SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20052
____________________________________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23751
--------
____________________________________________
SouthBanc Shares, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 58-2361245
------------ ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
907 N. Main Street
Anderson, South Carolina 29621
------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(864) 225-0241
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No ____
----
$0.01 par value of common stock 3,089,113
- ------------------------------- ---------
(Class) (Outstanding at December 31, 1999)
SouthBanc Shares, Inc. and Subsidiary
FORM 10-Q
FOR THE QUARTER ENDED December 31, 1999
TABLE OF CONTENTS
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 1999 (unaudited).................................... 3
Consolidated Statements of Income for the Quarter Ended
December 31, 1999, and the Three Months Ended December 31, 1998
(unaudited)....................................................... 4
Consolidated Statements of Stockholders' Equity
for the Year Ended September 30, 1999 and
the Three Months Ended December 31, 1999 (unaudited).............. 5
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1999 and 1998 (unaudited)...................... 6
Notes to Consolidated Financial Statements (unaudited)............... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended December 31,
1999 and 1998........................................................ 10
Liquidity and Capital Resources...................................... 14
Capital Compliance................................................... 14
Impact of New Accounting Pronouncements.............................. 15
Effect of Inflation and Changing Prices.............................. 15
Year 2000 Considerations............................................. 15
Item 3. Market Risk Disclosure............................................... 15
Part II Other Information
Items:
1. Legal Proceedings................................................ 16
2. Changes in Securities and Use of Proceeds........................ 16
3. Defaults Upon Senior Securities.................................. 16
4. Submission of Matters to a Vote of Senior Holders................ 16
5. Other Materially Important Events................................ 16
Signatures........................................................... 17
2
SouthBanc Shares, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
Item I - Financial Statements
December 31 September 30,
1999 1999
------------ ------------
Assets
- ------
Cash and cash equivalents $16,176,752 $15,546,360
Investment securities available for sale (amortized
cost of $16,761,195 at December 31, 1999,
$17,673,222 at September 30, 1999) 15,232,673 16,243,703
Federal Home Loan Bank stock, at cost 3,950,000 3,650,000
Mortgage-backed securities available for sale
(amortized cost of $49,854,873 at December 31,
1999, and $60,027,799 at September 30, 1999) 47,839,117 58,384,541
Loans receivable, (net of allowance for loan losses of
$2,744,405 at December 31, 1999, and
$2,617,662 at September 30, 1999) 267,302,568 255,488,141
Investment in limited partnership 1,575,373 1,575,373
Real estate acquired in settlement of loans 208,150 229,900
Real estate held for development 2,203,034 2,095,903
Premises and equipment, net 5,631,021 5,722,230
Accrued interest receivable
Loans receivable 2,085,958 1,860,838
Mortgage-backed and other securities 397,815 453,968
Cash surrender value of life insurance 7,961,408 7,865,743
Other 3,103,169 3,034,571
------------ ------------
Total Assets $373,667,038 $372,151,271
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $219,197,587 221,257,085
Advances from the Federal Home Loan Bank ("FHLB") 79,000,000 73,000,000
Securities sold under agreements to repurchase 20,453,489 20,254,436
Advance payments by borrowers for property taxes and
insurance 142,115 438,484
Accrued interest payable 1,320,624 1,356,578
Accrued expenses and other liabilities 2,501,332 3,094,136
------------ ------------
Total Liabilities 322,615,147 319,400,719
------------ ------------
Commitments and contingencies - Note 17
Stockholders' Equity
- --------------------
Preferred stock ($0.01 par value; authorized 250,000 shares;
none issued or outstanding at December 31, 1999, and
September 30, 1999) - -
Common stock ($0.01 par value; authorized 7,500,000
shares; issued 4,322,030 shares at December 31, 1999.
$0.01 par value; authorized 7,500,000 shares;
issued 4,322,030 shares at September 30, 1999 43,220 43,220
Additional paid-in capital 57,789,937 57,741,324
Retained earnings, restricted 23,232,932 22,351,722
Treasury stock - at cost (1,232,917 shares) (24,999,851) (22,515,585)
Accumulated other comprehensive income, net (2,339,223) (2,028,033)
Indirect guarantee of ESOP debt (600,024) (622,247)
Deferred compensation for Management
Recognition Plan (MRP) (2,075,100) (2,219,849)
------------ ------------
Total stockholders' equity 51,051,891 52,750,552
------------ ------------
Total liabilities and stockholders' equity $373,667,038 372,151,271
============ ============
See accompanying notes to consolidated financial statements.
