
======== ======
Noncash investing and financing
activities:
Real estate acquired in
satisfaction of
mortgage loans $ 132 $ 48
======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995 and 1996
(Tabular amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
South Carolina Community Bancshares, Inc. (the "Holding Company") was formed
in March 1994, as the holding company for Community Federal Savings and Loan
Association (the "Association") in connection with the Association's
conversion from a federally chartered mutual savings and loan association to
a federally chartered stock savings and loan association ("Conversion"). On
July 7, 1994, the Holding Company completed its initial public offering
("Offering") and with a portion of the net proceeds acquired all the issued
and outstanding stock of the Association.
The accounting and reporting policies of the Holding Company and the
Association (the "Company") conform, in all material respects, to generally
accepted accounting principles and to general practices with the savings and
loan industry. The following summarize the more significant of these
policies and practices.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
---------------------------
the accounts of the Holding Company and its subsidiary, the Association.
Intercompany balances and transactions have been eliminated.
LOANS RECEIVABLE - Loans receivable are carried at their unpaid principal
----------------
balance less, where applicable, deferred loan origination fees and allowances
for losses. Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current economic
conditions and such other factors which, in management's judgment, deserve
recognition in estimating loan losses. Interest accrual is discontinued when
a loan becomes 90 days delinquent unless, in management's opinion, the loan
is well secured and in process of collection. Interest income is
subsequently recognized only to the extent cash payments are received until
such time that, in management's opinion, the borrower will be able to meet
payments as they become due.
The Company's policy on first mortgage loans is to lend within its primary
market area which is defined as Fairfield County and the surrounding counties
in South Carolina. It is the Company's normal policy to limit an individual
single-family mortgage loan to 80% of the appraised value of the property
securing the loan.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
________________________________________________________________________________
The Company's multi-family and nonresidential real estate loans consist of
properties located in its primary market. The Company's policy is to limit
loans on multi-family residential complexes and nonresidential loans to 75%
of the appraised value of the property securing the loan, and land loans to
70% of the appraised value.
Management of the Company believes the allowance for loan losses is adequate.
However, the estimates used by management in determining the adequacy of such
allowance are susceptible to significant changes due primarily to unforeseen
changes in economic and market conditions. In addition, various regulatory
agencies periodically review the Company's allowance for loan losses as an
integral part of their examination. Such agencies may require the Company to
recognize additions to the allowance based on their judgments of information
available to them at the time of their examination.
The Association adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures", an amendment of SFAS No. 114,"
effective July 1, 1995. These statements address the accounting by creditors
for impairment of certain loans. They apply to all creditors and to all
loans, uncollateralized as well as collateralized, except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or at lower of cost or fair value,
leases, and debt securities. The Association considers all one-to-four
family residential mortgage loans and all consumer and other loans to be
smaller homogeneous loans. These statements apply to all loans that are
restructured involving a modification of terms. Loans within the scope of
these statements are considered impaired when, based on current information
and events, it is probable that all principal and interest will not be
collected in accordance with the contractual terms of the loans. Management
determines the impairment of loans based on knowledge of the borrower's
ability to repay the loan according to the contractual agreement and the
borrower's repayment history. Pursuant to SFAS No. 114, Paragraph 8,
management does not consider an insignificant delay or insignificant
shortfall to impair a loan. Management has determined that a delay less than
90 days will be considered an insignificant delay and that an amount less
than $25,000 will be considered an insignificant shortfall. The Association
does not apply SFAS No. 114 using major risk classifications, but applies
SFAS No. 114 on a loan by loan basis. All nonaccrual loans are considered to
be impaired. Impaired loans are considered to be nonaccrual loans only if
they are 90 days or more past due. All loans are charged off when management
determines that principal and interest are not collectible. At June 30,
1996, the Association had approximately $600,000 of nonaccrual loans which
would be considered impaired. The total allowance for credit loss on those
impaired loans was approximately $293,000 at June 30, 1996. The average
recorded investment in impaired loans during the year ending June 30, 1996
was approximately $482,000.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
______________________________________________________________________________
LOAN FEES - Loan fees result from the Company originating mortgage loans.
---------
Such fees and certain direct incremental costs related to origination of such
loans are deferred ("net deferred loan fees") and reflected as a reduction of
the carrying value of mortgage loans. The net deferred fees (or costs) are
amortized using the interest method over the contractual lives of the loans
as adjusted for prepayments.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - In 1995, the Company
----------------------------------------------------
adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). SFAS No. 115 requires that all investments in debt
securities and all investments in equity securities that have readily
determinable fair values be classified into three categories. Securities
that management has positive intent and ability to hold until maturity will
be classified as held to maturity. Securities that are bought and held
specifically for the purposes of selling them in the near term will be
classified as trading securities. All other securities will be classified as
available for sale. Securities classified as trading and available for sale
will be carried at market value.
