Southbanc Shares, Inc.
SouthBanc Shares, Inc.
907 North Main Street
Anderson, South Carolina 29621
Southbanc Shares, Inc.
COMPANY PROFILE
. Perpetual
[PICTURE OF ANGIE GIBERT] . Heritage
Angie Gibert
Customer Specialist
SouthBanc Shares, Inc.
[MAP APPEARS HERE]
. Northtowne Office/Anderson . Laurens Office/Laurens
. Main Office/Anderson . Simpsonville Office/Simpsonville
. Whitehall Office/Anderson . Belton Office/Belton
. Watson Village/Anderson . Ware Shoals Office/Ware Shoals
. Perpetual Square/Anderson
. Seneca Office/Seneca
SouthBanc Shares, Inc., a Delaware corporation organized on November 6,
1997, is the holding company for Perpetual Bank, a Federal Savings Bank and
Heritage Federal Bank. On July 31, 2000, SouthBanc Shares acquired Heritage
Federal Bank which operates four branches in Laurens, Simpsonville, Belton and
Ware Shoals. Perpetual Bank operates six branches in Anderson and Seneca.
The principal business of SouthBanc Shares consists of coordinating and
directing the affairs and operations of Perpetual Bank and Heritage Federal
Bank. The banks are primarily engaged in the business of attracting deposits
from the general public and originating and purchasing mortgage loans, which are
secured by one-to-four-family residential properties, and investing in mortgage-
backed securities. The banks also originate loans secured by commercial real
estate as well as commercial business and consumer loans.
The headquarters for SouthBanc Shares is located at 907 North Main Street,
Anderson, South Carolina. The common stock of SouthBanc Shares is publicly
traded on the Nasdaq Stock Market (R) under the symbol SBAN.
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FINANCIAL HIGHLIGHTS
[PICTURE OF THOMAS C. HALL]
Thomas C. Hall
Senior Vice President
SouthBanc Shares, Inc.
As of September 30,
2000 1999 1998 1997 1996
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(in thousands)
Total Assets.............. $672,525 $372,151 $362,529 $256,993 $209,827
Stockholders' Equity...... $ 80,111 $ 52,751 $ 74,407 $ 30,602 $ 29,091
Total Assets Stockholders' Equity
(in thousands) (in thousands)
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
TO OUR SHAREHOLDERS:
[PICTURE OF ROBERT W. ORR AND J. EDWARD WELLS APPEARS HERE]
Robert W. Orr J. Edward Wells
President & CEO Chairman of the Board
SouthBanc Shares, Inc. SouthBanc Shares, Inc.
As we entered the new millennium, SouthBanc Shares began a new era. During
fiscal 2000, we combined two highly respected community financial institutions
under one holding company. As we move forward as a unified company, we plan to
build shareholder value by capitalizing on new business opportunities available
to us as the third largest thrift holding company headquartered in South
Carolina.
In continuing to better position ourselves to reach the challenges that lie
ahead, we undertook many significant endeavors during 2000. Aimed at increasing
the long-term value of the company, these improvements will provide a vital link
in assisting management to reach ambitious goals and ensuring focus on creating
shareholder value.
ACCOMPLISHMENTS:
. A capital increase of $27 million from $53 million to $80 million and a $1.27
per share increase in book value from $16.46 per share to $17.73 per share.
. Total assets increased from $372 million to $673 million.
. We have increased our market area from two counties to five counties in the
Upstate of South Carolina.
. Despite lower annual earnings due to one-time merger and restructuring costs,
our future opportunity for increased earnings is greatly enhanced.
POSITIONING:
. In September, we began offering Perpetual Bank customers online Banking via
our web site at www.perpetualbank.com as well as online check imaging. We
plan to extend this service to Heritage customers in the near future.
. SouthBanc Shares has superior technology for any local or regional banking
company. This technology gives us a competitive advantage, allowing us to
offer a broad base of services to our customers.
. We have repositioned our company and balance sheet to maximize earnings
potential and minimize exposure to interest rate risk.
CAPITAL MANAGEMENT STRATEGIES:
. The continuation of effective capital management strategies remained a
priority in 1999-2000. The strategies included a stock repurchase program,
the payment of regular quarterly dividends, acquisition, and prudent
leveraging of the balance sheet.
. Regular quarterly dividend payments continued with total dividends of $0.60
per share during the
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year. The stock repurchase plan continued and 517,680 shares were repurchased
from October through September.
. SouthBanc Shares completed a strategic alliance with Heritage Bancorp, Inc.
This alliance will serve as a platform for continued geographic and product
expansion.
LOOKING AHEAD:
. Our ability to serve the financial needs of individuals and businesses in our
core markets is demonstrated by our ongoing leadership role and business
lending in the communities we serve.
. Teamwork comes by working together for a common cause. Training our
employees, setting high but attainable goals, monitoring results and
rewarding success will be imperative for the future success of our newly
unified organization.
. Striving to provide great products and services that meet the financial needs
of the customers and communities we serve.
. Continuing to provide quality customer service by building lasting
relationships with our customers and communities through well-trained team
members.
. Reducing or eliminating duplicate overhead costs as a result of the merger.
. Continuing to search for opportunities that complement the nature of the
business and markets of SouthBanc Shares in order to extend the service area
in the upstate of South Carolina.
. Keeping sight of our strategic focus to continue to be a profitable, full-
service community financial institution, encouraging innovation and
professionalism while striving for continuous improvement.
Opportunity awaits us in fiscal 2001 and we are excited about the
possibilities and challenges that the new year will bring. Clearly, our business
has grown and changed since we joined forces with Heritage Bancorp. In the midst
of these changes, we are determined not to forget our tradition of community
support and involvement. As a unified organization, we will continue to give our
customers the best service available and deliver increased value to our
shareholders. Thank you for all of your confidence and support.
Sincerely,
/s/ Robert W. Orr /s/ J. Edward Wells
Robert W. Orr J. Edward Wells
President & CEO Chairman of the Board
SouthBanc Shares, Inc. SouthBanc Shares, Inc.
A COMPLETED MERGER
Fiscal year 2000 has been a year of great opportunities and challenges for
SouthBanc Shares. On February 14, 2000, SouthBanc announced the signing of an
agreement under which Heritage Bancorp, Inc. would merge with SouthBanc Shares.
The merger was completed on July 31, 2000. Uniting these two companies will
allow SouthBanc to have a stronger presence in the market areas they serve. The
resulting holding company, SouthBanc Shares, Inc., has now become the third
largest thrift company operating in S. C. SouthBanc Shares' two subsidiary
banks, Perpetual Bank, FSB and Heritage Federal Bank, now operate ten offices in
the Upstate region of South Carolina which include; Anderson, Greenwood,
Greenville, Laurens and Oconee Counties.
[PICTURE APPEARS HERE]
William B. Ferguson
Senior Vice President
Heritage Federal Bank
Among the reasons for the merger of Heritage Bancorp and SouthBanc Shares
Inc. were based upon the complementary nature of the business and market areas
of SouthBanc Shares and Heritage. The merger will allow SouthBanc to provide a
wider array of products and services to the existing and potential customer base
of both banks. The unity of both banks under SouthBanc will ultimately allow
each bank to minimize weaknesses, capitalize on strengths and take advantage of
business opportunities.
We are very excited about the strategic combination of two upstate
community-oriented institutions and are confident that this transaction is a
terrific opportunity for our shareholders and our customers. "The complementary
strategies, customers and markets of our two companies make this a natural fit,"
says J. Edward Wells, Chairman of the Board, SouthBanc Shares, Inc. The
SouthBanc team is looking forward to even greater accomplishments in the years
ahead and is taking the necessary steps to achieve them. As an organization, we
are committed to building lasting relationships with our customers and
communities by providing excellent products and services to ultimately achieve
great returns for our shareholders.
[PICTURE APPEARS HERE]
Barry C. Visioli
Senior Vice President
Perpetual Bank, FSB
[LOGO OF HERITAGE FEDERAL BANK]
[LOGO] Perpetual Bank
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SouthBanc Shares, Inc. and Subsidiaries
SELECTED FINANCIAL INFORMATION
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Company at the dates and for
the periods indicated. This information is qualified in its entirety by
reference to the detailed information contained in the Consolidated Financial
Statements and noted thereto presented elsewhere in this report.
At September 30,
2000 1999 1998 1997 1996
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(In thousands)
Financial Condition Data:
Total assets.................................................. $ 672,525 $ 372,151 $ 362,529 $ 256,993 $ 209,827
Cash and interest-bearing deposits............................ 21,785 15,546 21,197 13,499 13,585
Investment in limited partnership/(1)/........................ 1,864 1,575 825 5,004 --
Investment securities available for sale...................... 14,659 16,244 23,301 11,326 2,494
Mortgage-backed securities available for sale................. 72,659 58,385 73,933 35,863 43,125
Loans receivable, net......................................... 516,339 255,488 219,896 178,772 140,758
Deposits...................................................... 451,913 221,257 207,791 201,002 160,244
Borrowings.................................................... 118,756 93,254 76,174 15,000 16,000
Stockholders equity........................................... 80,111 52,751 74,407 30,602 29,091
For the Years Ended September 30,
2000 1999 1998 1997 1996
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(In thousands)
Operating Data:
Interest income............................................... $ 31,783 $ 26,228 $ 23,937 $ 18,396 $ 14,921
Interest expense.............................................. 18,374 13,438 12,256 9,496 7,425
Net interest income........................................... 13,409 12,790 11,681 8,900 7,496
Provision for loan losses..................................... 2,720 481 606 655 349
Net interest income after provision for loan losses........... 10,689 12,309 11,075 8,245 7,147
Other income.................................................. 2,075 5,148 3,761 1,855 1,927
Equity in earnings (loss) on limited partnership.............. 289 750 (4,500) -- --
General and administrative expenses........................... 13,787 9,318 8,525 7,446 6,894
Income (loss) before income taxes............................. (734) 8,889 1,811 2,654 2,180
Income taxes.................................................. 209 2,916 549 926 756
Net income (loss)............................................. $ (943) $ 5,973 $ 1,262 $ 1,728 $ 1,424
For the Years Ended September 30,
2000 1999 1998 1997 1996
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Per Share Data/(2)/:
Basic earnings (loss) per share............................... $ (0.29) $ 1.76 $ 0.30 $ 0.41 $ 0.33
Diluted earnings (loss) per share............................. $ (0.29) $ 1.67 $ 0.29 $ 0.40 $ 0.33
Weighted average shares outstanding
Basic...................................................... 3,262,180 3,386,851 4,199,237 4,174,528 4,290,580
Diluted.................................................... 3,262,180 3,570,156 4,406,381 4,322,815 4,315,880
Dividends per share/(3)/...................................... $ 0.60 $ 0.54 $ 0.48 $ 0.47 $ 0.42
(continued)
SouthBanc Shares, Inc. and Subsidiaries
SELECTED FINANCIAL INFORMATION (continued)
At September 30,
2000 1999 1998 1997 1996
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Other Data:
Number of:
Real estate loans outstanding...................................... 6,944 4,848 3,121 2,645 2,653
Deposit accounts................................................... 44,533 35,388 32,361 31,504 26,135
Full-service offices............................................... 10 6 6 6 5
At or for the Years Ended September 30,
2000 1999 1998 1997 1996
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Key Operating Ratios:
Performance Ratios:
Return on average assets (net income (loss) divided by
average assets)................................................ (0.22)% 1.61% 0.39% 0.72% 0.75%
Return on average equity (net income (loss) divided by
average equity)................................................ (1.62) 10.18 2.41 5.78 7.40
Average equity to average assets.................................. 13.40 15.78 16.04 12.54 10.16
Interest rate spread (difference between yield on
interest-earning assets and average cost of interest-
bearing liabilities for the period)............................ 2.96 3.26 3.35 3.57 3.85
Net interest margin (net interest income as a percentage
of average interest-earning assets for the period)............. 3.35 3.72 3.85 3.96 4.16
Dividend payout ratio/(3)/........................................ N/M/(4)/ 29.72 165.58 117.39 126.32
Non-interest expense to average assets............................ 3.18 2.51 2.61 3.20 3.72
Average interest-earning assets to average interest-
bearing liabilities............................................ 108.32 111.62 112.57 109.36 107.69
Asset Quality Ratios:
Allowance for loan losses to total loans at end of period......... 1.27 1.01 1.07 1.04 1.08
Net charge-offs to average outstanding loans during the period.... 0.24 0.12 0.05 0.18 0.07
Ratio of non-performing assets to total assets.................... 2.00 0.70 0.34 0.20 0.38
Capital Ratios:
Average equity to average assets.................................. 13.40 15.78 16.04 12.54 10.16
(1) Represents a 20.625% equity investment in a limited partnership that
invests in mortgage servicing rights. See Note 4 of Notes to Consolidated
Financial Statements.
(2) Per share data has been restated for 1998, 1997 and 1996 to reflect the
stock exchange ratio of 2.85164 shares of common stock of the Company for
one share of Perpetual Bank common stock established in connection with
the conversion and reorganization, SouthBanc Shares, MHC ("MHC").
(3) Takes into account dividends waived by the MHC for the fiscal years ended
September 30, 1998, 1997 and 1996, which owned 800,000 shares of Perpetual
Bank stock. See Note 21 of Notes to Consolidated Financial Statements. The
dividend payout ratio is based only on dividends paid to public
stockholders of Perpetual Bank, excluding the shares owned by the MHC.
Including shares owned by the MHC, the dividend payout ratio was 143.4%,
55.19% and 22.40% for the fiscal years ended September 30, 1998, 1997 and
1996, respectively.
(4) Not meaningful.
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SouthBanc Shares, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
SouthBanc Shares, Inc. ("Company"), a Delaware corporation, is the holding
company for Perpetual Bank, a Federal Savings Bank ("Perpetual") and Heritage
Federal Bank ("Heritage"). The Company's primary business is coordinating and
directing the affairs and operations of Perpetual and Heritage. Perpetual and
Heritage (collectively the "Banks") are primarily engaged in the business of
attracting deposits from the public and originating and purchasing loans or
investing in securities. The Banks' savings accounts are insured up to the
applicable limits by the Federal Deposit Insurance Corporation ("FDIC") through
the Savings Association Insurance Fund ("SAIF"). The Banks are members of the
Federal Home Loan Bank ("FHLB") System.