3
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
For the Three Months Ended
December 31,
------------
1999 1998
---- ----
Interest Income:
Loans $5,223,922 $4,713,164
Mortgage-backed securities 915,758 1,171,238
Other investments 523,503 634,745
---------- ----------
Total interest income 6,663,183 6,519,147
---------- ----------
Interest expense:
Interest on deposits:
Transaction accounts 236,270 264,569
Passbook accounts 164,760 155,469
Certificate accounts 1,777,562 1,837,934
---------- ----------
Total interest on deposits 2,178,592 2,257,972
Interest on borrowings 1,325,685 1,075,078
---------- ----------
Total interest expense 3,504,277 3,333,050
---------- ----------
Net interest income 3,158,906 3,186,097
Provision for loan losses 150,000 80,000
---------- ----------
Net interest income after provision for
loan losses 3,008,906 3,106,097
---------- ----------
Other income:
Loan and deposit account service charges 998,414 878,783
Gain (Loss) on sale of investments (94,702) 292,035
(Loss) on sale of real estate acquired
in settlement of loans (5,150) (1,794)
Gain on sale of loans, net 0 48,741
Gain on sale of real estate held
for development 53,001 36,172
Earnings on bank owned life insurance 107,670 107,100
Other 250,461 143,487
---------- ----------
Total other income 1,309,694 1,504,524
---------- ----------
General and administrative expenses:
Salaries and employee benefits 1,277,822 1,150,068
Occupancy 127,792 119,522
Furniture and equipment expense 246,119 264,241
FDIC insurance premiums 32,833 29,188
Advertising 46,561 43,243
Data processing 126,883 109,457
Office supplies 104,041 46,783
Profit improvement program 70,000 65,774
Other 286,730 290,631
---------- ----------
Total general and administrative expenses 2,318,781 2,118,907
---------- ----------
Income before income taxes 1,999,819 2,491,714
Income taxes 653,242 869,790
---------- ----------
Net income $1,346,577 $1,621,924
---------- ----------
Basic earnings per share $ 0.44 $ 0.40
========== ==========
Diluted earnings per share $ 0.41 $ 0.39
========== ==========
Weighted average shares outstanding:
Basic 3,060,241 4,061,389
========== ==========
Diluted 3,257,956 4,154,804
========== ==========
Dividends per share $ 0.15 $ 0.12
========== ==========
See accompanying notes to consolidated financial statements.
4
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Year Ended September 30, 1999 and Three Months Ended December 31, 1999
(Unaudited)
Accumulated
Other
Additional Retained Comprehensive
Common Common Paid-in Earnings Income (Loss), Treasury
Shares Stock Capital Restricted Net Stock
--------- ------- --------- ---------- ------------- -------
Balance at September 30, 1998 4,306,410 $43,064 $57,470,324 $18,154,380 $ 180,009 -
Net income - - - 5,972,778 - -
Other comprehensive income - - - - - -
Unrealized loss on securities, net - - - - (2,304,587) -
Reclassification adjustment for - - - - - -
losses realized in net income, net - - - - 96,543 -
Comprehensive income - - - - - -
Exercise of stock options 15,620 156 68,057 - - -
Reduction of ESOP debt - - - - - -
ESOP compensation expense - - 180,130 - - -
Earned portion of MRP - - - - - -
Dividends on common stock - - (1,775,436)
Transfer from Treasury Stock to MRP - 22,813 - 1,830,515
Purchase of Treasury - - - - - (24,346,100)
--------- ------- ---------- ----------- -------------- -----------
Balance at September 30, 1999 4,322,030 43,220 57,741,324 22,351,722 (2,028,033) (22,515,585)
Net Income - - - 1,346,577 - -
Other comprehensive income:
Unrealized loss on securities, net - - - - (373,693) -
Reclassification adjustment for
losses realized in net income, net - - - - 62,503 -
Comprehensive income - - - - -
Reduction of ESOP debt - - -
ESOP compensation expense 48,613 - - -
Earned portion of MRP - - - - - -
Dividends on common stock - - - (465,367) - -
Purchase of Treasury Stock - - - - ($2,484,266)
--------- ------- ---------- ----------- -------------- -----------
Balance at December 31 1999 4,322,030 $43,220 57,789,937 $23,232,932 ($2,339,223) ($24,999,851)
========= ======= ========== =========== ============== ===========
Indirect
Guarantee Deferred
of Compensation
ESOP for
Debt MRP Total
---------- ----------- ---------
Balance at September 30, 1998 ($711,140) ($729,311) $74,407,326
Net income - - 5,972,778
Other comprehensive income - -
Unrealized loss on securities, net - - ($2,304,587)
Reclassification adjustment for - -
losses realized in net income, net - - 96,545
Comprehensive income - - 3,764,736
- -
Exercise of stock options - - 68,213
Reduction of ESOP debt 88,893 - 88,893
ESOP compensation expense - - 180,130
Earned portion of MRP 362,790 362,790
Dividends on common stock (1,775,436)
Transfer from Treasury Stock to MRP - (1,853,328) -
Purchase of Treasury Stock - - (24,346,100)
---------- ------------ ------------
Balance at September 30, 1999 (622,247) (2,219,849) 52,750,552
Net Income - - 1,346,577
Other comprehensive income:
Unrealized loss on securities, net - - (373,693)
Reclassification adjustment for
losses realized in net income, net - - 62,503
-----------
Comprehensive income - - 1,035,387
Reduction of ESOP debt 22,223 - 22,223
ESOP compensation expense - - 48,613
Earned portion of MRP - 144,749 144,749
Dividends on common stock - (465,367)
Purchase of Treasury Stock - - (2,484,266)
---------- ------------ -----------
Balance at December 31 1999 ($600,024) ($2,075,100) $51,051,891
========== ============ ===========
See accompanying notes to consolidated financial statements.