The Company has identified its entire portfolio of investment securities and
mortgage-backed securities as held to maturity. They are stated at amortized
cost since the Company has both the ability and intent to hold such
securities to maturity. Premiums and discounts on the investment and
mortgage-backed securities are amortized or accreted into income over the
contractual terms of the securities using a level yield interest method.
Gains and losses on the sale of these securities are calculated based on the
specific identification method.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, net of
----------------------
accumulated depreciation. Depreciation expense is calculated on a straight-
line basis over the estimated useful lives of the respective assets:
Buildings and improvements 30 years
Office furniture and equipment 5 to 10 years
The cost of maintenance and repairs is charged to expense as incurred while
expenditures which materially increase property lives are capitalized.
REAL ESTATE - Real estate acquired through, or in lieu of, loan foreclosure
-----------
are initially recorded at fair value at the date of foreclosure or in-
substance foreclosure. Subsequent to foreclosure, real estate is recorded at
the lower of initial fair value or existing fair value less estimated cost to
sell (net realizable value). Costs relating to development and improvement
of property are capitalized, whereas costs relating to the holding of
property are expensed.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
FEDERAL HOME LOAN BANK STOCK - Investment in stock of the Federal Home Loan
----------------------------
Bank is required by law of every federally insured savings and loan or
savings bank. The investment is carried at cost. No ready market exists for
the stock and it has no quoted market value.
INCOME TAXES - The Holding Company and its wholly owned subsidiary follow
------------
the practice of filing con solidated federal income tax returns. Income
taxes are allocated to the Association as though separate returns are being
filed. Individual state income tax returns are filed for each company.
The Company utilizes the liability method of computing income taxes in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted
for tax rate changes. The focus is on accruing the appropriate balance
sheet deferred tax amount, with the statement of income effect being the
result of changes in balance sheet amounts from period to period. Current
income tax expense is provided based upon the actual tax liability incurred
for tax return purposes.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - The FASB has issued SFAS No. 106,
---------------------------------------
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which requires, during an employee's active years of service, accrual of
the expected costs of providing postretirement benefits, principally health
care and life insurance, to employees and their beneficiaries and
dependents. SFAS No. 106 is effective for fiscal years beginning after
December 15, 1994. At the present time, the statement has no material
effect on the consolidated financial statements.
In November 1992, FASB issued SFAS No. 112 "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 requires recognition of the
obligations to provide postemployment benefits to former or inactive
employees after employment, but before retirement. The effective date for
this statement is for fiscal years beginning after December 15, 1993. At
the present time, the statement has no material effect on the consolidated
financial statements.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In evaluating recoverability, if estimated future cash
flows, undiscounted and without interest charges, are less than the
carrying amount of the asset, an impairment loss is recognized. SFAS 121
also required that certain long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount
or fair value less cost to sell. SFAS 121 applies prospectively for fiscal
years beginning after December 15, 1995. Management does not expect that
adoption of SFAS 121 will have a material impact on the Company's financial
statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights", which will become effective for years beginning after
December 15, 1995. This standard allows the capitalization as an asset the
rights to service mortgage loans for others when those rights were acquired
either through loan purchases or loan origination activities. This
accounting statement will significantly change the current accounting under
SFAS No. 65. The capitalized mortgage servicing rights will be amortized in
proportion to and over the period of estimated net service income and
should be evaluated for impairment based upon fair value. Management
believes that based on current operations, the adoption of this statement
will not have a material effect on the Company's financial position or
results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to all transactions in which an entity
acquires goods or services issuing equity instruments or by incurring
liabilities where the payment amounts are based on the entity's common
stock price, except for employee stock ownership plans (ESOP's). The SFAS
covers transactions with employees and non-employees and is applicable to
both public and non-public entities.
SFAS No. 123 requires that, except for transactions with employees that are
within the scope of APB Opinion No. 25, all transactions in which goods or
services are the consideration received for the issuance of equity
instruments are to be accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. However, it also allows an entity to
continue to measure compensation costs for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Entities electing to follow the
accounting methods in Opinion No. 25 must make proforma disclosures of net
income and, if presented, earnings per share, as if the fair value method
of accounting defined in the statement had been applied.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
SFAS No. 123 is effective for years beginning after December 15, 1995, or
for an earlier fiscal year for which this statement is initially adopted
for recognizing compensation costs. Proforma disclosures required for
entities that elect to continue to measure compensation cost using Opinion
No. 25 must include the effects of all awards granted in fiscal years that
begin after December 15, 1994.