Forward-Looking Statements
This discussion and analysis contains certain "forward-looking statements"
within the meaning of the federal securities laws. These forward-looking
statements include, but are not limited to, estimates and expectation of future
performance with respect to the financial condition and results of operations of
the Company and other factors. These forward-looking statements are not
guarantees of future performance and are subject to various factors that would
cause actual results to differ materially from these forward-looking statements.
These factors include, but are not limited to, changes in general economic and
market conditions and the legal and regulatory environment in which the Company
and the Banks operate and the development of an interest rate environment that
adversely affects the Company's interest rate spread or other income anticipated
from the Company's operations.
Market Area
The Company considers Anderson, Laurens, Greenville, Greenwood and Oconee
Counties, South Carolina, as its primary market area. Additional loan
origination demand is generated from customers living in contiguous counties.
The Company also purchases loans secured by properties in South Carolina located
outside its primary market area.
The primary market areas are situated in the upstate area of South
Carolina along Interstate 85 between Atlanta, Georgia and Charlotte, North
Carolina. The area, which has moved from textile-based industries to a broader
variety of employment sectors, has experienced a period of sustained growth and
prosperity in recent years. Major transportation routes, low cost of living and
labor, and aggressive marketing by local and state government have attracted
major employers to the area. Area employers include Anderson Area Medical
Center, Robert Bosch Corporation, Wal-Mart Distribution Center, BASF
Corporation, Owens-Corning Fiberglass and Michelin North America.
Comparison of Financial Condition at September 30, 2000 and 1999
General
Total assets increased $300.3 million at September 30, 2000, from $372.2 million
to $672.5 million at September 30, 2000, primarily as a result of the Company's
merger with Heritage Bancorp Inc. ("Heritage Bancorp"), parent company of
Heritage. See Note 2 to the Company's Consolidated Financial Statements for a
discussion of the merger. Immediately preceding the merger, Heritage Bancorp's
assets totaled approximately $341.4 million. The increase in total assets
brought about by the merger was partially offset by repurchases of Company stock
prior to the merger. Up to the date of merger the Company had repurchased
265,512 shares at a total cost of $5.1 million. Following the merger, the
Company repurchased 252,168 shares at a cost of $4.3 million, including 141,500
shares acquired in the merger.
Loans receivable increased 102.1% or $260.8 million to $516.3 million at
September 30, 2000, from $255.5 million at September 30, 1999. The increase in
loans receivable resulted from the merger. Mortgage-backed securities available
for sale increased 24.4% or $14.3 million to $72.7 million from $58.4 million.
The increase was due to the combination of the merger with Heritage Bancorp and
the restructuring of the Company's securities portfolios.
Principal payments on CMO's were $5.3 million during the year. At
September 30, 2000, the Company owned $16.1 million of CMO's with an average
yield of 7.73% with maturity ranges from 2001 to 2029. At September 30, 2000,
the Company owned $56.6 million of fixed and adjustable rate mortgage-backed
securities with an average yield of 7.19%.
Investment securities available for sale decreased 9.8% or $1.5 million to
$14.7 million from $16.2 million.
The Company's net investment in a limited partnership increased $289,000
to $1.9 million at September 30, 2000, from $1.6 million at September 30, 1999.
In 1998, the Company established a $4.5 million loss reserve on a limited
partnership that invests in mortgage servicing rights tied to a national
portfolio of residential mortgage loans. Recent increases in market interest
rates have enhanced the appraised value of the limited partnership. In 2000 and
1999, the Company reversed $289,000 and $750,000, respectively, of the reserve
established in 1998 due to the increase in the appraised value. No assurances
can be given that the establishment of future loss reserves will not be
required.
SouthBanc Shares, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Cash and cash equivalents increased 40.6% or $6.3 million to $21.8 million
at September 30, 2000, from $15.5 million at September 30, 1999. At September
30, 2000, $14.7 million was invested in interest-bearing overnight investment
accounts yielding 6.64%.
Real estate held for development remained flat at $2.1 million at
September 30, 2000 and 1999. The Company is presently developing two
single-family residential subdivisions and two commercial real estate
development projects.
Cash surrender value of life insurance was $8.3 million at September 30,
2000, an increase of $400,000 from $7.9 million at September 30, 1999. The
Company owns life insurance policies as part of the Supplemental Executive
Retirement Agreements maintained on certain key officers of the Company.
Deposits increased 104.2% or $230.7 million to $451.9 million at September
30, 2000, from $221.2 million at September 30, 1999. Of the increase,
approximately $209.3 million resulted from the merger. Non-interest-bearing
checking accounts decreased 5.1% or $799,409 to $14.9 million at September 30,
2000, from $15.7 million at September 30, 1999. Interest-bearing checking
accounts increased 3.5% or $1.5 million to $44.8 million at September 30, 2000,
from $43.3 million at September 30, 1999, as the Company continues to offer
checking products that are more aggressively priced than those offered by
competitors. Statement savings accounts increased 90.7% or $23.9 million to
$50.3 million at September 30, 2000 from $26.4 million at September 30, 1999.
Certificates of deposit increased 151.6% or $206.0 million to $341.9 million at
September 30, 2000 from $135.9 million at September 30, 1999.
Borrowings through reverse repurchase agreements were $20.4 million at
September 30, 2000 and $20.3 million at September 30, 1999. The Company pledged
$22.8 million of mortgage-backed securities as collateral for these borrowings.
The Company has borrowed $10.0 million at a rate of 6.71% with a call date of
February 3, 2002, and a maturity date of February 3, 2005, and $10.0 million at
a rate of 6.67%, with a maturity date of November 13, 2000.
Advances from the FHLB increased $25.3 million to $98.3 million at
September 30, 2000, from $73.0 million at September 30, 1999. The main reason
for the increase is the merger with Heritage Bancorp, whereby the Company
acquired advances of $59.8 million, net of discounts. Advances of $49.0 million
were repaid with proceeds from sales of securities following the merger.
Stockholders' equity increased $27.3 million to $80.1 million at September
30, 2000 from $52.8 million at September 30, 1999. The Company issued 1,829,085
shares of stock to purchase the outstanding shares of Heritage Bancorp. The
shares were issued at a price of $17.65 per share. Retained earnings was
decreased by a net loss of $943,000 and by dividends paid in the amount of $2.1
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 2000, the Company repurchased 517,680 shares at an average cost
of $18.22 per share and a total cost of $9.4 million. 265,512 shares were
subsequently retired. Accumulated other comprehensive income (loss), net,
increased $3.9 million to $1.90 million at September 30, 2000, from $(2.0)
million at September 30, 1999.
As a result of the merger, deferred compensation for the Management
Recognition Plan was recognized. The unvested shares of restricted stock vested
upon completion of the merger, creating compensation expense of $1.8 million.
The Management Recognition Plan was terminated. Prior to the merger,
approximately $400,000 was allocated to participants. The Company contributed
$411,000 to the employee stock ownership plan reducing the contra-equity account
related to the plan's debt.
Net Income
The net loss for the year ended September 30, 2000 was $(943,000) or $(0.29)
basic and diluted earnings per share compared to net income of $6.0 million or
$1.76 basic earnings per share and $1.67 diluted earnings per share in 1999. Net
income was negatively impacted by certain merger-related costs as well as an
increase in the provision for loan losses and losses on real estate acquired in
settlement of loans. Merger-related expenses include compensation costs of $1.8
million related to the vesting of shares in the Management Recognition Plan,
amounts paid to retiring directors totaling $300,000, a vested contribution to
the Company's employee stock ownership plan of $0.8 million, and consulting
expenses of $160,000. The Company also incurred losses immediately following the
merger as it restructured the securities portfolios of the Banks.
Net Interest Income
Net interest income increased $619,000 to $13.4 million for the year ended
September 30, 2000 from $12.8 million for the year ended September 30, 1999. Net
interest income attributable to Heritage Bank for the two months following the
merger was $1.8 million. Interest income increased $4.4 million for the year
ended September 30, 2000 as the yield on the average balance of interest-earning
assets increased to 7.93% for the year ended September 30, 2000 compared to a
yield of 7.62% for the year ended September 30, 1999. Average interest-earning
assets were $400.6 million for 2000 and $344.2 million for 1999. Interest income
increases attributable to the merger with
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Heritage Bank totaled $4.5 million. This increase was offset by a decrease in
income from mortgage-backed securities of $918,000. For 2000, the Company had
lower average balances of mortgage-backed securities than in 1999. Yields on
securities actually increased while yields on loans decreased during the year.
However, the average balance increases in loans outpaced the decreasing yields
on loans while decreasing balances outpaced increasing yields on mortgage-backed
securities.
Interest Expense
Interest expense increased $4.9 million to $18.4 million for the year ended
September 30, 2000 as the cost of deposits and borrowed funds increased to 4.97%
on an average balance of $369.9 million for the year ended September 30, 2000
compared to a cost of 4.36% on an average balance of $308.3 million for the year
ended September 30, 1999. Interest expense on deposits and borrowings of
Heritage Bank totaled $2.7 million for the two-month period following the
merger. Interest cost on savings accounts increased 35 basis points from 2.47%
in 1999 to 2.82% in 2000. Average balances of savings accounts increased by $4.9
million in 2000. Certificates of deposit increased in both rate and volume in
2000. The average cost paid on certificates of deposit in 2000 was 5.66% versus
5.31% in 1999. Average balances increased by $39.9 million in 2000 over 1999.
Provision 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 based upon
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan loses, 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 $2.2 million to $2.7 million for
the year ended September 30, 2000 from $481,000 for the year ended September 30,
1999. Provision for Heritage since the merger date totaled $825,000. The
remaining increase in the provision for loan losses is due to two factors.
First, Perpetual's non-performing assets increased during the year. Non-
performing assets, excluding $8.1 million of non-performing assets of Heritage,
were $6.2 million at September 30, 2000 compared to $2.6 million at September
30, 1999, an increase of $3.6 million. The second factor in the overall increase
in the provision for loan losses is management's efforts to standardize policies
for the allowance for loan losses across both banking subsidiaries. Non-
performing assets to total assets were 2.12% and 0.70% and the allowance for
loan losses to total loans was 1.28% and 1.0l% at September 30, 2000 and
September 30, 1999, respectively.
Other Income
Other income decreased $3.1 million in 2000 compared to 1999 primarily due to
losses on sales of investments, losses on real estate acquired in settlement of
loans, decreases in income on real estate held for development and losses on
sales of premises and equipment. Following the merger, management took steps to
restructure the securities portfolios of the two subsidiary banks.
This restructuring was aimed at improving the Banks' ability to manage interest
rate risk by selling long-term fixed-rate mortgage backed securities and zero
coupon bonds. The Banks sold a total of $62.7 million of securities at a loss of
$3.1 million. The losses on sales of securities were offset by an increase of
$457,000 in income from loan and deposit account service charges. This increase
was the result of an increase to the fee structure of deposit accounts.
General and Administrative Expenses
General and administrative expenses increased $4.5 million to $13.8 million for
the year ended September 30, 2000 from $9.3 million for the year ended September
30, 1999 due to merger-related expenses. General and administrative expenses of
Heritage since the Merger date totaled $1.0 million. Specific merger-related
expenses included: retiring board member expense of $300,000, $1.8 million
relating to the vesting of unvested Management Recognition Plan awards in
connection with the Merger, and $0.8 million relating to the vested portion of
the Employee Stock Ownership Plan, which are included in salaries and employee
benefits, and consultant expenses of $160,000, which are included in other
expense. The Company also incurred costs related to converting Heritage to
information systems used by the Company.
Income Taxes
Income taxes decreased $2.7 million to $209,000 for 2000 from $2.9 million, or
an effective tax rate of 32.8% in 1999 due primarily to a decrease in income
before taxes of $9.6 million to a loss before taxes of $0.7 million in 2000 from
income of $8.9 million in 1999.
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
Net Income
Net income increased $4.7 million to $6.0 million or $1.76 basic earnings per
share and $1.67 diluted earnings per share
SouthBanc Shares, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
in 1999, compared to $1.3 million or $0.30 basic earnings per share and $0.29
diluted earnings per share in 1998. In 1999, the stock repurchase increased
basic earnings per share by $0.37 and diluted earnings per share by $0.34. Net
income in 1998 was adversely affected by the establishment of $4.5 million pre-
tax loss reserve on the limited partnership and net income in 1999 was
positively affected by the $750,000 recapture of the reserve established in 1998
due to the increase in the appraised value of the limited partnership.
Net Interest Income
Net interest income increased 9.4% or $1.1 million to $12.8 million in 1998 from
$11.7 million. Interest income on loans increased 11.0% or $1.9 million to $19.2
million from $17.3 million as the average loans receivable increased to $235.3
million in 1999 from $198.4 in 1998, an increase of 18.6%. Interest income on
mortgage-backed securities increased 14.3% or $600,000 to $4.8 million in 1999
from $4.2 million in 1998 as the average balance of mortgage-backed securities
increased 12.3% or $8.1 million to $74.0 million in 1999 from $65.9 million in
1998. Interest income on other investments decreased $300,000 to $2.2 million in
1999 from $2.5 million in 1998 as the average balance of investment securities,
interest-bearing deposits and other earning assets decreased $4.1 million to
$34.8 million in 1999 from $38.9 million in 1998.
Interest Expense
Interest expense on deposits was $8.9 million in 1999 and in 1998, as the
average deposits increased 8.2% or $16.8 million to $221.4 million in 1999 from
$204.6 million in 1998 and the weighted average cost of deposits decreased to
4.03% in 1999 from 4.35% in 1998. Interest expense on borrowings increased 32.4%
or $1.1 million to $4.5 million in 1999 from $3.4 million in 1998 as the average
borrowings increased to $87.0 million in 1999 from $64.7 million in 1998.
Provision 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 based upon
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan loses, 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 decreased 21% to $481,000 for the year ended
September 30, 1999 from $606,500 for the year ended September 30, 1998. Loan
charge-offs for 1999 were $275,600 compared to $174,000 in 1998 and recoveries
were $38,200 in 1999 compared to $55,000 in 1998. The allowance for loan losses
to total loans was 1.01% at September 30, 1999 and 1.07% at September 30, 1998.