5
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998 (Unaudited)
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $1,346,577 $1,621,924
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 210,229 216,053
Accretion, Net (255,158) (242,280)
Provision for loan losses 150,000 80,000
(Gain) loss on sale of investments, net 94,702 (292,035)
Loss on sale of real estate 5,150 1,794
Gain on sale of loans, net - (48,741)
Gain on sale of real estate held for
development (53,001) (36,172)
Deferred compensation 193,362 91,959
Increase in accrued interest
receivable and other assets (237,565) (2,375,697)
Increase (decrease) in other liabilities (575,757) 434,663
----------------- -----------------
Net cash provided by operating activities 878,539 (548,532)
----------------- -----------------
Cash flows from investing activities:
Increase in loans receivable, net (3,703,905) (536,209)
Purchases of loans receivable (8,468,672) (15,824,441)
Purchase of mortgage-backed securities - (9,929,696)
Purchases of investment securities (877,943) (3,337,004)
Purchases of FHLB stock (1,300,000) (160,800)
Purchase of premises and equipment (119,020) (48,295)
Sales of loans receivable - 1,666,037
Proceeds from redemption of FHLB stock 1,000,000 -
Principal repayments on mortgage-backed securities 2,748,005 13,150,723
Proceeds from maturities of investment securities 2,000,000 -
Proceeds from sale of mortgage-backed securities,
available for sale 7,439,993 1,911,563
Proceeds from sale of real estate owned 224,750 83,055
Proceeds from sale of real estate held for
development 67,860 327,589
Capital improvements of real estate held for
development (174,991) (134,409)
----------------- -----------------
Net cash used in investing activities (1,163,923) (12,831,887)
----------------- -----------------
Continued
6
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998 (Unaudited)
1999 1998
----------- -----------
Cash flows from financing activities:
Increase (decrease) in deposit accounts (2,059,498) 9,587,820
Proceeds from FHLB Advances 83,000,000 38,000,000
Repayment of FHLB Advances (77,000,000) (33,000,000)
Proceeds from securities sold under agreements
to repurchase 199,053 59
Proceeds from other borrowings - 7,000,000
Payment of stock offering costs - (15,669)
Purchase of Treasury stock (2,484,266) (14,921,186)
Repayments of ESOP loan 22,223 22,223
Dividends paid on common stock (465,367) (480,342)
Increase (decrease) in advance payments by borrowers
for property taxes and insurance (296,369) (216,544)
----------- -----------
Net cash provided by (used in) financing activities 915,776 5,976,361
Net increase (decrease) in cash and cash equivalents 630,392 (7,404,058)
Cash and cash equivalents, beginning of year 15,546,360 21,197,419
----------- -----------
Cash and cash equivalents, end of year $16,176,752 $13,793,361
=========== ===========
Supplemental disclosures:
Cash paid during the year for
Interest $ 3,540,231 $ 3,303,071
=========== ===========
Taxes $ 760,000 $ 580,000
=========== ===========
Noncash investing activities:
Additions to real estate acquired in settlement of loans $ 208,150 $ 172,207
=========== ===========
Loans receivable exchanged for mortgage-backed
securities - -
=========== ===========
Change in unrealized net gain (loss) on securities
available for sale, net of tax $ 311,190 $ 8,211
=========== ===========
Increase (decrease) in Employee Stock
Ownership Plan debt guaranteed by the
Bank $ 22,223 $ 22,223
=========== ===========
See accompanying notes to consolidated financial statements.