CASH FLOW INFORMATION - As presented in the consolidated statements of cash
---------------------
flows, cash and cash equivalents include cash on hand and interest-earning
deposits in other banks. The Company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
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.
RECLASSIFICATIONS - Certain amounts in prior year have been reclassified to
-----------------
be presented on a comparable basis with June 30, 1996, amounts.
2. INVESTMENT SECURITIES
---------------------
The amortized cost and estimated market values of investments are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held to maturity:
June 30, 1995:
U.S. government and
agency obligations $ 6,183 $ 60 $ (18) $ 6,225
======== ========= ========= ========
June 30, 1996:
U.S. government and
agency obligations $ 4,749 $ 34 $ (9) $ 4,774
======== ========= ========= ========
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The amortized cost and estimated market values of securities by contractual
maturity are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------------- ------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Due in one year or $ 2,396 $ 1,600 $ 2,388 $ 1,602
Due in one year through
five years 3,787 2,890 3,837 2,911
Due after 5 years - 259 - 261
------ ------ ------ ------
$ 6,183 $ 4,749 $ 6,225 $ 4,774
====== ====== ====== ======
</TABLE>
The Company had no investment securities pledged at June 30, 1995 and 1996.
There were no investment securities sold during the fiscal years 1995 and
1996.
3. MORTGAGE-BACKED SECURITIES
--------------------------
The summary of mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held to maturity:
June 30, 1995:
FHLMC Certificates $ 50 $ 1 $ - $ 51
GNMA Certificates 28 - - 28
-------- -------- -------- --------
$ 78 $ 1 $ - $ 79
-------- -------- -------- --------
June 30, 1996:
FHLMC Certificates $ 41 $ - $ - $ 41
GNMA Certificates 21 - - 21
-------- -------- -------- --------
$ 62 $ - $ - $ 62
-------- -------- -------- --------
</TABLE>
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity date.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The Company had no sales of mortgage-backed securities during the fiscal
years 1995 and 1996. Mortgage-backed securities were not pledged at June
30, 1995 and 1996.
4. LOANS RECEIVABLE
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
Real estate mortgage loans:
One to four family $ 30,877 $ 31,067
Construction 679 350
Commercial real estate 1,225 1,485
Other real estate 1,155 1,121
------- -------
Total real estate loans 33,936 34,023
Consumer loans:
Savings account loans 204 282
------- -------
Total loans 34,140 34,305
------- -------
Less:
Undisbursed portion of loans in process 480 377
Net deferred loan fees 319 297
Allowance for loan losses 294 293
------- -------
1,093 967
------- -------
$ 33,047 $ 33,338
======= =======
</TABLE>
The change in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
------------------------
1995 1996
---- ----
<S> <C> <C>
Beginning balance $ 294 $ 294
Provision charged to income - -
Charge-offs - (1)
------- -------
Ending balance $ 294 $ 293
======= =======
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. REAL ESTATE
-----------
Real estate is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
---- ----
<S> <C> <C>
Real estate acquired in settlement of loans $ 80 $ 37
In substance foreclosed real estate 91 119
----- -----
$ 171 $ 156
===== =====
</TABLE>
6. INTEREST RECEIVABLE
-------------------
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1995 1996
---- ----
<S> <C> <C>
Loans receivable $ 294 $ 315
Investment securities 95 84
Interest earning deposits 1 1
Allowance for uncollected interest (26) (53)
----- -----
$ 364 $ 347
===== =====
</TABLE>
7. PREMISES AND EQUIPMENT
----------------------
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
---- ----
<S> <C> <C>
Land $ 48 $ 48
Building and improvements 384 384
Furniture, fixtures and equipment 157 158
----- -----
589 590
Less accumulated depreciation 149 175
----- -----
$ 440 $ 415
===== =====
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
8. DEPOSITS
--------
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
JUNE 30, INTEREST RATES
----------------- --------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Money market accounts $ 4,223 $ 4,214 4.19% 3.36%
Passbook accounts 2,293 2,323 3.30% 3.30%
Certificates of deposit 23,590 24,736 5.70% 5.66%
------- ------- ---- ----
$ 30,106 $ 31,273 5.31% 5.17%
======= ======= ==== ====
</TABLE>
The aggregate amount of deposits with a minimum denomination of $100,000 is
approximately $6,565,000 and $6,762,000 at June 30, 1996 and 1995,
respectively.