Non-performing assets at September 30, 1999 were $2.4 million compared to
$1.2 million at September 30, 1998. Of this $1.2 million increase, approximately
70% is related to a single commercial real estate loan.
Other Income
Other income increased $1.3 million or 34.2% to $5.1 million in 1999 from $3.8
million in 1998. Loan and deposit account service charges increased $1.2 million
to $3.5 million in 1999 from $2.3 million in 1998 as a result of an increase in
checking accounts and fees. Loss on sale of investments was $146,000 in 1999
compared to a gain of $177,000 in 1998. Gain on sale of real estate held for
development increased $240,000 to $355,000 in from $115,000 in 1998. Earnings on
bank owned life insurance increased $344,000 to $436,000 in 1999 compared to
$92,000 in 1998 as the average balance of cash surrender value of life insurance
was $7.7 million in 1999 and $1.9 million in 1998.
Other income decreased $155,000 to $863,000 in 1999 from $1,018,000 in
1998. There were no earnings on the investment in the limited partnership in
1999 compared to earnings of $140,000 in 1998.
General and Administrative Expenses
General and administrative expenses increased $800,000 or 9.4% to $9.3 million
in 1999 from $8.5 million in 1998. Salaries and employee benefits increased
$500,000 or 11.6% to $4.8 million in 1999 from $4.3 million in 1998 due to the
expense of the Management Recognition and Development Plan. Occupancy expense
increased $78,000 due to non-recurring property expenses associated with repairs
of one office. Furniture and equipment expense increased $71,000 or 7.0% to
$1,082,000 in 1999 from $1,011,000 in 1998 due to the purchase of additional
equipment related to technology investments. The FDIC insurance premiums
decreased $8,000 to $124,000 in 1999 from $132,000 in 1998. Advertising
decreased $32,000 or 13% to $215,000 in 1999 from $247,000 in 1998. Data
processing increased $129,000 or 29.1% to $572,000 in 1999 from $443,000 in 1998
due to expenses incurred with Year 2000 considerations, expenses associated with
the increasing number of checks processed and ATM and debit card transactions.
Office supplies decreased $19,000 or 5.8% to $310,000 in 1998 from $329,000 in
1998 due to the elimination and consolidation of
10
11
data processing forms. Profit improvement program expenses increased $45,000 to
$488,000 or 10.2% in 1999 or $443,000 in 1998 due to consultant fees for sales
training, staff realignment and product fee enhancement. Other operating
expenses increased $72,000 or 6.5% to $1.2 million in 1999 from $1.1 million in
1998 due to increases in postage, directors and officers' liability insurance
and expenses establishing the Company's dividend reinvestment program.
Income Taxes
Income taxes increased $2.4 million to $2.9 million or an effective tax rate
of 32.8% for 1999 from $549,000, or an effective tax rate of 30.3% in 1998 due
primarily to an increase in income before taxes of $7.1 million to $8.9 million
in 1999 from $1.8 million in 1998.
Average Balance Sheets
The following table sets forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
ratio of interest-earning assets to interest-bearing liabilities and net
interest margin. Average balances have been calculated using daily balances.
2000 1999 1998
--------------------------- -------------------------- ---------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
--------------------------- -------------------------- ----------------------------
(Dollars in thousands)
Interest-earning assets/(1)(2)/:
Mortgage loans.............................. $ 216,326 $ 16,770 7.75% $161,229 $ 12,389 7.68% $ 139,497 $ 11,401 8.17%
Commercial real estate loans................ 56,148 4,875 8.68 38,888 3,605 9.27 28,943 2,961 10.23
Commercial other loans...................... 15,047 1,280 8.51 11,681 1,047 8.96 9,400 857 9.12
Consumer loans.............................. 27,513 2,650 9.63 23,531 2,153 9.15 20,525 2,056 10.02
------------------ ------------------ -------------------
Total loans............................... 315,034 25,575 8.12 235,329 19,194 8.16 198,365 17,275 8.71
Mortgage-backed securities and CMO's........ 51,892 3,905 7.53 74,004 4,824 6.52 65,866 4,205 6.38
Investment securities....................... 17,399 1,310 7.53 20,649 1,415 6.85 20,013 1,383 6.91
Interest-earning deposits................... 11,844 655 5.53 10,671 533 5.00 16,546 899 5.43
Other interest-earning assets............... 4,469 339 7.58 3,507 262 7.47 2,375 175 7.37
------------------ ------------------ -------------------
Total interest-earning assets............. 400,638 31,784 7.93 344,160 26,228 7.62 303,165 23,937 7.90
Non-interest-earning assets:
Office properties and equipment, net........ 6,558 6,072 6,555
Real estate, net............................ 359 192 135
Other non-interest-earning assets........... 25,671 21,383 16,369
--------- -------- ---------
Total assets.............................. $ 433,226 $371,807 $ 326,224
========= ======== =========
Interest-bearing liabilities:
Savings..................................... $ 30,485 $ 860 2.82% $ 25,618 $ 634 2.47% $ 25,569 $ 637 2.49%
Negotiable order of withdrawal
("NOW") accounts.......................... 58,684 936 1.59 60,321 1,092 1.81 44,420 643 1.45
Certificates of deposit..................... 175,357 9,918 5.66 135,421 7,194 5.31 134,574 7,622 5.66
------------------ ------------------- -------------------
Total deposits............................ 264,526 11,714 4.43 221,360 8,920 4.03 204,563 8,902 4.35
Other interest-bearing liabilities.......... 105,349 6,660 6.32 86,965 4,518 5.20 64,739 3,354 5.18
------------------ ------------------- -------------------
Total interest-bearing liabilities........ 369,875 18,374 4.97 308,325 13,438 4.36 269,302 12,256 4.55
------------------ ------------------- -------------------
Non-interest-bearing liabilities:
Non-interest-bearing deposits............... 334 1,224 247
Other liabilities........................... 4,974 3,573 4,345
--------- -------- ---------
Total liabilities......................... 375,183 313,122 273,894
Stockholders equity.......................... 58,043 58,685 52,330
--------- -------- ---------
Total liabilities and stockholders' equity.. $ 433,226 $371,807 $326,224
========= ======== =========
Net interest income.......................... $13,410 $ 12,790 $11,681
======= ======== =======
Interest rate spread......................... 2.96% 3.26% 3.35%
====== ====== ======
Net interest margin.......................... 3.35% 3.72% 3.85%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 108.32% 111.62% 112.57%
====== ====== ======
(1) Excludes interest on loans 90 days or more past due.
(2) Heritage Federal Bank amounts are included from the date of merger, July
31, 2000.
SouthBanc Shares, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on income attributable to changes in
rate (changes in rate multiplied by prior volume); (iii) changes in rate/volume
(change in rate by change in volume); and (iv) the net change (the sum of the
prior columns).
Year Ended September 30, 2000 Year Ended September 30, 1999
Compared to September 30, 1999 Compared to September 30, 1998
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------ ------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------------------------------------ ------------------------------------
(Dollars in thousands)
Interest-earning assets/(1)/:
Mortgage loans ................................ $ 4,234 $ 110 $ 37 $4,381 $1,776 $ (682) $(106) $ 988
Commercial real estate ........................ 1,600 (230) (101) 1,269 1,018 (278) (96) 644
Commercial other .............................. 302 (53) (15) 234 208 (15) (3) 190
Consumer loans ................................ 364 114 19 497 301 (178) (26) 97
----------------------------------------------------------------------------
Total loans ................................. 6,500 (59) (60) 6,381 3,303 (1,153) (231) 1,919
Mortgage-backed securities and CMO's .......... (1,441) 746 (223) (918) 519 89 11 619
Investment securities ......................... (222) 139 (22) (105) 44 (11) (1) 32
Interest-earning deposits ..................... 58 57 6 121 (319) (72) 26 (365)
Other interest-earning assets ................. 72 4 1 77 83 2 1 86
----------------------------------------------------------------------------
Total net change in income on
interest-earning assets .................. 4,967 887 (298) 5,556 3,630 (1,145) (194) 2,291
----------------------------------------------------------------------------
Interest-bearing liabilities:
Savings accounts ............................. 120 89 17 226 1 (4) -- (3)
NOW accounts ................................. (30) (129) 4 (155) 230 161 58 449
Certificates of deposit ...................... 2,122 465 137 2,724 48 (473) (3) (428)
----------------------------------------------------------------------------
Total deposits ............................. 2,212 425 158 2,795 279 (316) 55 18
----------------------------------------------------------------------------
Other interest-bearing liabilities ........... 955 980 207 2,142 1,151 10 3 1,164
----------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities ............. 3,167 1,405 365 4,937 1,430 (306) 58 1,182
----------------------------------------------------------------------------
Net change in net interest income ............. $ 1,800 $ (518) $ (663) $ 619 $2,200 $ (839) $(252) $1,109
============================================================================
/(1)/ Heritage Federal Bank amounts are included from the date of merger, July
31, 2000.
12
13
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, repayment of loan principal
and repayment of mortgage backed securities and CMOs, 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
and has $84.2 million of available credit based on eligible collateral as of
September 30, 2000. 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 Perpetual and Heritage
at September 30, 2000, was 14.21% and 14.28%, respectively.
At September 30, 2000, the Banks exceeded the OTS' capital requirements. See
Note 13 to the Company's consolidated financial statements for discussion of
these capital requirements.
The primary investing activity of the Company is lending. During the year
ended September 30, 2000, the Company originated $82.9 million of loans and
swapped $47.9 million for mortgage-backed securities. The Company also purchased
$33.4 million of loans. The retained originations were primarily funded by
increases in deposits, principal repayments of loans and mortgage-backed
securities and CMO's, FHLB Advances and securities sold under agreements to
repurchase.
Liquidity management is both a short and long-term responsibility of the
Company's 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 September 30, 2000,
the Company had outstanding commitments to originate loans of approximately
$17.7 million. Unused lines of credit were $55.8 million at September 30, 2000.
The Company plans to spend approximately $400,000 in capital expenditures in
fiscal year 2001.
Certificates of deposit scheduled to mature in one year or less at September
30, 2000, totaled $285.5 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.
Market Risk and Asset and Liability Management
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, investment, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks such as credit quality and liquidity risk in the normal
course of business, management considers interest rate risk to be its most
significant market risk that could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in market interest
rates. Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same rate, to the same extent or on the
SouthBanc Shares, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
same basis. The Company monitors the impact of changes in interest rates on its
net interest income using a test that measures the impact on net interest income
and net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of
assets, liabilities and off-balance sheet contracts.
At September 30, 2000, the Company's calculations based on the information and
assumptions produced for the analysis, suggested that for Perpetual a 200 basis
point increase in rates would decrease net income over a 12-month period by 6.2%
and reduce net portfolio value by 17.0% while a 200 basis point decline in rates
would increase net interest income over a 12-month period by 4.1% and increase
net portfolio value by 5.9% in the same period. The analysis suggested that for
Heritage a 200 basis point increase in rates would decrease net income over a
12-month period by 11.4% while a 200 basis point decline in rates would increase
net interest income over a 12-month period by 10.9% and increase net portfolio
value by 5.7%.
The following tables are provided to the Company by the FHLB and illustrate
the percent change in Net Present Value (NPV) as of September 30, 2000, based on
FHLB assumptions. No effect has been given to any steps that the Company may
take to counteract the effect of the interest rate movements presented in the
tables (dollars in thousands).
Perpetual NPV as Percent
Net Portfolio Value of Present Value
Net Interest Income Increase (Decrease) of Assets
------------------- --------------------------------- ---------------------
Basis Points (bp) % % NPV Basis Point
Change In Rates Amount Change Amount $ Change Change Ratio Change
- ----------------------------------------------------------------------------------------------------------
300 bp $8,321 (9.7) $31,725 $(11,709) (27.0) 8.75% (267)
200 bp 8,643 (6.2) 36,038 (7,396) (17.0) 9.77 (165)
100 bp 8,952 (2.8) 40,088 (3,346) (7.7) 10.69 (73)
0 bp 9,214 0.0 43,434 11.42
(100 bp) 9,393 1.9 45,541 2,107 4.9 11.84 42
(200 bp) 9,591 4.1 45,990 2,556 5.9 11.88 46
(300 bp) 9,835 6.7 47,612 4,178 9.6 12.17 76
Heritage NPV as Percent
Net Portfolio Value of Present Value
Net Interest Income Increase (Decrease) of Assets
------------------- --------------------------------- ---------------------
Basis Points (bp) % % NPV Basis Point
Change In Rates Amount Change Amount $ Change Change Ratio Change
- ----------------------------------------------------------------------------------------------------------
300 bp $6,144 (18.0) $23,397 $(12,957) (35.6) 8.59% (394)
200 bp 6,639 (11.4) 27,909 (8,445) (23.2) 10.02 (251)
100 bp 7,074 (5.6) 32,603 (3,751) (10.3) 11.45 (108)
0 bp 7,495 -- 36,354 -- -- 12.53 --
(100 bp) 7,885 5.2 37,534 1,180 3.2 12.81 28
(200 bp) 8,311 10.9 38,417 2,063 5.7 13.00 47
(300 bp) 8,776 17.1 40,391 4,037 11.1 13.50 97
14
15
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Furthermore, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates likely could
deviate significantly from those assumed in calculating the table. Therefore,
the data presented in the table should not be relied upon as necessarily
indicative of actual results.
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.
Interest Sensitive Asset and Liability Maturity Table
The following table presents the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity and
the instruments' fair values at September 30, 2000. Certain assumptions about
loan prepayment rates and deposit decay rates, among others, were utilized in
the preparation of the table. There are shortcomings inherent in this method of
analysis. For example, although a financial instrument may have a similar
maturity or remaining term to repricing as another financial instrument, the two
may react differently to changes in market interest rates. In the event of
changes in interest rates, prepayments and withdrawals would likely deviate
significantly from those assumed in the data underlying the table. (Dollar
amounts in the table are in thousands).