7
SouthBanc Shares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for
SouthBanc Shares, Inc. ("Company") were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include all
disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments, consisting
only of normal recurring accruals, which are, in the opinion of
management, necessary for fair presentation of the interim consolidated
financial statements have been included. The results of operations for
the period ended December 31, 1999 are not necessarily indicative of
the results that may be expected for the entire year. These
consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read
in conjunction with the Company's audited consolidated financial
statements and related notes for the year ended September 30, 1999.
2. Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include
the accounts of the Company, Perpetual Bank, A Federal Savings Bank,
("Savings Bank"), and the Savings Bank's wholly owned subsidiaries,
Mortgage First Service Corporation and United Service Corporation, and
United Service Corporation's wholly owned subsidiary, United Investment
Services.
United Service Corporation is a wholly-owned subsidiary of the Savings
Bank. At December 31, 1999, United Service had assets of $2.5 million.
United Service is involved in two residential and two commercial real
estate development projects.
All significant intercompany items and transactions have been
eliminated in consolidation.
3. Payment of Dividends
--------------------
The payment of dividends by the Company depends primarily on the
ability of the Savings Bank to pay dividends to the Company. The
payment of dividends by the Savings Bank is subject to regulation by
the Office of Thrift Supervision ("OTS"). The Savings Bank may not
declare or pay a cash dividend if the effect thereof would cause the
capital of the Savings Bank to be reduced below regulatory capital
requirements imposed by the OTS or below the liquidation account
established by the Savings Bank in connection with the conversion of
the Savings Bank's former mutual holding company (SouthBanc Shares,
M.H.C.) from the mutual to stock form of organization.
The Company's Board of Directors declared a cash dividend of $.15 per
share to its shareholders during the quarter ended December 31, 1999,
payable to shareholders of record as of January 4, 2000.
4. Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public
market. This standard
8
4. Earnings Per Share (Continued)
------------------------------
specifies computation and presentation requirements for both basic EPS
and, for entities with complex capital structures, diluted EPS. Basic
earnings per share are computed by dividing net income by the weighted
average common shares outstanding. Diluted earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares had been issued. The dilutive effect of options
outstanding under the Company's stock option plan is reflected in
diluted earnings per share by application of the treasury stock method.
SFAS No. 128 is effective for reporting periods ending after December
15, 1997. The Company adopted SFAS No. 128 during the quarter ended
December 31, 1997. Accordingly, all prior period earnings per share
have been restated for the purchase of Treasury Stock.
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND
DILUTED EPS COMPUTATIONS:
FOR THE QUARTER ENDED DECEMBER 31, 1999
---------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------ ------
BASIC EPS $1,346,577 3,060,241 $0.44
Effect of Diluted Securities:
Stock Options 0 105,530
ESOP 0 92,185
----------- ---------
Diluted EPS $1,346,577 3,257,956 $0.41
9
4. Earnings Per Share (Continued)
------------------------------
FOR THE QUARTER ENDED DECEMBER 31, 1998
---------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
BASIC EPS $1,621,924 3,956,035 $0.41
Effect of Diluted Securities:
Stock Options 0 93,415
ESOP 0 105,354
-------- --------
Diluted EPS $1,621,924 4,154,804 $0.39
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at December 31, 1999 and September 30, 1999
Total assets increased 0.40% or $1.5 million to $373.7 million at December 31,
1999, from $372.2 million at September 30, 1999. Loans receivable increased
4.62% or $11.8 million to $267.3 million at December 31, 1999, from $255.5
million at September 30, 1999. The increase in loans receivable resulted from
growth in first mortgage residential loans which increased $7.2 million to
$151.9 million at December 31, 1999, from $144.7 million at September 30, 1999,
residential construction loans which increased $0.3 million to $28.1 million at
December 31, 1999 from $27.8 million at September 30, 1999, commercial real
estate which increased $1.9 million to $50.0 million at December 31, 1999, from
$48.1 million at September 30, 1999, commercial loans which increased $0.9
million to $16.3 million at December 31, 1999, from $15.4 million at September
30, 1999, and consumer loans which increased $1.8 million to $23.8 million at
December 31, 1999, from $22.0 million at September 30, 1999.
Cash and cash equivalents increased 4.52% or $0.7 million to $16.2 million at
December 31, 1999, from $15.5 million at September 30, 1999.