Contractual maturities of certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
---- ----
<S> <C> <C>
12 months or less $ 19,803 $ 20,482
1-2 years 2,260 3,862
2-3 years 1,527 392
------- -------
$ 23,590 $ 24,736
======= =======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
----------------------
1995 1996
------- -------
<S> <C> <C>
Passbook savings $ 70 $ 71
NOW and money market 176 159
Certificates of deposit 1,105 1,413
------- -------
$ 1,351 $ 1,643
======= =======
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATEED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
9. INCOME TAXES
------------
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
1995
----------
Current $ 456 $ 57 $ 513
Deferred 38 5 43
---- --- ----
$ 494 $ 62 $ 556
==== === ====
1996
----------
current $ 302 $ 27 $ 329
Deferred (9) (1) (10)
---- --- ----
$ 293 $ 26 $ 319
==== === ====
</TABLE>
The differences between actual income tax expense and the amount computed
by applying the federal statutory income tax rate of 34% to income before
income taxes are reconciled as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Computed income tax expense $ 504 $ 274
Increase (decrease) resulting from:
State income tax, net of
federal benefit 40 17
Nondeductible expenses 7 22
Other 5 6
----- -----
Actual income tax expense $ 556 $ 319
===== =====
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Accrued income $ 170 $ 155
FHLB stock dividends 67 67
Other 30 16
----- -----
267 238
----- -----
Deferred tax assets:
Bad debt reserves 54 54
Loan origination fees 67 68
Other 10 2
----- -----
131 124
----- -----
Net deferred tax liability $ 136 $ 114
===== =====
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The Association's annual addition to its reserves for bad debts allowed
under the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt deductions
for income tax purposes are included in taxable income of later years only
if the bad debt reserves are used for purposes other than to absorb bad
debt losses. Since the Association does not intend to use the reserves for
purposes other than to absorb losses, no deferred income taxes have been
provided on the amount of bad debt reserves for tax purposes that arose in
tax years beginning before December 31, 1987, in accordance with SFAS No.
109. Therefore, retained earnings at June 30, 1995 and 1996, includes
approximately $855,000, representing such bad debt deductions for which no
deferred income taxes have been provided.
10. PROFIT SHARING AND EMPLOYEE SAVINGS PLAN
----------------------------------------
The Company has established a qualifying noncontributory profit sharing
plan covering substantially all employees who have completed six months of
service and have attained the age of twenty-one. All employer
contributions, as determined by the Board of Directors, are irrevocable and
the Company has reserved the right of amendment and termination of the
Plan. A contribution to the Plan of $4,000 was made for the year ended June
30, 1995. No contribution was made for 1996.
The Company also sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code. This plan covers substantially all full-time
employees who have completed six months of service and have attained the
age of twenty-one. Employees may contribute a percentage of their annual
gross salary as limited by the federal tax laws. The Company can match
employee contributions based on the plan guidelines. No salary deferrals or
matching contributions by the Company were made for the years ended June
30, 1995 and 1996.
11. PENSION PLAN TERMINATION
------------------------
In 1995, the Association completed the termination of its qualified defined
benefit pension plan. Final distribution of plan assets provided that a
portion be distributed to eligible participants, a portion to a qualified
replacement plan, and the balance to be reverted to the employer. The
amount reverted to the Association, after paying a twenty percent excise
tax, was approximately $69,000. This amount is included in the consolidated
financial statements for 1995 as noninterest income.
12. COMMITMENTS
-----------
The Company had outstanding commitments to originate mortgage loans of
approximately $233,000 and $609,000 at June 30, 1995 and 1996,
respectively. The commitments to originate mortgage loans at June 30, 1995,
were composed of fixed rate loans having interest rates ranging from 8.25%
to 10.00% and terms ranging from 3 to 25 years. The commitments to
originate mortgage loans at June 30, 1996, were composed of fixed rate
loans having interest rates ranging from 6.50% to 9.75% and terms ranging
from 3 to 20 years.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
On May 2, 1996, the Company entered into an agreement with First Palmetto
Savings Bank (Seller) to purchase certain assets and assume certain
deposits and other liabilities associated with the operations of the
Seller's branch office in Winnsboro, South Carolina. The assets to be
purchased will consist of branch loans, cash on hand, premises and
equipment, safe deposit contracts and records. It is anticipated that total
assets acquired will be approximately $4 million based on preliminary
information. The liabilities assumed will consist of branch deposits and
assumption of assignable leases and operating contracts.