After 3
Average Within 1 Year to Years to Beyond Fair
Rate One Year 3 Years 5 Years 5 Years Total Value
----------------------------------------------------------------------------
Interest-sensitive assets:
Loans receivable, net of loans in process
and deferred loan fees......................... 8.26% $318,264 $141,636 $ 34,928 $ 21,511 $516,339 $511,239
Investment securities............................ 6.04 6,003 -- -- 8,655 14,658 14,658
Mortgage-backed securities....................... 7.34 51,504 13,520 4,673 2,962 72,659 72,659
FHLB stock....................................... 7.25 7,525 -- -- -- 7,525 7,525
FHLB overnight interest-bearing deposits......... 6.60 14,662 -- -- -- 14,662 14,662
Interest-sensitive liabilities:
Interest-bearing checking accounts............... 1.83 36,445 2,837 1,870 3,629 44,781 44,781
Savings accounts................................. 3.23 50,314 -- -- -- 50,314 50,314
Certificates of deposits......................... 5.99 285,520 54,415 1,953 -- 341,888 341,042
Advances from the FHLB........................... 6.16 28,333 -- 21,000 49,000 98,333 97,589
Securities sold under agreements to repurchase... 6.65 10,423 -- 10,000 -- 20,423 20,333
Off balance sheet items:
Commitments to extend credit..................... 7.63 17,742 -- -- -- 17,742 17,742
Unused lines of credit........................... 10.43 55,755 -- -- -- 55,755 55,755
Loans in process................................. 9.59 29,278 -- -- -- 29,278 29,278
SouthBanc Shares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30,
2000 1999
------------------------------
Assets
Cash and cash equivalents ....................................................................... $ 21,784,653 $ 15,546,360
Investment securities available for sale ........................................................ 14,658,670 16,243,703
Federal Home Loan Bank stock, at cost ........................................................... 7,525,000 3,650,000
Mortgage-backed securities available for sale ................................................... 72,659,003 58,384,541
Loans receivable ................................................................................ 516,338,740 255,488,141
Investment in limited partnership ............................................................... 1,864,373 1,575,373
Real estate acquired in settlement of loans ..................................................... 1,091,609 229,900
Real estate held for development ................................................................ 2,133,598 2,095,903
Premises and equipment .......................................................................... 10,776,074 5,722,230
Accrued interest receivable
Loans ........................................................................................ 3,765,678 1,860,838
Mortgage-backed and other securities ......................................................... 726,503 453,968
Cash surrender value of life insurance ......................................................... 8,272,700 7,865,743
Other ........................................................................................... 10,927,970 3,034,571
------------------------------
Total Assets ............................................................................... $672,524,571 $372,151,271
==============================
Liabilities and Stockholders Equity
Deposits ........................................................................................ $451,913,200 $221,257,085
Advances from the Federal Home Loan Bank ........................................................ 98,332,948 73,000,000
Securities sold under agreements to repurchase .................................................. 20,423,482 20,254,436
Advance payments by borrowers for property taxes and insurance .................................. 676,429 438,484
Accrued interest payable ........................................................................ 2,041,265 1,356,578
Unsettled security purchases .................................................................... 11,000,000 --
Accrued expenses and other liabilities .......................................................... 8,026,707 3,094,136
------------------------------
Total Liabilities .......................................................................... 592,414,031 319,400,719
------------------------------
Commitments and contingencies--Note 19
Stockholders' Equity
Preferred stock ($0.01 par value; authorized 250,000 shares;
none issued or outstanding at September 30, 2000 and 1999) ................................... -- --
Common stock ($0.01 par value; authorized 7,500,000 shares; issued and outstanding
4,771,271 and 4,322,030 shares at September 30, 2000 and 1999, respectively) ................. 47,713 43,220
Additional paid-in capital ...................................................................... 63,327,410 57,741,324
Retained earnings, restricted ................................................................... 19,357,050 22,351,722
Treasury stock--at cost (252,168 and 1,117,242 shares
at September 30, 2000 and 1999, respectively) ................................................ (4,306,209) (22,515,585)
Accumulated other comprehensive income (loss), net .............................................. 1,917,931 (2,028,033)
Indirect guarantee of ESOP debt ................................................................. (233,355) (622,247)
Deferred compensation for Management Recognition Plan ........................................... -- (2,219,849)
------------------------------
Total Stockholders' Equity ................................................................. 80,110,540 52,750,552
------------------------------
Total Liabilities and Stockholders' Equity ................................................. $672,524,571 $372,151,271
==============================
See accompanying notes to consolidated financial statements.
16
17
SouthBanc Shares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30,
2000 1999 1998
-----------------------------------------------
Interest income:
Loans ........................................................................ $25,574,844 $19,193,986 $17,275,097
Mortgage-backed securities ................................................... 3,905,713 4,824,104 4,204,475
Other investments ............................................................ 2,303,241 2,210,086 2,457,233
----------------------------------------------
Total interest income ...................................................... 31,783,798 26,228,176 23,936,805
----------------------------------------------
Interest expense:
Interest on deposits:
Transaction accounts ....................................................... 936,339 1,091,659 642,545
Passbook accounts .......................................................... 859,605 633,809 637,206
Certificate accounts ....................................................... 9,917,953 7,194,190 7,622,013
----------------------------------------------
Total interest on deposits ................................................. 11,713,897 8,919,658 8,901,764
Interest on borrowings ....................................................... 6,660,459 4,518,201 3,353,810
----------------------------------------------
Total interest expense ..................................................... 18,374,356 13,437,859 12,255,574
----------------------------------------------
Net interest income ............................................................. 13,409,442 12,790,317 11,681,231
Provision for loan losses ....................................................... 2,719,982 481,000 606,500
----------------------------------------------
Net interest income after provision for loan losses ............................. 10,689,460 12,309,317 11,074,731
----------------------------------------------
Other income:
Loan and deposit account service charges ..................................... 3,977,767 3,520,334 2,295,710
Gain (loss) on sale of investments ........................................... (3,081,814) (146,281) 177,388
Gain (loss) on sale of real estate acquired in settlement of loans ........... (90,581) 31,958 45,570
Gain on sale of loans, net ................................................... 11,318 88,070 20,797
Gain on sale of real estate held for development ............................. 108,957 355,018 114,716
Loss on sale of premises and equipment ....................................... (100,288) (204) (4,161)
Earnings on bank owned life insurance ........................................ 456,105 436,181 92,343
Other ........................................................................ 793,968 862,906 1,018,249
----------------------------------------------
Total other income ......................................................... 2,075,432 5,147,982 3,760,612
----------------------------------------------
Equity in earnings (losses) of investment in limited partnership ................ 289,000 750,000 (4,500,000)
----------------------------------------------
General and administrative expenses:
Salaries and employee benefits ............................................... 8,435,833 4,752,741 4,294,678
Occupancy .................................................................... 582,172 587,364 509,465
Furniture and equipment expense .............................................. 1,198,925 1,082,470 1,011,422
FDIC insurance premiums ...................................................... 74,494 123,872 132,163
Advertising .................................................................. 283,729 215,084 247,081
Data processing .............................................................. 794,656 571,690 442,664
Office supplies .............................................................. 434,652 309,524 328,981
Profit improvement program ................................................... 94,280 487,915 442,556
Other ........................................................................ 1,889,017 1,188,123 1,115,594
----------------------------------------------
Total general and administrative expenses .................................. 13,787,758 9,318,783 8,524,604
----------------------------------------------
Income (loss) before income taxes ............................................... (733,866) 8,888,516 1,810,739
Income taxes .................................................................... 209,106 2,915,738 548,696
----------------------------------------------
Net income (loss) ............................................................... $ (942,972) $ 5,972,778 $ 1,262,043
==============================================
Basic earnings (loss) per common share .......................................... $ (0.29) $ 1.76 $ 0.30
==============================================
Diluted earnings (loss) per common share ........................................ $ (0.29) $ 1.67 $ 0.29
==============================================
Weighted average shares outstanding:
Basic ........................................................................ 3,262,180 3,386,851 4,199,237
==============================================
Diluted ...................................................................... 3,262,180 3,570,156 4,406,381
==============================================
Cash dividends per common share ................................................. $ 0.60 $ 0.53 $ 0.35
==============================================
See accompanying notes to consolidated financial statements.
SouthBanc Shares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common Common
Shares Stock
--------------------------
Balance at September 30, 1997 ....................................................................... 1,508,873 $ 1,508,873
Net income ....................................................................................... -- --
Other comprehensive income:
Unrealized gain on securities, net ............................................................. -- --
Reclassification adjustment for gains realized in net income, net .............................. -- --
Comprehensive income ............................................................................. -- --
Exercise of stock options ........................................................................ 1,317 1,317
Reduction of ESOP debt ........................................................................... -- --
ESOP compensation expense ........................................................................ -- --
Purchase of common stock for MRP ................................................................. -- --
Earned portion of MRP ............................................................................ -- --
Dividends on common stock ........................................................................ -- --
Sales of common stock (less offering expenses of $1,494,488) ..................................... 2,281,312 22,813
Shares issued in reorganization and par value adjustments ........................................ 514,908 (1,489,939)
---------------------------
Balance at September 30, 1998 ....................................................................... 4,306,410 43,064
Net income ....................................................................................... -- --
Other comprehensive income:
Unrealized loss on securities, net.............................................................. -- --
Reclassification adjustment for losses realized in net income, net.............................. -- --
Comprehensive income ............................................................................. -- --
Exercise of stock options......................................................................... 15,620 156
Reduction of ESOP debt ........................................................................... -- --
ESOP compensation expense ........................................................................ -- --
Earned portion of MRP ............................................................................ -- --
Dividends on common stock ........................................................................ -- --
Transfer from treasury stock to MRP .............................................................. -- --
Purchase of treasury stock ....................................................................... -- --
---------------------------
Balance at September 30, 1999 ....................................................................... 4,322,030 43,220
Net loss ......................................................................................... -- --
Other comprehensive income:
Unrealized gain on securities, net ............................................................. -- --
Reclassification adjustment for losses realized in net income, net ............................. -- --
Comprehensive income ............................................................................. -- --
Stock issued in merger with Heritage Bancorp ..................................................... 1,829,085 18,291
Treasury stock acquired in merger with Heritage Bancorp .......................................... -- --
Retirement of treasury shares .................................................................... (1,382,754) (13,827)
Exercise of stock options ........................................................................ 2,910 29
Reduction of ESOP debt ........................................................................... -- --
ESOP compensation expense ........................................................................ -- --
ESOP payment ..................................................................................... -- --
Earned portion of MRP ............................................................................ -- --
Dividends on common stock ........................................................................ -- --
Purchase of treasury stock ....................................................................... -- --
---------------------------
Balance at September 30, 2000 ....................................................................... 4,771,271 $ 47,713
===========================
See accompanying notes to consolidated financial statements.