Investment securities available-for-sale decreased 6.17% or $1.0 million to
$15.2 million at December 31, 1999, from $16.2 million at September 30, 1999.
The Company's $2.0 million agency callable bond yielding 8.00% was called, and
the Company purchased $0.9 million of equity investments.
Mortgage-backed securities available-for-sale decreased 18.15% or $10.6 million
to $47.8 million at December 31, 1999, from $58.4 million at September 30, 1999.
The Company sold $7.4 million FHLMC fixed rate mortgage-backed securities with
coupon rates between 7.50% and 8.00% maturing in twenty years. Principal
repayments on mortgage-backed securities were $2.7 million.
The investment in the limited partnership was $1.6 million at December 31, 1999,
and September 30, 1999, based upon independent appraisals. Future adjustments to
the valuation reserve will be recorded as deemed necessary. The limited
partnership, an equity investment, invests in mortgage servicing rights tied to
a national portfolio of residential mortgage loans.
Real estate held for development increased $0.1 million to $2.2 million at
December 31, 1999, from $2.1 million at September 30, 1999. United Service
Corporation sold three single-family residential lots in The Meadows Subdivision
at a cost of $97,000. Forty-six lots remain available for sale in Phase II in
The Meadows residential subdivision with all infrastructure to be completed by
June 2000. One tract of 8.0 acres and another tract of 5.0 acres remain
available for
10
Comparison of Financial Condition at December 31, 1999 and September 30, 1999
- -----------------------------------------------------------------------------
sale in Perpetual Square, a commercial real estate development. Northpark, an
industrial park has twenty unsold acres of land.
Deposits decreased 1.0% or $2.1 million to $219.2 million at December 31, 1999,
from $221.3 million at September 30, 1999. The Company consolidated the number
of checking and statement saving accounts being offered and initiated a new
deposit fee schedule. Non interest bearing checking accounts decreased 11.46% or
$1.8 million to $13.9 million at December 31, 1999, from $15.7 million at
September 30, 1999. Interest bearing checking accounts decreased 0.69% or $0.3
million to $43.0 million at December 31, 1999, from $43.3 million at September
30, 1999. Statement savings accounts decreased 6.06% or $1.6 million to $24.8
million at December 31, 1999, from $26.4 million at September 30, 1999.
Certificates of deposits increased 1.18% or $1.6 million to $137.5 million at
December 31, 1999, from $135.9 million at September 30, 1999.
Advances from the Federal Home Loan Bank increased 8.22% or $6.0 million to
$79.0 million at December 31, 1999, from $73.0 million at September 30, 1999.
The advances were used to fund the common stock repurchase program and to fund
loan originations and loan purchases from Mortgage First Service Corporation, a
subsidiary of the Savings Bank.
Stockholders equity decreased 3.22% or $1.7 million to $51.1 million at December
31, 1999, from $52.8 million at September 30, 1999. Retained earnings were
offset by dividends paid in the amount of $0.5 million. Common stock repurchased
through the common stock repurchase programs is recorded on the Company's
balance sheet as Treasury Stock, a contra-equity account. During the three
months ended December 31, 1999, the Company repurchased 115,675 shares at an
average cost of $21.48 per share and a total cost of $2.5 million.
Accumulated other comprehensive income net decreased ($0.3) million to ($2.3)
million at December 31, 1999, from ($2.0) million at September 30, 1999, due to
a decrease in the market value of the investment securities available for sale
and mortgage-backed securities available for sale resulting from an increase in
interest rates in the securities markets.
Deferred compensation for Management Recognition Plan (MRP) decreased $0.1
million to ($2.1) million at December 31, 1999, from ($2.2) million at September
30, 1999, due to the amortization of the cost of the (MRP).
Comparison of Operating Results for the Three Months Ended December 31, 1999,
and 1998
Net Income
- ----------
Net income for the three months ended December 31, 1999, decreased to $1.4
million or $0.44 basic earnings per share and $0.41 diluted earnings per share,
compared to $1.6 million or $0.41 basic earnings per share and $0.39 diluted
earnings per share for the same three months a year ago.