The closing of the transaction contemplated by the agreement shall take
place at an agreed upon time within thirty (30) days following the first
date on which both regulatory approvals and consents have been received and
all waiting periods required by law and regulation have expired. The
purchase price will be established based on the assets and liabilities
outlined in the agreement at or near the closing date. The anticipated
closing of the transaction is second quarter of fiscal 1997.
13. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT (FIRREA) OF
-----------------------------------------------------------------------
1989
----
FIRREA regulations for savings institutions' minimum-capital requirements
went into effect on December 7, 1989. In addition to the capital
requirements, FIRREA includes provisions for changes in the federal
regulatory structure for institutions, including a new deposit insurance
system, increased deposit insurance premiums, and restricted investment
activities with respect to non-investment-grade corporate debt and certain
other investments. FIRREA also increases the required ratio of housing-
related assets needed to qualify as a savings institution. The regulations
require institutions to have minimum regulatory tangible capital equal to
1.5 percent of total assets, a 3 percent leverage capital ratio, and an 8
percent risk-based capital ratio.
At June 30, 1995 and 1996, the Association met the regulatory tangible-
capital, core-capital, and risk-based capital requirements, as defined by
FIRREA. The Association had the following capital ratios at June 30, 1995
and 1996:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1995 1996
----- -----
<S> <C> <C>
Tangible capital to adjusted total assets 24.5% 24.0%
Core capital to adjusted total assets 24.5% 24.0%
Risk-based capital to risk-weighted assets 54.1% 53.1%
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The following is a reconciliation of the Association's generally accepted
accounting principles ("GAAP") capital to regulatory capital at June 30,
1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
<S> <C> <C> <C>
GAAP capital $10,163 $10,163 $10,163
Additional capital item:
General valuation allowance - - 232
------- ------- -------
Regulatory capital computed 10,163 10,163 10,395
Minimum capital requirement 635 1,269 1,566
------- ------- -------
Regulatory capital excess $ 9,528 $ 8,894 $ 8,829
======= ======= =======
</TABLE>
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------
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 include commitments to extend
credit. Those instruments involve, to varying degrees, elements of credit
and interest-rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect the
extent of the Company's involvement in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral may include one to four family residences and nonresidential
properties.
The Company's only financial instruments with off-balance sheet risk at
June 30, 1996, are outlined in Note 12.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
15. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
------------------------------------
The Association has established for eligible employees an Employee Stock
Ownership Plan ("ESOP"). The ESOP borrowed approximately $624,000 from the
Holding Company and purchased 62,422 common shares issued in the offering.
The Association is expected to make scheduled cash contributions to the
ESOP sufficient to service the amount borrowed. The $624,000 in stock
issued by the Holding Company is reflected in the accompanying consolidated
financial statements as a charge to unearned compensation and a credit to
common stock and paid-in capital. In accordance with GAAP, the unpaid
balance of the ESOP loan has been eliminated in consolidation and the
unamortized balance of unearned compensation is shown as a reduction of
stockholders' equity. For the years ending June 30, 1995 and 1996, the
total contributions to the ESOP were used to fund principal and interest
payments on the ESOP debt and totaled approximately $74,000 and $102,000,
respectively.
For the years ending June 30, 1995 and 1996, compensation from the ESOP of
approximately $49,000 and $127,000 was expensed, respectively. Compensation
is recognized at the average fair value of the ratably released shares
during the accounting period as the employees performed services. At June
30, 1996, the ESOP had 11,055 allocated shares and 51,367 unallocated
shares. The fair value of the unallocated shares at June 30, 1996, was
approximately $847,000.
The ESOP plan states that dividends on unallocated shares will be used for
debt service and dividends on allocated shares will be distributed to the
Plan participants. For the purposes of computing earnings per share, all
ESOP shares committed to be released have been considered outstanding.
16. MANAGEMENT RECOGNITION AND RETENTION PLAN
-----------------------------------------
The Company has established a management recognition and retention plan
("MRP") which reserved 31,211 shares of common stock for issuance. The
shares were reserved for certain employees, officers, and directors of the
Company who began vesting on December 13, 1995, and will be fully vested by
December 13, 1999. The number of shares granted to directors was 7,800 and
to certain officers was 13,904. Compensation expense in the amount of the
fair value of the common stock at the date of grant to the officer or
director will be recognized during the periods the participants become
vested. The unamortized balance of unearned compensation will be reflected
as a reduction of stockholders' equity. During 1996, 31,211 shares of
common stock were purchased to fund the MRP. For the year ended June 30,
1996, approximately $125,000 has been recognized as compensation expense.