18
19
For the Years Ended September 30, 2000, 1999 and 1998
Other Indirect
Additional Retained Comprehensive Guarantee Deferred
Paid-in Earnings Income Treasury of ESOP Compensation
Capital Restricted (Loss), Net Stock Debt for MRP Total
- --------------------------------------------------------------------------------------------------------------------------------
$ 11,651,917 $18,381,766 $ 188,423 $ -- $ (804,024) $ (325,212) $ 30,601,743
-------------
-- 1,262,043 -- -- -- -- 1,262,043
-- -- 108,662 -- -- -- 108,662
-- -- (117,076) -- -- -- (117,076)
------------ -------------
-- -- -- -- -- -- 1,253,629
31,937 -- -- -- -- -- 33,254
-- -- -- -- 92,884 -- 92,884
187,592 -- -- -- -- -- 187,592
-- -- -- -- -- (616,558) (616,558)
-- -- -- -- -- 212,459 212,459
-- (1,489,429) -- -- -- -- (1,489,429)
44,108,939 -- -- -- -- -- 44,131,752
1,489,939 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
57,470,324 18,154,380 180,009 -- (711,140) (729,311) 74,407,326
-------------
-- 5,972,778 -- -- -- -- 5,972,778
-- -- (2,304,587) -- -- -- (2,304,587)
-- -- 96,545 -- -- -- 96,545
------------ -------------
-- -- -- -- -- -- 3,764,736
68,057 -- -- -- -- -- 68,213
-- -- -- -- 88,893 -- 88,893
180,130 -- -- -- -- -- 180,130
-- -- -- -- -- 362,790 362,790
-- (1,775,436) -- -- -- -- (1,775,436)
22,813 -- -- 1,830,515 -- (1,853,328) --
-- -- -- (24,346,100) -- -- (24,346,100)
- --------------------------------------------------------------------------------------------------------------------------------
57,741,324 22,351,722 (2,028,033) (22,515,585) (622,247) (2,219,849) 52,750,552
-------------
-- (942,972) -- -- -- -- (942,972)
-- -- 1,916,185 -- -- -- 1,916,185
-- -- 2,029,779 -- -- -- 2,029,779
------------ -------------
-- -- -- -- -- -- 3,002,992
32,504,075 -- -- -- -- -- 32,522,366
-- -- -- (2,379,313) -- -- (2,379,313)
(27,626,214) -- -- 27,640,041 -- -- --
25,725 -- -- -- -- -- 25,754
-- -- -- -- 388,892 -- 388,892
157,616 -- -- -- -- -- 157,616
524,884 -- -- -- -- -- 524,884
-- -- -- -- -- 2,219,849 2,219,849
-- (2,051,700) -- -- -- -- (2,051,700)
-- -- -- (7,051,352) -- -- (7,051,352)
- --------------------------------------------------------------------------------------------------------------------------------
$ 63,327,410 $19,357,050 $ 1,917,931 $ (4,306,209) $ (233,355) $ -- $ 80,110,540
================================================================================================================================
SouthBanc Shares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
2000 1999 1998
----------------------------------------------
Cash flows from operating activities:
Net income (loss) .............................................................. $ (942,972) $ 5,972,778 $ 1,262,043
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ................................................................. 1,198,407 877,133 843,389
Accretion, net ............................................................... (716,985) (918,562) (768,076)
Provision for loan losses .................................................... 2,719,982 481,000 606,500
(Earnings) losses on investment in limited partnership ....................... (289,000) (750,000) 4,359,587
(Gain) loss on sale of investments, net ...................................... 3,081,814 146,281 (177,388)
(Gain) loss on sale of real estate ........................................... 90,581 (31,958) (45,570)
Gain on sale of loans, net ................................................... (11,318) (88,070) (20,797)
Gain on sale of real estate held for development ............................. (108,957) (355,018) (114,716)
Loss on sale of premises and equipment ....................................... 100,288 204 4,161
Deferred compensation ........................................................ 2,377,465 542,920 395,941
Increase in accrued interest receivable and other assets ..................... (5,570,139) (1,084,514) (2,126,635)
Increase (decrease) in other liabilities ..................................... 11,028,597 627,496 (986,822)
----------------------------------------------
Net cash provided by operating activities ................................. 12,957,763 5,419,690 3,231,617
----------------------------------------------
Cash flows from investing activities:
Increase in loans receivable, net .............................................. (689,050) (13,414,267) (21,497,351)
Purchases of loans receivable .................................................. (33,442,726) (30,624,420) (54,055,109)
Purchase of mortgage-backed securities ......................................... (33,160,606) (35,405,460) (80,440,920)
Purchases of investment securities ............................................. (10,804,151) (7,342,712) (26,071,961)
Purchase of investments in limited partnership ................................. -- -- (181,125)
Purchase of life insurance ..................................................... -- -- (7,390,000)
Purchases of FHLB stock ........................................................ (2,525,000) (2,160,800) (2,442,100)
Purchase of premises and equipment ............................................. (2,109,896) (249,576) (924,376)
Sales of loans receivable ...................................................... -- 7,476,562 28,516,313
Proceeds from redemption of FHLB stock ......................................... 1,650,000 1,800,000 802,900
Principal repayments on mortgage-backed securities ............................. 13,371,908 32,408,342 19,316,915
Proceeds from maturities of investment securities .............................. 3,000,000 500,000 14,710,657
Proceeds from sale of mortgage-backed securities, available for sale ........... 51,784,633 16,777,939 22,844,186
Proceeds from sale of investment securities, available for sale ................ 23,444,550 13,839,255 430,298
Proceeds from the sale of premises and equipment ............................... -- 500 20,800
Proceeds from sale of real estate owned ........................................ 1,152,972 468,193 282,325
Proceeds from sale of real estate held for development ......................... 541,727 924,044 1,213,625
Capital improvements of real estate held for development ....................... (470,465) (755,535) (724,265)
Net cash received in merger .................................................... 2,534,279 -- --
----------------------------------------------
Net cash provided by (used in) investing activities ....................... 14,278,175 (15,757,935) (105,589,188)
----------------------------------------------
(continued)
20
21
For the Years Ended September 30,
2000 1999 1998
-----------------------------------------------------
Cash flows from financing activities:
Increase in deposit accounts............................................ 21,535,331 13,466,310 6,759,773
Proceeds from FHLB advances............................................. 151,500,000 89,000,000 153,813,120
Repayment of FHLB advances.............................................. (186,000,000) (72,000,000) (112,813,120)
Proceeds from securities sold under agreements to repurchase............ 169,046 80,503 20,173,933
Proceeds from the sale of stock subscriptions........................... -- -- 45,659,494
Payment of stock offering costs......................................... -- -- (1,494,488)
Purchase of treasury stock.............................................. (7,051,354) (24,346,100) --
Proceeds from exercise of stock options................................. 25,754 68,213 33,254
Purchase of stock for MRP............................................... -- -- (616,558)
Repayments of ESOP loan................................................. 1,071,392 88,893 92,884
Dividends paid on common stock.......................................... (2,051,700) (1,775,436) (1,489,429)
Increase (decrease) in advance payments by borrowers for
property taxes and insurance.......................................... (196,114) 104,803 (63,205)
-----------------------------------------------------
Net cash provided by (used in) financing activities................ (20,997,645) 4,687,186 110,055,658
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents............... 6,238,293 (5,651,059) 7,698,087
Cash and cash equivalents, beginning of year............................... 15,546,360 21,197,419 13,499,332
-----------------------------------------------------
Cash and cash equivalents, end of year..................................... $ 21,784,653 $ 15,546,360 $ 21,197,419
=====================================================
Supplemental disclosures:
Cash paid during the year for
Interest.............................................................. $ 17,689,669 $ 13,500,051 $ 12,199,287
=====================================================
Taxes................................................................. $ 2,584,786 $ 2,862,964 $ 1,668,726
=====================================================
Noncash investing activities:
Additions to real estate acquired in settlement of loans.............. $ 1,827,422 $ -- $ 158,609
=====================================================
Loans receivable exchanged for mortgage-backed securities............. $ 47,953,652 $ -- $ 5,167,985
=====================================================
Change in unrealized net gain (loss) on securities available
for sale, net of tax............................................... $ 3,945,962 $ (2,208,042) $ (8,414)
=====================================================
Increase (decrease) in Employee Stock Ownership Plan debt
guaranteed by the Bank............................................. $ (388,892) $ (88,893) $ (92,884)
=====================================================
See accompanying notes to consolidated financial statements.
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
In September 1997, SouthBanc Shares, Inc. ("Company" or "SouthBanc"), a Delaware
Corporation, was formed at the direction of Perpetual Bank, a Federal Savings
Bank, ("Perpetual") to become the holding company for Perpetual in connection
with the conversion of Perpetual's parent mutual holding company, SouthBanc
Shares, M.H.C. ("MHC"), to a stock form of organization ("Conversion and
Reorganization"). The Conversion and Reorganization was consummated on April 14,
1998. The Company exchanged 2.85164 shares of its common stock for each
outstanding share of common stock held by stockholders of Perpetual other than
the MHC. The additional 2,281,312 shares of common stock were sold at $20.00 per
share for gross proceeds of $45,626,240, less offering cost of $1,494,488
resulting in net proceeds of $44,131,752.
In July 2000, the Company issued 1,829,085 shares of stock and paid $36,282,530
to shareholders of Heritage Bancorp Inc. ("Heritage Bancorp") in a merger with
Heritage Bancorp, parent of Heritage Federal Bank ("Heritage") in Laurens, South
Carolina. See Note 2 for a discussion of the merger. Heritage and Perpetual are
collectively referred to as the "Banks."
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, Perpetual and its wholly-owned subsidiaries, United Service Corporation
of Anderson, Inc. ("USC"), which primarily engages in real estate development,
and Mortgage First Service Corporation, which holds an equity investment in a
mortgage banking company, and Heritage (collectively the Company). USC has a
wholly-owned subsidiary, United Investment Services, Inc., which primarily
engages in brokerage services. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Loans Receivable
Loans receivable are stated at their unpaid principal balances less the
allowance for loan losses, and net of deferred loan origination fees and
discounts. The Company provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to the allowance. Additions to the allowance for loan
losses are provided by charges to operations based on various factors which, in
management's judgment, deserve current recognition in estimating losses. Such
factors considered by management include the market value of the underlying
collateral, growth and composition of the loan portfolios, 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 is adjusted accordingly. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making evaluations. Allowances for loan losses are subject
to periodic evaluation by various regulatory authorities and may be subject to
adjustment upon their examination.
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan," requires that creditors value all
specifically reviewed loans for which it is probable that the creditors will be
unable to collect all amounts due according to the terms of the loan agreement
at either the present value of expected cash flows discounted at the loan's
effective interest rate, or if more practical, the market price or value of the
collateral. If the resulting value of the impaired loan is less than the
recorded balance, the impairment must be recognized by creating a valuation
allowance for the difference and recognizing a corresponding bad debt expense.
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," amends SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan and
requires additional disclosures about how a creditor recognizes interest income
related to impaired loans. The Company adopted the provisions of SFAS No. 114
and No. 118 effective October 1, 1995. The adoption of these standards required
no increase to the reserve for loan losses and had no impact on net income.
Interest income on loans and lease financing is recorded on the accrual
basis. Accrual of interest on loans (including loans impaired under SFAS No.
114) generally is discontinued when the loan is 90 days past due and management
deems that collection of additional interest is doubtful. Interest received on
nonaccrual loans and impaired loans is generally applied against principal or
may be reported as interest income depending on management's judgment as to the
collectibility of principal. When borrowers with loans on a nonaccrual status
demonstrate their ability to repay their loans in accordance with the
contractual terms of the notes, the loans are returned to accrual status.
22
23
The Company provides an allowance for uncollectible interest based on an
experience method of anticipated collections. This allowance is netted against
accrued interest receivable for financial statement reporting purposes.
Loan fees and direct incremental costs of originating loans are deferred
and amortized over the contractual life of the related loan. The amortization of
the net fees or costs are recognized as a yield adjustment using the interest
method.
Investment and Mortgage-Backed Securities
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. These investments are classified in three categories and are
accounted for as follows: (a) debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held for investment and
reported at amortized cost; (b) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings; and (c) debt and equity securities not classified
as either held for investment or trading are classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a component of accumulated other comprehensive income
in stockholders' equity.
The Company has no securities classified as held for investment or trading.
SFAS No. 115 may cause fluctuations in stockholders' equity based on changes in
values of debt and equity securities classified as available for sale.
Securities classified as available for sale will be considered in the
Company's asset/liability management strategies and may be sold in response to
changes in interest rates, liquidity needs and/or significant prepayment risk.
The cost of investment securities sold is determined by the "identified
certificate" method.
Declines in the fair value of individual securities below their cost that
are deemed by management to be other than temporary result in write-downs of the
individual securities to their fair value. The write-downs are included in
earnings as realized losses.
Premiums and discounts on securities are amortized by a method which
approximates a level yield.
Investment in Limited Partnership
Investment in limited partnership represents an equity investment in a limited
partnership in which the Company owned more than 20% but not in excess of 50% of
the limited partnership and is accounted for under the equity method.
Accordingly, the Company records 20.625% of the partnership's profits and losses
in the consolidated statement of income.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate acquired
through foreclosure and is initially recorded at estimated fair value.
Subsequent to acquisition, real estate acquired in settlement of loans is stated
at the lower of cost or fair value, less estimated selling costs. Costs related
to holding these properties are charged to operations. Market values of real
estate acquired in settlement of loans are reviewed regularly and allowances for
losses are established when the carrying values of real estate acquired in
settlement of loans exceeds fair value less costs to sell.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated primarily on the straight-line method over the
estimated useful lives of the respective assets, five to forty years.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase.
Fixed-coupon reverse repurchase agreements are treated as financings, with the
obligation to repurchase securities sold being reflected as a liability and the
securities underlying the agreements remaining as an asset. The securities are
delivered by appropriate entry by the Company's safekeeping agent to the
counterparties' accounts.
The dealers may have sold, loaned or otherwise disposed of such securities
to other parties in the normal course of their operations, and have agreed to
resell to the Company substantially identical securities at the maturities of
the agreements.
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Taxes
The provision for income taxes is based upon income and expense reported for
financial statement purposes after adjustment for permanent differences such as
tax-exempt interest income.
When income and expenses are recognized in different periods for financial
reporting purposes than for income tax purposes, deferred taxes are provided in
recognition of these temporary differences. The Company computes its income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method to record income taxes. The liability
method calculates the effect of tax rates expected to be in place when the
related temporary differences reverse. Subsequent changes in tax rates will
require adjustment to these deferred tax assets and liabilities.
Stock Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123 "Accounting
for Stock Based Compensation." The statement permits the Company to continue
accounting for stock based compensation as set forth in Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," provided
the Company discloses the pro forma effect on net income and earnings per share
of adopting the full provisions of SFAS No. 123. Accordingly, the Company
continues to account for stock based compensation under APB Opinion 25 and has
provided the required pro forma disclosures.
Earnings Per Share
Basic earnings per share is 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.
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than
its interest-earning assets.
Credit risk is the risk of default on the Company's loan portfolio that
results from the borrowers' inability or unwillingness to make contractually
required payments. Credit risk also applies to investment securities and
mortgage-backed securities should the issuer of the security be unable to make
principal and interest payments. Market risk reflects changes in the value of
collateral underlying loans receivable, the valuation of real estate held by the
Company and the valuation of investment securities.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the dates
of the balance sheets and revenues and expenses for the periods covered. Actual
results could differ significantly from those estimates and assumptions.
24
25
Recently Issued Accounting Standards
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 and liabilities. SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" was issued in June 2000 and amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and hedging
activities. The two statements are to be adopted concurrently and are effective
for fiscal years and quarters beginning after June 15, 2000. Adoption of SFAS
No. 133 and SFAS No. 138 did not have a material impact on the presentation of
the Company's financial results or financial position.
Other accounting standards that have been issued or proposed by the
Financial Accounting Standards Board that do not require adoption until a future
date are not expected to have a material impact on the consolidated financial
statements upon adoption.
Reclassification
Certain reclassifications of accounts reported for previous periods have been
made in these consolidated financial statements. Such reclassifications had no
effect on stockholders' equity or the net income as previously reported.
(2) Merger
On July 31, 2000, the Company merged with Heritage Bancorp, the parent company
of Heritage. The Company issued stock or cash or a combination thereof, at the
option of the Heritage Bancorp stockholders, for the outstanding shares of
Heritage Bancorp as of the merger date. The purchase consideration totaled cash
of $36.3 million and 1,829,085 shares of SouthBanc stock. The cash price paid
was $17.65 per share and the exchange ratio for the stock was .992 shares of
SouthBanc for each exchanged share of Heritage Bancorp. The transaction was
accounted for under the purchase method of accounting. Accordingly, the results
of operations of Heritage for the period August 1, 2000 through September 30,
2000 are included in the accompanying consolidated financial statements. Assets
acquired and liabilities assumed have been recorded at their estimated fair
market values. The excess of cost over the estimated fair value of net assets
acquired was allocated to goodwill and subsequently amortized. The following
unaudited pro forma information presents the results of operations of the
Company as if the acquisition had taken place on October 1, 1998 (in thousands,
except per share data):
For the Year Ended
September 30,
2000 1999
--------------------
Net interest income......................... $ 20,600 $ 22,500
Net earnings................................ $ 5,200 $ 7,800
Earnings per share--basis................... $ 1.09 $ 1.49
Earnings per share--diluted................. $ 1.06 $ 1.44
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the merger occurred on the date indicated
or which may result in the future.