Net Interest Income
- -------------------
Net interest income was $3.2 million for the three months ended December 31,
1999, and the three months ended December 31, 1998. Total interest income
increased 2.21% or $144,000 to $6.7 million for the three months ended December
31, 1999, from $6.5 million for the three months ended December 31, 1998, due
primarily to a higher average balance of outstanding loans which increased $23.6
million or 10.02% to an average of $259.1 million yielding 8.06% for the three
months ended December 31, 1999, from $235.5 million yielding 8.01% for the three
months ended December 31, 1998. Interest income on mortgage-backed securities
decreased 21.78% or $255,000 to $0.9 million for the three months ended December
31, 1999, as the average balance decreased $21.9 million to $51.7 million for
the three months ended December 31, 1999, from $73.6 million for the three
months ended December 31, 1998. Interest income on other investments decreased
17.48% or $111,000 due primarily to a lower balance of investment securities
11
Net Interest Income - Continued
- -------------------------------
and interest bearing securities which decreased 23.85% or $9.3 million, to an
average balance of $29.7 million yielding 7.06% for the three months ended
December 31, 1999, from $39.0 million yielding 6.51% for the three months ended
December 31, 1998.
Interest Expense
- ----------------
Interest expense on deposits decreased 3.50% or $79,000 as the average
outstanding balance increased 3.28% or $7.0 million to $220.2 million at an
average cost of 3.96% for the three months ended December 31, 1999, from $213.2
million at an average cost of 4.24% for the three months ended December 31,
1998. Interest on borrowings increased $251,000 to $1.3 million for the three
months ended December 31, 1999, from $1.1 million for the three months ended
December 31, 1998, as the average borrowings increased 9.26% or $8.0 million to
$94.4 million at an average cost of 5.62% for the three months ended December
31, 1999, from $86.4 million at an average cost of 4.98% for the three months
ended December 31, 1998.
Provisions for Loan Losses
- --------------------------
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan losses, management evaluates various factors including
the market value of the underlying collateral, growth, and composition of the
loan portfolio, the relationship of the allowance for loan losses to outstanding
loans, loss experience, delinquency trends and economic conditions. Management
evaluates the carrying value of loans periodically, and the allowance for loan
losses is adjusted accordingly.
The provision for loan losses increased 87.5% or $70,000 to $150,000 for the
three months ended December 31, 1999, from $80,000 for the three months ended
December 31, 1998, due to an increase in non-performing assets during the
quarter ended December 31, 1999.
Non-performing assets at December 31, 1999, were $2.7 million consisting of
$456,000 of residential mortgage construction loans, $208,000 of real estate
acquired in settlement of loans, $905,000 of single family residential loans,
$909,000 of a commercial real estate loan, $124,000 of commercial loans, and
$95,000 of consumer loans.
Non-performing assets at September 30, 1999, were $2.6 million consisting of
$88,000 of residential mortgage construction loans, $208,000 of real estate
acquired in settlement of loans, $1,184,000 of single family residential loans,
$873,000 of a commercial real estate loans, $126,000 of commercial loans, and
$86,000 of consumer loans.
The allowance for loan losses to total loans was 1.02% at December 31, 1999, and
1.01% at September 30, 1999.
Other Income
- ------------
Total other income decreased 13.0% or $195,000 to $1.3 million for the three
months ended December 31, 1999, from $1.5 million for the three months ended
December 31, 1998. Loan and deposit service charges increased $119,000 to
$998,000 from $879,000 for the three months ended December 31, 1998, as a result
of an increase to the fee structure of deposit accounts. Gain (loss) on sale of
investments was a loss of $95,000 for the three months ended December 31, 1999,
compared to a gain of $292,000 for the three months ended December 31, 1998.
Loss on sale of real estate acquired in settlement of loans was a loss of $5,000
for the three months ended December 31, 1999, compared to a loss of $2,000 for
the three months ended December 31, 1998.
There was no gain on sale of loans for the three months ended December 31, 1999,
compared to a gain of $49,000 for the three months ended December 31, 1998. Gain
on sale of real estate held for development was $53,000 for the three months
ended December 31, 1999, as three residential lots were sold by the United
Service Corporation in The Meadows residential subdivision compared to $36,000
for the three months ended December 31, 1998, as two residential lots were sold
in The Meadows. Other income increased $107,000 to $250,000 for the three months
ended
12
Other Income - Continued
- ------------------------
December 31, 1999, compared to $143,000 for the three months ended December 31,
1998, due to earnings from Mortgage First Service Corporation, United Investment
Services Inc., and the accounts receivable processing service.