17. STOCK OPTION PLANS
------------------
The Company has adopted a stock option plan for the benefit of directors,
officers, and other key employees of the Company. The number of shares of
common stock reserved for issuance under the stock option plan was equal to
approximately 10% of the total number of common shares
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
issued pursuant to the Company's offering. The plan provides for incentive
options for officers and employees and non-incentive options for directors.
The plan is administered by a committee of at least three directors of the
Company. The option exercise price cannot be less than the fair value of
the underlying common stock as the date of the option grant, and the
maximum option term cannot exceed ten years. The number of shares of common
stock authorized under the stock option and incentive plan is 78,028 with
an exercise price of $13.50. As of June 30, 1996, 19,505 non-incentive
stock options have been granted to directors and are exercisable on a
cumulative basis in equal installments over a five year period. The
incentive stock options awarded to officers and other key employees totaled
28,707 as of June 30, 1996, and are exercisable on a cumulative basis in
equal installments over a five year period. As of June 30, 1996, 48,212
options have been granted, of which 9,642 are exercisable.
18. STOCKHOLDERS' EQUITY
--------------------
On July 7, 1994, the Holding Company issued and sold 780,275 shares of
common stock at $10 per share in its initial public offering, including
62,422 shares to the Association's ESOP (see Note 15). The net proceeds to
the Holding Company after recognizing the approximately $584,000 of
expenses and underwriting costs and approximately $624,000 of employee
compensation plans were approximately $6.6 million.
The Holding Company used $3.6 million of the net proceeds to purchase all
of the capital stock of the Association and invest virtually all of the
remaining proceeds in U.S. government and agency securities and overnight
funds (after loaning $624,000 to the Association's ESOP).
At the time of its conversion to a stock association, the Association
established a liquidation account in an amount equal to its total retained
earnings as of June 30, 1994. The liquidation account will be maintained
for the benefit of eligible account holders who continue to maintain their
accounts at the Association after the conversion. The liquidation account
will be reduced annually to the extent that eligible account holders reduce
their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event
of a complete liquidation, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualified balances for accounts then
held.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on or repurchase any of its shares of common stock, if the effect
would cause stockholders' equity to be reduced below the amount required
for the liquidation account, applicable regulatory capital maintenance
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
Unlike the Association, the Holding Company is not subject to these
regulatory restrictions on payment of dividends to its stockholders.
However, the source of future dividends may be dependent upon dividends
from the Association.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The Company also has 200,000 shares of preferred stock with par value of
$.01 per share authorized but none issued or outstanding at June 30, 1995
and 1996.
19. FINANCIAL INSTRUMENTS
---------------------
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands):
<TABLE>
<CAPTION>
STATED ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and interest earning deposits $ 4,587 $ 4,587
Securities held to maturity 4,749 4,774
Loans receivable, net 33,338 33,547
Mortgage-backed securities 62 62
Federal Home Loan Bank stock 429 429
Interest receivable 347 347
-------- ---------
$ 43,512 $ 43,746
======== =========
Financial liabilities:
Deposits $ 31,273 $ 31,404
Other liabilities 408 408
-------- ---------
$ 31,681 $ 31,812
======== =========
</TABLE>
The Company had off-balance sheet financial commitments, which include
approximately $609,000 of commitments to originate and fund loans. Since
these commitments are based on current market rates, the commitment amount
is considered to be a reasonable estimate of fair market value.
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate
that value. The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments:
CASH - The carrying amount of such instruments is deemed to be a reasonable
----
estimate of fair value.
INVESTMENTS - Fair values for investment securities are based on quoted
-----------
market prices.
LOANS - Fair values for loans held for investment are estimated by
-------
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio. A
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
FEDERAL HOME LOAN BANK STOCK - No ready market exists for this stock and it
----------------------------
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed
to be a reasonable estimate of fair value.
DEPOSITS - The fair values disclosed for demand deposits are, as required
--------
by SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
OTHER ASSETS AND OTHER LIABILITIES - Other assets represent accrued
----------------------------------
interest receivable; other liabilities represent advances from borrowers
for taxes and insurance and accrued interest payable. Since these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
Fair value estimates are made at a specific point of time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Company's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayments trends, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value also
would affect significantly the estimates. Further, the fair value estimates
were calculated as of June 30, 1996. Changes in market interest rates and
prepayment assumptions could change significantly the estimated fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial assets
or liabilities including deposit franchise value, real estate, deferred tax
liabilities, and premises and equipment.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
20. EMPLOYMENT AND SEVERANCE AGREEMENTS
-----------------------------------
The Association and the Holding Company entered into employment and
severance agreements with certain key officers. The employment and
severance agreements provide for up to three-year terms. Commencing on the
first anniversary date and continuing each anniversary date thereafter, the
respective boards of directors may extend the agreements for an additional
year so that the remaining terms shall be up to three years, unless written
notice of termination of the agreement is given. The agreements provide for
severance payments and other benefits in the event of involuntary
termination of employment in connection with any change in control of the
employers. Severance payments also will be provided on a similar basis in
connection with voluntary termination of employment where, subsequent to a
change in control, officers are assigned duties inconsistent with their
positions, duties, responsibilities and status immediately prior to such
change in control. The severance payments will equal up to 2.99 times the
executive officer's average annual compensation during the preceding three
to five years for certain officers. The employment agreement provides for
termination by the Association or the Holding Company for just cause at any
time. At June 30, 1995 and 1996, the Company has not accrued any benefits
for these postemployment agreements.