(3) Cash and Cash Equivalents
Cash and cash equivalents consisted of the following at September 30, 2000 and
1999:
2000 1999
------------ ------------
Working funds................................ $ 2,910,117 $ 3,949,305
Noninterest-earning demand deposits.......... 4,212,653 3,074,324
Interest-earning overnight deposits.......... 14,661,883 8,522,731
------------ ------------
$ 21,784,653 $ 15,546,360
============ ============
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) Investment in Limited Partnership
At September 30, 2000, the Company's investment in the limited partnership
consisted of a 20.625% interest in Dovenmuehle Mortgage Company Limited
Partnership which invests in mortgage servicing rights. The Company committed
and invested $5.0 million in Dovenmuehle in December 1996. The Company has no
obligation to contribute additional amounts to the limited partnership and has
no additional or potential future liability to the limited partnership in excess
of the invested amount.
The mortgage servicing rights held by the Partnership are valued quarterly
by an independent third party. The valuations are based on discounted cash flows
and include estimates regarding prepayments speeds, expected servicing costs,
internal rate of return, delinquencies, foreclosure costs and other factors
(economic value pricing model). A second valuation is prepared (market value
pricing model) which in addition to these factors also includes estimates of the
effect on cash flow of the Dovenmuehle Retention Program. The program is
designed to have a favorable impact on prepayment speeds. The Partnership
prepares its financial statements based on the market value pricing model.
The Company records its investment in the Partnership under the equity
method of accounting using the economic value pricing model valuation. The
investment in the Partnership is reported at $1,864,373 and $1,575,373 at
September 30, 2000 and 1999, respectively. The change in the equity in earnings
(losses) of investment in limited partnership was $289,000, $750,000 and
(4,500,000) for the years ended September 30, 2000, 1999 and 1998.
September 30,
2000 1999
-----------------------
20.625% interest in shareholders'
equity of the Partnership based upon
Dovenmuehle financial statements............... $2,424,989 $2,493,396
Book value of investment in limited partnership... 1,864,373 1,575,373
-----------------------
Difference in the economic value and
the market value pricing models................ $ 560,616 $ 918,023
=======================
The table below contains the summarized financial information of
Dovenmuehle (unaudited):
Condensed Operations Statement
For the Years Ended
September 30,
2000 1999
-------------------------
Service fees........................... $ 4,929,253 $ 6,046,437
Other income........................... 1,282,566 1,580,909
-------------------------
Total income........................ 6,211,819 7,627,346
Servicing expense...................... 1,373,190 1,593,516
Purchased mortgage servicing
rights amortization................. 4,191,474 1,404,648
Other expense.......................... 978,827 1,957,950
-------------------------
Total expense....................... 6,543,491 4,956,114
-------------------------
Net gain (loss)..................... $ (331,672) $ 2,671,232
=========================
Condensed Balance Sheet
At September 30,
2000 1999
--------------------------
Cash................................. $ 683,534 $ 259,120
Accounts receivable.................. 452,469 960,644
Purchased mortgage servicing rights 22,011,151 25,881,063
Other assets......................... 39,442 40,302
Organizational costs................. -- 321,562
--------------------------
Total Assets...................... $ 23,186,596 $ 27,462,691
==========================
Accounts payable..................... $ 478,075 $ 813,499
Long-term debt....................... 10,950,000 14,560,000
Shareholders equity.................. 11,757,521 12,089,192
--------------------------
Total Liabilities and
Shareholders Equity............. $ 23,186,596 $ 27,462,691
==========================
26
27
(5) Investment and Mortgage-Backed Securities Available for Sale
The Company had securities available for sale as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
September 30, 2000
Investment securities:
U. S. Treasury note.............................................. $ 1,002,735 $ -- $ 300 $ 1,002,435
Equity investments............................................... 1,126,755 4,195,934 33,750 5,288,939
Agency callable bond............................................. 5,000,000 -- -- 5,000,000
Trust preferred bonds............................................ 4,001,871 -- 634,575 3,367,296
----------------------------------------------------------
$ 11,131,361 $ 4,195,934 $ 668,625 $ 14,658,670
==========================================================
Mortgage-backed securities:
FHLMC and FNMA fixed rate........................................ $ 16,483,370 $ 171,998 $ 36,881 $ 16,618,487
GNMA adjustable rate............................................. 24,501,775 96 -- 24,501,871
FHLMC and FNMA adjustable rate................................... 15,446,225 26,169 15,273 15,457,121
Private label collateralized mortgage obligations (CMOs)......... 9,315,086 -- 337,346 8,977,740
Agency CMOs...................................................... 7,301,753 -- 197,969 7,103,784
----------------------------------------------------------
$ 73,048,209 $ 198,263 $ 587,469 $ 72,659,003
==========================================================
September 30, 1999
Investment securities:
FHLB zero coupon bond............................................ $ 6,158,388 $ -- $ 507,946 $ 5,650,442
U. S. Treasury note.............................................. 1,009,129 -- 1,004 1,008,125
Stock mutual fund................................................ 1,043,000 -- -- 1,043,000
Equity investments............................................... 150,000 -- 43,125 106,875
Municipal bond................................................... 3,289,905 -- 502,065 2,787,840
Agency callable bond............................................. 2,000,000 -- -- 2,000,000
Trust preferred bonds............................................ 4,022,800 -- 375,379 3,647,421
----------------------------------------------------------
$ 17,673,222 $ -- $ 1,429,519 $ 16,243,703
==========================================================
Mortgage-backed securities:
FHLMC and FNMA fixed rate........................................ $ 10,259,848 $ 28,445 $ 211,409 $ 10,076,884
GNMA fixed rate.................................................. 27,490,755 -- 1,036,099 26,454,656
FNMA adjustable rate............................................. 280,539 -- 3,306 277,233
Private label collateralized mortgage obligations (CMOs)......... 11,439,739 24,442 9,972 11,454,209
Agency CMOs...................................................... 10,556,918 -- 435,359 10,121,559
----------------------------------------------------------
$ 60,027,799 $ 52,887 $ 1,696,145 $ 58,384,541
==========================================================
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The amounts of scheduled maturities of investments and mortgage-backed
securities at September 30, 2000 were as follows:
Amortized Fair
Cost Value
----------------------------
Less than one year............................. $ 1,136,558 $ 1,134,281
One year to ten years.......................... 5,118,303 5,120,592
Ten to twenty years............................ 11,710,984 11,825,841
Twenty to twenty-five years.................... 16,091,029 15,625,936
Twenty-five to thirty years.................... 48,995,941 48,322,084
No stated maturity............................. 1,126,755 5,288,939
----------------------------
$ 84,179,570 $ 87,317,673
============================
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at September 30, 2000 by contractual maturity are
shown above. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
At September 30, 2000 and 1999, $888,981 and $656,035, respectively, of
securities were pledged as collateral for certain deposits.
Proceeds from sales of securities available for sale and the related gross
realized gains and losses were as follows:
For the Years Ended September 30,
2000 1999 1998
---------------------------------------
Proceeds from sales of securities....... $ 66,160,574 $ 30,617,194 $ 23,274,484
Gross realized gains.................... 5,213 449,953 226,884
Gross realized losses................... 3,087,027 596,234 49,496
(6) Loans Receivable
Loans receivable at September 30, 2000 and 1999 are summarized as follows:
2000 1999
-------------------------------
First mortgage loans, substantially
all one to four family.................. $ 282,911,938 $ 131,952,534
Construction............................... 135,625,481 41,141,117
Commercial real estate..................... 66,361,898 48,107,184
Loan participations purchased.............. 7,565,205 11,572,799
Home improvement loans..................... 988,311 1,453,977
Commercial loans........................... 19,021,144 15,441,282
Consumer loans............................. 37,663,215 20,692,077
Loans secured by deposits.................. 2,827,843 1,377,831
-------------------------------
552,965,035 271,738,801
Less: Deferred loan fees, net.............. 732,299 317,371
Allowance for loan losses............. 6,616,143 2,617,662
Undisbursed loans in process.......... 29,277,853 13,315,627
-------------------------------
Loans receivable, net................. $ 516,338,740 $ 255,488,141
===============================
Changes in the allowance for loan losses for the years ended September 30,
2000, 1999 and 1998 are summarized as follows:
2000 1999 1998
-----------------------------------------
Balance, beginning of year.......... $ 2,617,662 $ 2,374,044 $ 1,886,243
Allowance acquired in merger........ 1,989,580 -- --
Provision for loan losses........... 2,719,982 481,000 606,500
Charge-offs......................... (760,812) (275,583) (174,183)
Recoveries.......................... 49,731 38,201 55,484
-----------------------------------------
Balance, end of year............. $ 6,616,143 $ 2,617,662 $ 2,374,044
=========================================
Loans serviced for others amounted to approximately $101,207,000,
$59,990,000 and $74,877,000 at September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000 and 1999, the Company had no loans receivable which
were ninety days or more delinquent and still accruing interest.
At September 30, 2000, 1999 and 1998, the Company had approximately
$12,331,000, $2,357,000 and $1,175,000, respectively, in non-accrual loans. The
amount of interest income that would have been recognized had these loans
performed according to their contractual terms amounted to approximately
$677,000, $209,000 and $110,000, during the
28
29
years ended September 30, 2000, 1999 and 1998, respectively. The actual interest
income recognized on these loans amounted to approximately $143,000, $103,000
and $26,000 during the years ended September 30, 2000, 1999 and 1998,
respectively.
At September 30, 2000, 1999 and 1998, the carrying value of loans that are
considered to be impaired under SFAS No. 114 totaled approximately $13,423,000,
$2,587,000 and $1,264,000, respectively. Impairments on these loans are included
in the allowance for loan losses. The average balance of impaired loans was
$5,981,000, $2,111,000 and $1,339,000, for years ended September 30, 2000, 1999
and 1998, respectively. Interest income recognized on impaired loans was
$170,672, $103,087 and $26,489, for years ended September 30, 2000, 1999 and
1998, respectively.
Activity in loans to officers, directors and other related parties for the
years ended September 30, 2000, 1999 and 1998 is summarized as follows:
2000 1999 1998
------------------------------------
Balance at beginning
of year...................... $ 1,245,025 $ 917,014 $ 925,503
New loans.................. 380,000 572,000 88,000
Repayments................. (338,149) (243,989) (96,489)
------------------------------------
Balance at end of year.......... $ 1,286,876 $ 1,245,025 $ 917,014
====================================
The Company primarily grants residential loans to customers in the upstate
counties of South Carolina. The Company's ability to collect these balances
depends substantially upon the economic conditions and real estate market in the
region. The Company does not have any concentrations of loans to any one
borrower. The Company has increased its commercial and consumer loan portfolios,
which may entail greater risk than residential mortgage loans.
(7) Real Estate
Real estate is summarized at September 30, 2000 and 1999 as follows:
2000 1999
-------------------------
Real estate held for development.......... $ 2,133,598 $ 2,095,903
Real estate acquired in settlement
of loans............................... 1,091,609 229,900
-------------------------
$ 3,225,207 $ 2,325,803
=========================
Real estate held for development is comprised of four projects. At
September 30, 2000 and 1999, the net investment in two single family residential
subdivisions was $1,257,624 compared to $1,262,966 at September 30, 1999, and
the net investment in two commercial real estate development projects at
September 30, 2000 was $875,974 compared to $832,937 at September 30, 1999.
(8) Premises and Equipment
Premises and equipment are summarized at September 30, 2000 and 1999 as follows:
2000 1999
-----------------------------
Land.................................. $ 1,104,646 $ 871,242
Office and other buildings............ 7,924,949 3,750,102
Furniture, fixtures and equipment..... 8,473,037 5,436,934
-----------------------------
17,502,632 10,058,278
Less accumulated depreciation......... (6,726,558) (4,336,048)
-----------------------------
$ 10,776,074 $ 5,722,230
=============================
Depreciation expense was $1,198,407, $877,133 and $843,389 for the years
ended September 30, 2000, 1999 and 1998, respectively.
(9) Deposits
Deposits outstanding by type of account and range of interest rates at September
30, 2000 and 1999 are summarized as follows:
2000 1999
-------------------------------- --------------------------------
Range of Range of
Balance Interest Rates Balance Interest Rates
-------------------------------- --------------------------------
Non-interest-bearing checking accounts................... $ 14,929,620 -- $ 15,729,029 --
Interest-bearing checking accounts....................... 44,780,717 0.91%-3.44% 43,255,605 1.21%-3.49%
Passbook accounts........................................ 50,314,390 1.49%-4.95% 26,386,582 2.12%-4.59%
------------- --------------
110,024,727 85,371,216
Certificate accounts..................................... 341,888,473 2.28%-9.25% 135,885,869 2.28%-8.00%
------------- --------------
$ 451,913,200 $ 221,257,085
============= ==============
Weighted average interest rate........................... 5.07% 4.08%
========== ==========
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The amounts of scheduled maturities of certificate accounts at September
30, 2000 and 1999 were as follows:
2000 1999
--------------------------
Maturing within one year............ $285,520,514 $ 117,722,833
Maturing one through three years.... 54,414,785 16,889,586
Maturing after three years.......... 1,953,174 1,273,450
--------------------------
$341,888,473 $ 135,885,869
==========================
At September 30, 2000, 1999 and 1998, the aggregate amounts of time
deposits of $100,000 or more amounted to $92,525,434, $20,175,089 and
$17,412,810, respectively. Interest paid on time deposits greater than $100,000
was $2,172,175, $864,223 and $988,989 for the years ended September 30, 2000,
1999 and 1998, respectively.
(10) Advances from the FHLB
Advances, net of discounts, from the FHLB at September 30, 2000 and 1999 are
summarized as follows:
September 30, 2000
- ------------------------------------------------------------------
Interest
Maturity Date Call Date Rate Balance
- ------------------------------------------------------------------
Daily Advance 6.94% $ 28,500,000
October 2004 October 2000 5.62 16,000,000
January 2005 January 2002 6.42 5,000,000
June 2009 June 2001 5.30 13,000,000
August 2009 September 2001 6.71 5,000,000
August 2009 August 2004 6.39 5,832,948
September 2010 September 2003 6.04 25,000,000
-------------
$ 98,332,948
=============
September 30, 1999
- ------------------------------------------------------------------
Interest
Maturity Date Call Date Rate Balance
- ------------------------------------------------------------------
Daily Advance 5.75% $ 20,000,000
January 2002 October 1999 5.78 5,000,000
January 2002 October 1999 4.83 10,000,000
July 2008 October 1999 4.78 25,000,000
June 2009 June 2001 5.30 13,000,000
-------------
$ 73,000,000
=============
At September 30, 2000, the Company had $98.5 million in outstanding FHLB
advances ($98.3 million net of discounts) and, based upon eligible collateral,
additional available credit of $84.2 million.