General and Administrative Expense
- ----------------------------------
Salaries and employee benefits increased 11.13% or $128,000 to $1.3 million for
the three months ended December 31, 1999, from $1.2 million for the three months
ended December 31, 1998, due to the expense of the 1999 Management Recognition
Plan (MRP). Office occupancy increased 6.67% or $8,000 to $128,000 for the three
months ended December 31, 1999, from $120,000 for the three months ended
December 31, 1998, due to a increase in building maintenance. Furniture and
equipment expenses decreased 6.82% or $18,000 to $246,000 for the three months
ended December 31, 1999, from $264,000 for the three months ended December 31,
1998, due to decreases in depreciation expense and equipment maintenance
expense. Advertising increased 9.30% or $4,000 to $47,000 for the three months
ended December 31, 1999, from $43,000 for the three months ended December 31,
1998. Data processing increased 16.51% or $18,000 to $127,000 for the three
months ended December 31, 1999, from $109,000 for the three months ended
December 31, 1998, as a result of increased volume and cost of ATM and debit
card processing. Office supplies increased 121.28% or $57,000 to $104,000 for
the three months ended December 31, 1999, from $47,000 for the three months
ended December 31, 1998, due to a increase in the purchase of data processing
supplies. The profit improvement program expense increased 6.06% or $4,000 to
$70,000 for the three months ended December 31, 1999 from $66,000 for the three
months ended December 31, 1998, based on increased deposit service charges.
Other operating expenses decreased 1.37% or $4,000 to $287,000 for the three
months ended December 31, 1999, from $291,000 for the three months ended
December 31, 1998.
Income Taxes
- ------------
Income taxes decreased 24.94% or $217,000 to $653,000 for the three months ended
December 31, 1999, from $870,000 for the three months ended December 31, 1998.
This was due to a decrease in income before taxes of 19.75% or $492,000 to $2.5
million from $2.0 million for the three months ended December 31, 1999, and
1998, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, repayment of loan
principal, and repayment of mortgage backed securities and collateralized
mortgage obligations, and, to a lesser extent, maturities of investment
securities, and short-term investments and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, general
economic conditions, and competition. The Company attempts to price its deposits
to meet its asset/liability objectives consistent with local market conditions.
Excess balances are invested in overnight funds. In addition, the Company is
eligible to borrow funds from the FHLB of Atlanta. Under OTS regulations, a
member thrift institution is required to maintain an average daily balance of
liquid assets (cash, certain time deposits and savings accounts, bankers'
acceptances, and specified U. S. government, state or federal agency obligations
and certain other investments) equal to a monthly average of not less than a
specified percentage of its net withdrawable accounts plus short-term
borrowings. This liquidity requirement, which is currently 4.0%, may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10.0%,
depending upon economic conditions and the savings flow of member associations.
Monetary penalties may be imposed for failure to meet liquidity requirements.
The liquidity of the Company at December 31, 1999 was 13.59%.
The primary investing activity of the Company is lending. During the three
months ended December 31, 1999, the Company originated $12.2 million of loans
and no loans were sold. The Company also purchased $8.5 million of loans. The
retained originations were primarily funded by principal repayments of loans and
mortgage-backed securities and collateralized mortgage obligations, and Federal
Home Loan Bank Advances.
13
Liquidity and Capital Resources - Continued
- -------------------------------------------
Liquidity management is both a short and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) projected loan sales, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) liquidity of its asset/liability management program. Excess liquidity is
generally invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires funds beyond its
ability to generate them internally, it has additional borrowing capacity with
the FHLB and collateral eligible for repurchase agreements.
The Company anticipates that it will have sufficient funds available through
normal loan repayments to meet current loan commitments. At December 31, 1999,
the Company had outstanding commitments to originate loans of approximately
$54.3 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
1999, totaled $119.6 million. Based upon management's experience and familiarity
with the customers involved and the Company's pricing policy relative to that of
its perceived competitors, management believes that a significant portion of
such deposits will remain with the Company.
The Company plans to repurchase up to 134,624 shares of its common stock before
April 14, 2000, subject to market conditions. The Company intends to fund the
repurchase program through cash on hand and/or liquidation of some of its other
interest earning assets.
Capital Compliance
- ------------------
The Company is not subject to any regulatory capital requirements. The Savings
Bank's actual capital and ratios as required by the OTS, as well as those
required to be considered well capitalized according to the Prompt Corrective
Action Provisions are presented in the following table. As of December 31, 1999,
the most recent notification from the OTS categorized the Savings Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Savings Bank must maintain minimum total
risk-based, Tier I risked-based, and Tier I core ("leverage") ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Savings Bank's category.