21. DEPOSIT INSURANCE PREMIUMS
--------------------------
The Company currently pays an insurance premium to the Federal Deposit
Insurance Corporation (FDIC) equal to a percentage of its total deposits as
a member of the Savings Association Insurance Fund (SAIF). In August 1995,
the FDIC announced plans to lower the insurance premium rates for members
of the Bank Insurance Fund (BIF). The disparity in insurance premiums
between BIF and SAIF could create a competitive disadvantage for SAIF
members. A proposed alternative to mitigate the effect is the assessment of
a special premium of approximately .85% of deposits in order to
recapitalize the SAIF and a subsequent lowering of the SAIF insurance
premium rates.
If the proposal is realized, the Company would recognize an immediate
charge to earnings for the amount of the fee which would immediately reduce
its capital. After recapitalization, it is expected that the SAIF and BIF
premiums would initially be equal and therefore provide the Company with
reduced insurance premiums in the future. However, management of the
Company is unable to predict whether this proposal will be enacted or
whether ongoing SAIF premiums will be reduced to a level equal to that of
BIF premiums.
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------
The following condensed balance sheets as of June 30, 1995 and 1996, and
condensed statements of income and cash flows for the period from July 7,
1994 to June 30, 1995, and for the year ended June 30, 1996, for South
Carolina Community Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
PARENT COMPANY ONLY JUNE 30,
-------------------------------------------------
BALANCE SHEETS (IN THOUSANDS) 1995 1996
---- ----
<S> <C> <C>
Assets:
Interest earning deposits $ 1,052 $ 412
Investment securities (market value
of $1,919 in 1995 and $1,410 in 1996) 1,895 1,398
Loans receivable from ESOP 578 515
Equity in net assets of Association 10,606 11,054
Other 34 47
------------ -----------
Total assets $ 14,165 $ 13,426
============ ===========
Liabilities:
Accrued income taxes payable $ 45 $ 2
Accrued dividends 195 221
Accrued expenses - 3
------------ -----------
Total liabilities 240 226
------------ -----------
Stockholders' equity:
Common stock 8 8
Paid-in capital 7,213 7,213
Retained earnings 6,704 6,769
Treasury stock - (790)
------------ -----------
Total stockholders' equity 13,925 13,200
------------ -----------
Total liabilities and stockholders' equity $ 14,165 $ 13,426
============ ===========
</TABLE>
<PAGE>
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM YEAR
PARENT COMPANY ONLY JULY 7, 1994 TO ENDING
STATEMENTS OF INCOME (IN THOUSANDS) JUNE 30, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
Equity in earnings of Association $ 845 $ 448
Interest income 195 156
Noninterest expenses (68) (95)
Income tax expense (45) (21)
------------- ------------
Net income $ 927 $ 488
============= ============
</TABLE>
The Association subsidiary has not paid any cash dividends to the parent
company for the periods ending June 30, 1995 and 1996.