The Company, as a member institution of the FHLB of Atlanta, is required to
own capital stock in the FHLB of Atlanta based generally on the Company's
balances of residential mortgage loans and FHLB Advances. No ready market exists
for the FHLB stock, and it has no quoted market value. Redemption of this stock
has historically been at par value. As collateral for its Advances, the Company
has pledged qualifying residential mortgage loans totaling $135.5 million at
September 30, 2000, and all of its FHLB stock.
(11) Securities Sold Under Agreements to Repurchase
The Company had $20,423,482 and $20,254,436 borrowed under agreements to
repurchase at September 30, 2000 and 1999, respectively. The amortized cost of
the securities underlying the agreements to repurchase at September 30, 2000 and
1999 was $22,004,114 and $22,630,102, respectively. The maximum amount
outstanding at any month end during fiscal 2000 and 1999 was $20,501,343 and
$20,366,481, respectively. The average amount of outstanding agreements for
fiscal 2000 and 1999 was approximately $20,483,084 and $20,244,801,
respectively.
(12) Income Taxes
Income taxes for the years ended September 30, 2000, 1999 and 1998 are
summarized as follows:
2000 1999 1998
----------------------------------
Current...................... $ 722,720 $2,383,738 $ 994,696
Deferred..................... (513,614) 532,000 (446,000)
----------------------------------
Total..................... $ 209,106 $2,915,738 $ 548,696
==================================
30
31
Income tax expense differs from the amount computed at the federal
statutory rate of 34% for the years ended September 30, 2000, 1999 and 1998, as
a result of the following:
2000 1999 1998
----------------------------------------
Income taxes (benefit) at federal rate................................... $ (249,515) $ 3,022,095 $ 615,651
Differences resulting from:
State taxes, net of federal benefit................................... -- 41,000 29,000
Change in beginning of year valuation allowance....................... 782,200 (48,000) (120,000)
Income from unconsolidated subsidiary................................. -- (48,000) (50,000)
Non-deductible compensation........................................... -- 123,000 71,000
Tax exempt interest................................................... (179,500) (113,000) (34,000)
Tax exempt earnings on life insurance policies........................... (138,365) (133,000) (28,000)
Non-deductible ESOP expense.............................................. -- 62,000 64,000
Other.................................................................... (5,714) 9,643 1,045
----------------------------------------
$ 209,106 $ 2,915,738 $ 548,696
========================================
At September 30, 2000, the Company has state net operating loss
carryforwards of approximately $43,400,000. These carryforwards expire in
various amounts beginning in fiscal year 2001 through 2012.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 2000 and 1999 are presented below:
2000 1999
-----------------------------
Deferred tax assets:
Loan loss allowances deferred for tax purposes............................................ $ 2,401,600 $ 901,000
State loss carryforwards.................................................................. 2,604,000 2,220,000
Unrealized loss on securities available for sale.......................................... -- 1,045,000
Limited partnership book expenses in excess of tax deductions............................. 214,000 745,000
Other..................................................................................... 523,500 300,000
-----------------------------
Total gross deferred tax assets...................................................... 5,743,100 5,211,000
Less valuation allowances, primarily for tax loss carryforwards........................... (3,398,340) (2,352,000)
-----------------------------
Net deferred tax assets.............................................................. 2,344,760 2,859,000
-----------------------------
Deferred tax liabilities:
Depreciation for tax purposes in excess of such amount for financial reporting
purposes................................................................................ 230,100 119,000
Tax bad debt reserve in excess of base year............................................... 299,200 307,000
Unrealized gain on securities available for sale.......................................... 1,223,560 --
Book and tax basis difference in FHLB stock............................................... 236,300 --
Other..................................................................................... 118,600 14,000
-----------------------------
Total gross deferred tax liabilities................................................. 2,107,760 440,000
-----------------------------
Net deferred tax asset (included in other assets).................................... $ 237,000 $ 2,419,000
=============================
A portion of the change in the deferred tax asset relates to unrealized
gains and losses on securities available for sale which have been recorded
directly to stockholders' equity.
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The realization of net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income in
certain periods and the utilization of tax planning strategies. Management has
determined that it is more likely than not that the net deferred tax assets can
be supported based upon these criteria except for the state loss carryforwards.
A valuation allowance for the deferred tax asset has been reflected to reduce
the potential deferred tax assets, primarily for state loss carryforwards, to an
amount that more likely than not can be realized at September 30, 2000 and 1999.
(13) Capital
The Company is not subject to any regulatory capital requirements. The Banks'
actual capital and ratios as required by the Banks' primary regulator, the
Office of Thrift Supervision (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 September 30, 2000, the most recent
notification from the OTS categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum core capital, Tier I capital and
risk-based capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Banks'
category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Perpetual Actual Adequacy Purposes Action Provisions
------------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
(Amounts in thousands)
As of September 30, 2000:
Tangible Capital (To Total Assets).................... $ 34,098 9.2% $ 5,567 1.5% $ -- --%
Core Capital (To Total Assets)........................ 34,098 9.2 14,847 4.0 18,558 5.0
Tier I Capital (To Risk-Weighted Assets).............. 34,098 13.5 -- -- 15,195 6.0
Risk-Based Capital (To Risk-Weighted Assets).......... 36,781 14.5 20,260 8.0 25,325 10.0
As of September 30, 1999:
Tangible Capital (To Total Assets).................... $ 41,305 11.4% $ 5,419 1.5% $ -- --%
Core Capital (To Total Assets)........................ 41,305 11.4 14,431 4.0 18,039 5.0
Tier I Capital (To Risk-Weighted Assets).............. 41,305 17.9 -- -- 13,816 6.0
Risk-Based Capital (To Risk-Weighted Assets).......... 43,817 19.0 18,422 8.0 23,074 10.0
As of September 30, 1998:
Tangible Capital (To Total Assets).................... $ 49,983 14.8% $ 5,075 1.5% $ -- --%
Core Capital (To Total Assets)........................ 49,983 14.8 13,533 4.0 16,916 5.0
Tier I Capital (To Risk-Weighted Assets).............. 49,983 23.7 -- -- 12,661 6.0
Risk-Based Capital (To Risk-Weighted Assets).......... 50,266 23.8 16,881 8.0 21,101 10.0
32
33
To Be Well
Capitalized Under
For Capital Prompt Corrective
Heritage Actual Adequacy Purposes Action Provisions
-------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------
(Amounts in thousands)
As of September 30, 2000:
Tangible Capital (To Total Assets)................. $ 32,419 11.3% $ 4,302 1.5% $ -- --%
Core Capital (To Total Assets)..................... 32,419 11.3 11,472 4.0 14,340 5.0
Tier I Capital (To Risk-Weighted Assets)........... 32,419 17.4 -- 11,200 6.0
Risk-Based Capital (To Risk-Weighted Assets)....... 36,442 19.5 14,934 8.0 18,667 10.0
As of September 30, 1999:
Tangible Capital (To Total Assets)................. $ 63,404 20.3% $ 4,675 1.5% $ -- --%
Core Capital (To Total Assets)..................... 63,404 20.3 12,466 4.0 15,583 5.0
Tier I Capital (To Risk-Weighted Assets) . ........ 63,404 34.7 -- 10,949 6.0
Risk-Based Capital (To Risk-Weighted Assets)....... 64,749 35.5 14,598 8.0 18,248 10.0
As of September 30, 1998:
Tangible Capital (To Total Assets)................. $ 58,777 19.4% $ 4,541 1.5% $ -- --%
Core Capital (To Total Assets)..................... 58,777 19.4 12,110 4.0 15,138 5.0
Tier I Capital (To Risk-Weighted Assets)........... 58,777 40.3 -- 8,760 6.0
Risk-Based Capital (To Risk-Weighted Assets)....... 59,527 40.8 11,681 8.0 14,601 10.0
If either of the Banks were to fail to meet its minimum capital
requirements, it would 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.
The following table reconciles the Company's consolidated stockholders'
equity to the Banks' regulatory capital positions at September 30, 2000 and
1999:
2000 1999
-------------------------------
Stockholders' equity................ $ 80,110,540 $ 52,750,552
Adjustment for equity of Company
not eligible for computation..... (8,973,593) (10,948,406)
Adjustments for unrealized (gains)
losses on available for sale
securities....................... (2,041,575) 1,751,820
Investments in and advances to
nonincludable subsidiaries....... (2,301,690) (2,179,143)
Disallowed servicing assets......... (275,972) (69,557)
------------------------------
Regulatory tangible and
core capital................ 66,517,710 41,305,266
Supplemental capital................ 4,359,642 2,587,923
Equity assets to be deducted........ (21,246) (76,300)
Unrealized gains on available for
sale equity securities........... 2,367,713 --
------------------------------
Risk-based capital............. $ 73,223,819 $ 43,816,889
==============================
(14) Employee Benefit Plans
The Company has a profit sharing and deferred compensation plan for
substantially all full-time employees. The plan permits eligible participants to
contribute a percentage of their salary up to amounts permitted by the Internal
Revenue Code each year. At the discretion of the Board of Directors, the Company
may match a percentage of each participant's contribution during the plan year.
In addition, the Board of Directors may from year to year make a discretionary
contribution to the plan. The Company's contribution recorded as expense for the
years ended September 30, 2000, 1999 and 1998, was $108,281, $138,200 and
$203,790, respectively.
Supplemental benefits are provided to certain key officers under
Supplemental Executive Retirement Agreements. These agreements are not qualified
under the Internal Revenue Code, and the benefits are unfunded. However, certain
benefits are informally and indirectly funded by insurance policies on the lives
of the covered officers. The cash surrender values of the life insurance
policies are recorded in the accompanying balance sheets at $8,272,700 and
$7,865,743 at September 30, 2000 and 1999, respectively.
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(15) Stock Option Plan
The Company has stock option plans through which the Board of Directors may
grant options to directors, officers and employees to purchase the Company's
common stock at prices not less than the market value of the stock on the option
grant date. The granted options become exercisable in various increments and
expire ten years from the grant date.
The following table summarizes option activity during the years ended
September 30, 2000, 1999 and 1998.
Number of Price Per
Shares Share
----------------------
Outstanding at September 30, 1997.......... 179,943 $ 8.47
Granted................................. -- --
Exercised............................... 3,753 8.85
----------------------
Outstanding at September 30, 1998.......... 176,190 8.45
Granted................................. 228,131 20.31
Exercised............................... 15,620 4.37
----------------------
Outstanding at September 30, 1999.......... 388,701 15.58
Granted................................. 7,722 18.38
Exercised............................... 2,910 8.85
Forfeited............................... 7,722 20.31
----------------------
Outstanding at September 30, 2000.......... 385,791 $ 15.65
======================
The Company applies APB Opinion 25 in accounting for the stock option
plans. Accordingly, no compensation expense has been recognized for the plans.
Had compensation cost been recognized for the stock option plans applying the
fair-value-based method as prescribed by SFAS 123, the Bank's net income (loss)
and earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
2000 1999 1998
----------------------------------------
Net Income (loss)
As reported................ $ (942,972) $ 5,972,778 $ 1,262,043
Pro forma.................. (1,114,228) 5,803,728 1,184,589
Earnings (loss) Per Share
Basic
As reported.............. $ (.29) $ 1.76 $ .30
Pro forma................ (.34) 1.71 .28
Diluted
As reported.............. $ (.29) $ 1.67 $ .29
Pro forma................ (.34) 1.63 .27
The effects of applying SFAS 123 may not be representative of the effects
on reported net income in future years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999
---------------------
Dividend yield................................. 3.00 2.50
Expected volatility............................ 10% 10%
Risk-free interest rate........................ 5.00% 5.00%
Expected lives................................. 10 years 10 years
There were no options granted in 1998.
(16) Management Recognition Plan
The Company has Management Recognition Plans (MRP) through which the Board of
Directors may grant shares of the Company's common stock to management. During
the year ended September 30, 1999, 91,252 shares of common stock were granted to
management. There were no shares granted in 2000 or 1998. All of the unvested
shares vested on July 31, 2000, with the merger, and related compensation
expense of $2,219,849 was recorded for the year ended September 30, 2000.
Compensation expense was $362,790 and $212,459 for the years ended September 30,
1999 and 1998, respectively.
(17) Employee Stock Ownership Plan
The Company maintains an Employee Stock Ownership Plan (ESOP) for eligible
employees. The ESOP has a loan used to acquire shares of common stock of the
Company. Such stock is pledged as collateral for the loan. In accordance with
the requirements of Statement of Position (SOP) 93-6, the Company presents the
outstanding loan amount as an other liability and as a reduction of
stockholders' equity in the accompanying consolidated balance sheets. Company
contributions to the ESOP, which are at the discretion of the Board of
Directors, are the primary source of funds used by the ESOP to service the debt.
Contributions of $362,468, $146,814 and $158,729 were charged to operations for
the years ended September 30, 2000, 1999 and 1998, respectively. In accordance
with SOP 93-6, the Company is required to record compensation expense or income
for the difference between the cost of the stock to the ESOP at the time of
purchase and the market value of the stock at the time shares are released to
ESOP participants. Compensation expense recorded under the ESOP was $682,500,
$180,130 and $187,592 for the years ended September 30, 2000, 1999 and 1998,
respectively.
34
35
(18) Earnings Per Share
The following is a summary of the earnings per share (EPS) calculation for the
years ended September 30, 2000, 1999 and 1998:
2000
-------------------------------------
Per
Income Share Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS....................... $ (942,972) 3,262,180 $ (0.29)
======
Effect of dilutive securities:
Stock options................ -- --
Unearned ESOP Shares......... -- --
---------------------------
Diluted EPS..................... $ (942,972) 3,262,180 $ (0.29)
=====================================
For the year ended September 30, 2000, common stock equivalents were
anti-dilutive because of the Company's net loss. Common stock equivalents that
would have been considered for diluted EPS calculation were 116,018.