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
(Dollars in Thousands)
As of December 31, 1999:
- ------------------------
Tangible Capital (To Total Assets) $43,037 11.76% $ 5,491 1.50% $ - -%
Core Capital (To Total Assets) $43,037 11.76% $ 14,642 4.00% $18,303 5.00%
Tier I Capital (To Risk-Based Assets) $43,037 18.23% - - $14,165 6.00%
Risk-Based Capital (To Risk-Based
Assets) $45,645 19.33% $ 18,887 8.00% $23,609 10.00%
If the Savings Bank were to fail to meet the minimum capital requirements, it
will be required to file a written capital restoration plan with regulatory
agencies and would be subject to various mandatory and discretionary
restrictions on its operations.
14
Impact of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." All derivatives are to be measured
at fair value and recognized in the balance sheet as assets or
liabilities. This statement's effective date was delayed by the issuance
of SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS 133," and is
effective for fiscal years and quarters beginning after June 15, 2000.
The Company does not expect that the adoption of SFAS No. 133 will have
a material impact on the presentation of the Company's financial results
or financial position.
In February 1999, the FASB issued SFAS No. 135, "Rescission of SFAS 75
and Technical Corrections." This statement provides technical
corrections for previously issued statements and rescinds SFAS No. 75,
which provides guidance related to pension plans of state and local
governmental units. SFAS No. 135 is effective for fiscal years ending
after February 15, 1999. The adoption of SFAS 135 did not have a
material impact on the presentation of the Company's financial results
or financial position.
In June 1999, the FASB issued SFAS No. 136, "Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others." This statement establishes standards for
transactions in which an entity makes a contribution by transferring
assets to a not-for-profit organization or a charitable trust and then
requires these contributions to be used in specified manner. SFAS No.
136 is effective for fiscal periods beginning after December 15, 1999.
The Company does not expect that the adoption of SFAS No. 136 will have
a material impact on the presentation of the Company's financial results
or financial position.
Effect of Inflation and Changing Prices
- ---------------------------------------
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP") which require the measurement of financial position and
operating results in terms of historical dollars, without considering the
changes in relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
Year 2000
- ---------
Before January 1, 2000, the Bank had implemented and satisfactorily tested a
comprehensive plan to address the effect of the Year 2000 date change on the
Bunk's mission critical computer systems. While there can be no assurances that
the Bank's Year 2000 plan has effectively addressed the Year 2000 issue, the
Bank has not been notified, and it is unaware of, any vendor or service provider
problems related to Year 2000, and all of the Bank's systems have performed
properly since January 1, 2000. Likewise, the Bank is unaware of any Year 2000
issues that have impaired the ability of its borrowers to repay their debts.
ITEM 3 - Market Risk Disclosure
- -------------------------------
There have been no material changes to the market risk information set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Market Risk and Asset Liability Management" in the Company's
Annual Report dated September 30, 1999.
15
PART II
Item 1. Legal Proceedings
-----------------
The Company is not a party to any legal proceedings at this time. The Savings
Bank from time to time and currently is involved as plaintiff or defendant in
various legal actions incident to its business. These actions are not believed
to be material, either individually or collectively, to the consolidated
financial condition or results of operations of the Savings Bank.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits:
---------
3(a) Certificate of Incorporation of the Company *
3(b) Bylaws of the Company *
10.1 Employment Agreement between SouthBanc Shares,
Inc. and Robert W. Orr **
10.2 Employment Agreement between SouthBanc Shares,
Inc. and Thomas C. Hall **
10.3 Employment Agreement between SouthBanc Shares,
Inc. and Barry C. Visioli **
10.4 Employment Agreement between Perpetual Bank,
A Federal Savings Bank and Robert W. Orr **
10.5 Employment Agreement between Perpetual Bank,
A Federal Savings Bank and Thomas C. Hall **
10.6 Employment Agreement between Perpetual Bank,
A Federal Savings Bank and Barry C. Visioli **
10.7 1998 Stock Option Plan ***
10.8 1998 Management Development and Recognition
Plan ***
10.9 Supplemental Executive Retirement Agreement
with Robert W. Orr **
10.10 Supplemental Executive Retirement Agreement
with Thomas C. Hall **
10.11 Supplemental Executive Retirement Agreement
with Barry C. Visioli **
27 Financial Data Schedule
* Incorporated by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 333-42517).
** Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended September 30, 1999.
*** Incorporated by reference to the Company's Definitive Proxy
Statement dated December 18, 1998.
B. Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1999.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
SouthBanc Shares, Inc.
Date: February 11, 2000 /S/ Robert W. Orr
-----------------
Robert W. Orr
President and Managing Officer
(Duly Authorized Representative)
Date: February 11, 2000 /S/ Thomas C. Hall
------------------
Thomas C. Hall
Chief Financial Officer
17