<TABLE>
<CAPTION>
PERIOD FROM YEAR
PARENT COMPANY ONLY JULY 7, 1994 TO ENDING
STATEMENTS OF CASH FLOWS (IN THOUSANDS) JUNE 30, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
Operating activities:
Net income $ 927 $ 488
Equity earnings of Association (845) (448)
Amortization of discounts on (25) (3)
investment securities
Deferred income taxes 12 -
Increase in prepaid expenses and (34) (13)
other assets
Increase in accrued expenses - 3
Increase in income taxes payable 33 (43)
---------- ------------
Net cash provided (used) by
operating activities 68 (16)
---------- ------------
Investing activities:
Loan to ESOP net of repayments (578) -
Purchase of capital stock of (3,610) -
Association
Purchases of investment securities (2,620) -
Proceeds from maturities of 750 500
investment securities
Repayments of ESOP loan - 63
---------- ------------
Net cash provided (used) by
investing activities (6,058) 563
---------- ------------
Financing activities:
Proceeds from issuance of common 7,222 -
stock
Dividends paid (180) (397)
Acquisition of treasury stock - (790)
---------- ------------
Net cash provided (used) by
financing activities 7,042 (1,187)
---------- ------------
Net increase in cash 1,052 (640)
Cash at beginning of period - 1,052
---------- ------------
Cash at end of period $ 1,052 $ 412
========== ============
</TABLE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
At its board meeting on January 30, 1995, the Board of Directors of South
Carolina Community Bancshares, Inc. decided not to engage Philip Lee and Company
as the independent accountant but instead engaged the accounting firm of Crisp,
Hughes & Co., L.L.P. as independent accountants for the Registrant for fiscal
1995. During the two most recent fiscal years and interim period subsequent to
June 30, 1994, there have been no disagreements with Philip Lee and Company on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events. Philip Lee
and Company's report on the financial statements for the two years prior to June
30, 1995 contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -------------------------------------------------
Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1996 Annual Meeting of Shareholders is incorporated herein by
reference. Information concerning executive officers of the Company during
fiscal year 1996, who were not also directors of the Company, is provided below.
Terri C. Robinson, age 37, has been employed by the Association since 1984
in various capacities, most recently as Bookkeeper, Secretary-Treasurer and
since December 1993, as Chief Financial Officer.
ITEM 10. EXECUTIVE COMPENSATION
- ---------------------------------------------
Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1996 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1996 Annual Meeting of Shareholders is incorporated herein by
reference.
63
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1996 Annual Meeting of Shareholders is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-KSB
- ---------------------------------------------
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of South Carolina Community Bancshares,
Inc.*
3.2 Bylaws of South Carolina Community Bancshares, Inc.*
4.0 Stock Certificate of South Carolina Community Bancshares, Inc.*
10.0 Community Federal Savings and Loan Association Employee Stock
Ownership Plan*
10.1 South Carolina Community Bancshares, Inc. 1994 Stock Option Plan**
10.2 South Carolina Community Bancshares, Inc. 1994 Recognition and
Retention Plan**
10.3 Employment Agreement between the Association and Alan W. Pullen*
(b) Reports on Form 8-KSB
None
* Incorporated herein by reference into this document from the Exhibits to
Form S-1 Registration Statement, initially filed on March 18 , 1994,
Registration No. 33-76676.
** Incorporated by reference to the Appendix to the Company's Proxy Statement
dated November 8, 1994.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTH CAROLINA COMMUNITY
BANCSHARES, INC.
By: /s/ Alan W. Pullen
-------------------------
Alan W. Pullen
President and Chief Executive Officer
(Duly Authorized Representative)
Dated: September 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Alan W. Pullen President and Chief Executive Officer September 27, 1996
- -------------------------------- (Principal Executive Officer) ------------------
Alan W. Pullen
/s/ Terri C. Robinson Secretary-Controller and September 27, 1996
- -------------------------------- Chief Financial Officer ------------------
Terri C. Robinson (Principal Financial and Accounting Officer
/s/ Quay W. McMaster Chairman of the Board September 27, 1996
- -------------------------------- ------------------
Quay W. McMaster
/s/ Richard H. Burton Vice-Chairman of the Board September 27, 1996
- -------------------------------- ------------------
Richard H. Burton
/s/ George R. Lauderdale, Jr. Director September 27, 1996
- -------------------------------- ------------------
George R. Lauderdale, Jr.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 416
<INT-BEARING-DEPOSITS> 4,171
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,811
<INVESTMENTS-MARKET> 4,836
<LOANS> 33,338
<ALLOWANCE> 0
<TOTAL-ASSETS> 44,172
<DEPOSITS> 31,273
<SHORT-TERM> 0
<LIABILITIES-OTHER> 590
<LONG-TERM> 0
0
0
<COMMON> 8
<OTHER-SE> 12,301
<TOTAL-LIABILITIES-AND-EQUITY> 44,172
<INTEREST-LOAN> 2,817
<INTEREST-INVEST> 333
<INTEREST-OTHER> 256
<INTEREST-TOTAL> 3,406
<INTEREST-DEPOSIT> 1,643
<INTEREST-EXPENSE> 1,643
<INTEREST-INCOME-NET> 1,763
<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 991
<INCOME-PRETAX> 807
<INCOME-PRE-EXTRAORDINARY> 807
<EXTRAORDINARY> 0
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<NET-INCOME> 488
<EPS-PRIMARY> .67
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.94
<LOANS-NON> 600
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 638
<ALLOWANCE-OPEN> 293
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 293
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