1999
-------------------------------------
Per
Income Share Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS....................... $ 5,972,778 3,386,851 $ 1.76
======
Effect of dilutive securities:
Stock options................ -- 91,120
Unearned ESOP Shares......... -- 92,185
----------------------------
Diluted EPS..................... $ 5,972,778 3,570,156 $ 1.67
=====================================
1998
-------------------------------------
Per
Income Share Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS....................... $ 1,262,043 4,199,237 $ 0.30
======
Effect of dilutive securities:
Stock options................ -- 101,790
Unearned ESOP Shares......... -- 105,354
----------------------------
Diluted EPS..................... $ 1,262,043 4,406,381 $ 0.29
=====================================
(19) Commitments and Contingencies
In conjunction with its lending activities, the Company enters into various
commitments to extend credit and issue letters of credit. Loan commitments
(unfunded loans and unused lines of credit) and letters of credit are issued to
accommodate the financing needs of the Bank's customers. Loan commitments are
agreements to lend moneys at a future date, so long as there are no violations
of any conditions established in the agreement. Letters of credit commit the
Company to make payments on behalf of customers when certain specified events
occur.
Financial instruments where the contract amount represents the Company's
credit risk at September 30, 2000 and 1999, include loan and letter of credit
commitments of $91,857,000 and $44,852,000, respectively.
These loan and letter of credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the amount
and nature, is obtained based upon management's assessment of the credit risk.
Since many of the extensions of credit are expected to expire without being
drawn, the total commitment amounts do not necessarily represent future cash
requirements.
Outstanding commitments on mortgage loans not yet closed amounted to
approximately $10,918,000 and $9,000,000 at September 30, 2000 and 1999,
respectively. Substantially, all of these commitments were at variable interest
rates. Such commitments, which are funded subject to certain limitations, extend
over varying periods of time with the majority being funded within thirty days.
These commitments will be funded with the cash flow generated from normal
operations, as well as possible utilization of existing credit facilities
available to the Company.
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued)
(20) Carrying Amounts and Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information, whether or not recognized in the balance
sheets, when it is practical to estimate the fair value. SFAS No. 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity, or
contractual obligations which require the exchange of cash or other financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock, premises and equipment,
accrued interest receivable and payable and other assets and liabilities.
For cash and cash equivalents and FHLB stock, the carrying value is a
reasonable estimate of fair value.
For investment securities available for sale, mortgage-backed securities
and collateralized mortgage obligations, fair value is based on available quoted
market prices or quoted market prices for similar securities if a quoted market
price is not available.
The fair value of the limited partnership is based on an appraised value by
an independent appraiser.
The fair value of fixed rate loans is estimated based upon discounted
future cash flows using discount rates comparable to rates currently offered for
such loans. The discounted future cash flows reflect estimated maturity dates
adjusted for expected prepayments. For adjustable rate loans, the fair value is
equal to the carrying amount due to frequent repricing.
The fair value of time deposits is estimated by discounting the amounts
payable at the certificate rates currently offered for deposits of similar
remaining maturities. The fair value of all other deposit account types is the
amount payable on demand at year-end.
For FHLB Advances and securities sold under agreements to repurchase, fair
value is estimated based on discounting amounts payable at the current rates
offered to the Company for debt of the same remaining maturities.
The carrying amounts and calculated fair values of the Company's financial
instruments are as follows at September 30, 2000 and 1999 (in thousands):
2000 1999
---------------------------- -----------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------
Financial assets:
Cash and cash equivalents........................... $ 21,784 $ 21,784 $ 15,546 $ 15,546
Investment in limited partnership................... 1,864 1,864 1,575 1,575
Investment securities available for sale............ 14,658 14,658 16,244 16,244
Federal Home Loan Bank stock........................ 7,525 7,525 3,650 3,650
Mortgage-backed securities and
collateralized mortgage obligations............... 72,659 72,659 58,385 58,385
Loans receivable................................... 516,339 511,239 255,488 255,972
Financial liabilities:
Deposits
Demand deposits................................... 110,025 110,025 85,371 84,790
Certificate accounts.............................. 341,888 341,042 135,886 136,019
Advances from the FHLB.............................. 98,333 97,589 73,000 72,901
Securities sold under agreements to repurchase...... 20,423 20,333 20,254 20,254
36
37
The Company had $102.8 million of off-balance sheet financial commitments,
which are commitments to originate loans and unused consumer lines of credit.
Since these obligations are based on current market rates, the carrying amount
is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in 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 prepayment 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 would also significantly affect the estimates. Further,
the fair value estimates were calculated as of September 30, 2000 and 1999.
Changes in market interest rates and prepayment assumptions could significantly
change the fair value. Therefore, management believes that the foregoing
information is of limited value and has no basis for determining whether the
fair value presented would be indicative of the value which could be negotiated
during an actual sale.
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, loan servicing portfolio, real estate, deferred tax
liabilities and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of these estimates.
(21) Dividends
On April 14, 1998, the MHC and Perpetual completed a conversion and
reorganization from a mutual to a stock form of organization. A special
liquidation account was established by Perpetual for the preconversion retained
earnings of approximately $12.9 million. The liquidation account is maintained
for the benefit of depositors who held a savings or demand account as of the
June 30, 1996 eligibility or the December 31, 1997 supplemental eligibility
record dates who continue to maintain their deposits at Perpetual after the
conversion. In the event of a future liquidation (and only in such an event),
each eligible and supplemental eligible account holder who continues to maintain
his or her savings account will be entitled to receive a distribution from the
liquidation account. The total amount of the liquidation account will be
decreased in an amount proportionately corresponding to decreases in the savings
account balances of eligible and supplemental eligible account holders on each
subsequent annual determination date. Except for payment of dividends by the
Bank to the Company and repurchase of the Company's stock, the existence of the
liquidation account will not restrict the use or application of such net worth.
Perpetual is prohibited from declaring cash dividends on its common stock
or repurchasing its common stock if the effect thereof would cause its net worth
to be reduced below either the amount required for the liquidation account or
its minimum regulatory capital requirement. In addition, Perpetual is also
prohibited from declaring cash dividends and repurchasing its own stock without
prior regulatory approval if the total amount of all dividends and stock
repurchases (including any proposed dividends and stock repurchases) for the
applicable calendar year exceeds its current year's net income plus its retained
net income for the preceding two years.
Heritage converted from a mutual savings and loan association to a stock
association in 1997 ("the Conversion"). At the time of Conversion, Heritage also
established a special liquidation account for the preconversion retained
earnings of approximately $29.8 million. The liquidation account is maintained
for the benefit of depositors who held a savings or demand account as of the
June 30, 1996 eligibility or the
SouthBanc Shares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997 supplemental eligibility record dates who continue to maintain
their deposits at Heritage after the conversion. In the event of a future
liquidation (and only in such an event), each eligible and supplemental eligible
account holder who continues to maintain his or her savings account will be
entitled to receive a distribution from the liquidation account. The total
amount of the liquidation account will be decreased in an amount proportionately
corresponding to decreases in the savings account balances of eligible and
supplemental eligible account holders on each subsequent annual determination
date. Except for payment of dividends by the Bank to the Company and repurchase
of the Company's stock, the existence of the liquidation account will not
restrict the use or application of such net worth.
Heritage is prohibited from declaring cash dividends on its common stock or
repurchasing its common stock if the effect thereof would cause its net worth to
be reduced below either the amount required for the liquidation account or its
minimum regulatory capital requirement. In addition, Heritage is also prohibited
from declaring cash dividends and repurchasing its own stock without prior
regulatory approval if the total amount of all dividends and stock repurchases
(including any proposed dividends and stock repurchases) for the applicable
calendar year exceeds its current year's net income plus its retained net income
for the preceding two years.
(22) Condensed Financial Information for SouthBanc Shares, Inc.
The following are condensed statements of the Company (in thousands):
September 30,
2000 1999
---------------------
Condensed Balance Sheets
Assets
Cash and cash equivalents.......................... $ 4,330 $ 4,976
Investment securities.............................. 4,966 4,790
Investment in bank subsidiary...................... 71,104 41,802
ESOP loan.......................................... 233 622
Other assets....................................... 1,283 1,171
---------------------
Total Assets......................................... $ 81,916 $ 53,361
=====================
Liabilities and Stockholders' Equity
Liabilities........................................ $ 1,805 $ 610
Stockholders' Equity............................... 80,111 52,751
---------------------
Total Liabilities and Stockholders' Equity........... $ 81,916 $ 53,361
=====================
For the Years Ended
September 30,
2000 1999
----------------------
Condensed Statements of Income
Equity in undistributed net income of bank subsidiary................................. $ 1,323 $ 5,394
Interest income--investment securities................................................ 728 1,368
Other expenses........................................................................ (2,994) (789)
----------------------
Net Income.......................................................................... $ (943) $ 5,973
======================
Condensed Statements of Cash Flows
Cash flow from operating activities:
Net income (loss)................................................................... $ (943) $ 5,973
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
Undistributed net income of bank subsidiary...................................... (1,323) (5,394)
Increase in other assets......................................................... (112) (1,061)
Increase (decrease) in other liabilities......................................... 1,195 (197)
----------------------
Net cash used in operating activities................................................. (1,183) (679)
----------------------
Cash flow from investing activities:
(Purchase) sale of investment securities............................................ (176) 6,047
Decrease in ESOP loan............................................................... 389 89
Net increase in investment in subsidiary............................................ (8,997) --
----------------------
Net cash provided by (used in) investing activities................................... (8,784) 6,136
----------------------
Cash flow from financing activities:
Dividends paid...................................................................... (2,052) (1,775)
Purchase of treasury stock.......................................................... (7,052) (24,346)
Exercise of stock options........................................................... 25 68
Dividends received.................................................................. 18,400 15,000
----------------------
Net cash provided by (used in) financing activities................................... 9,321 (11,053)
----------------------
Net decrease in cash and cash equivalents........................................ (646) (5,596)
Cash and cash equivalents, beginning of year.......................................... 4,976 10,572
----------------------
Cash and cash equivalents, end of year................................................ $ 4,330 $ 4,976
======================
38
39
(23) Quarterly Results of Operations (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------
September 30, 2000:
Interest income........................................... $ 6,663 $ 6,625 $ 6,922 $ 11,574
Interest expense.......................................... 3,504 3,656 4,089 7,125
----------------------------------------------------------
Net interest income....................................... 3,159 2,969 2,833 4,449
Provision for loan losses................................. 150 210 75 2,285
----------------------------------------------------------
Net interest income after provision for loan losses....... 3,009 2,759 2,758 2,164
Noninterest income........................................ 1,310 1,258 1,302 (1,795)
Recapture of losses on limited partnership................ -- 199 90 --
Noninterest expense....................................... 2,319 2,290 2,406 6,773
----------------------------------------------------------
Income (loss) before income taxes......................... 2,000 1,926 1,744 (6,404)
Income taxes.............................................. 653 613 548 (1,605)
----------------------------------------------------------
Net income (loss)......................................... $ 1,347 $ 1,313 $ 1,196 $ (4,799)
==========================================================
Basic earnings (loss) per common share.................... $ 0.44 $ 0.44 $ 0.42 $ (1.20)
Diluted earnings (loss) per common share.................. $ 0.41 $ 0.42 $ 0.40 $ (1.20)
Weighted average shares outstanding
Basic................................................... 3,060,241 2,962,296 2,863,797 3,992,977
Diluted................................................. 3,257,956 3,136,841 3,023,757 3,992,977
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------
September 30, 1999:
Interest income........................................... $ 6,519 $ 6,494 $ 6,569 $ 6,646
Interest expense.......................................... 3,333 3,444 3,334 3,327
----------------------------------------------------------
Net interest income....................................... 3,186 3,050 3,235 3,319
Provision for loan losses................................. 80 80 170 151
----------------------------------------------------------
Net interest income after provision for loan losses....... 3,106 2,970 3,065 3,168
Noninterest income........................................ 1,505 1,207 1,261 1,176
Recapture of losses on limited partnership................ -- -- 400 350
Noninterest expense....................................... 2,119 2,167 2,346 2,687
----------------------------------------------------------
Income before income taxes................................ 2,492 2,010 2,380 2,007
Income taxes.............................................. 870 605 783 658
----------------------------------------------------------
Net income................................................ $ 1,622 $ 1,405 $ 1,597 $ 1,349
==========================================================
Basic earnings per common share........................... $ 0.40 $ 0.43 $ 0.51 $ 0.43
Diluted earnings per common share......................... $ 0.39 $ 0.40 $ 0.48 $ 0.40
Weighted average shares outstanding
Basic................................................... 4,061,389 3,288,729 3,137,542 3,121,361
Diluted................................................. 4,154,804 3,483,601 3,350,282 3,344,502
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SouthBanc Shares, Inc. and Subsidiaries
Anderson, South Carolina
We have audited the accompanying consolidated balance sheets of SouthBanc
Shares, Inc. and Subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 2000. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SouthBanc Shares, Inc. and Subsidiaries as of September 30, 2000 and 1999 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2000 in conformity with
generally accepted accounting principles.
/s/ Elliott, Davis & Company, L.L.P.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
November 17, 2000
- --------------------------------------------------------------------------------
SouthBanc Shares, Inc. and Subsidiaries
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
SouthBanc's common stock is traded on the Nasdaq National Market(R) under the
symbol "SBAN." As of November 13, 2000, there were approximately 4,027
registered shareholders. The holders of common stock are entitled to receive
dividends when and as declared by the Board of Directors. The payment of
dividends by the Company is within the discretion of the Company's Board of
Directors. The ability of the Company to declare and pay cash dividends depends
primarily on the ability of the Banks to pay cash dividends to the Company. See
Note 21 of the Notes to the Consolidated Financial Statements for the regulatory
restrictions applicable to the Company's ability to pay cash dividends.
The table below presents the range of high and low per share bid prices and
dividends declared during the quarter.
High Low Dividend
----------------------------
December 31, 1998................... $20.88 $15.25 $0.12
March 31, 1999...................... $20.63 $18.38 $0.12
June 30, 1999....................... $23.25 $18.88 $0.15
September 30, 1999.................. $25.00 $19.25 $0.15
December 31, 1999................... $22.25 $20.00 $0.15
March 31, 2000...................... $20.50 $16.00 $0.15
June 30, 2000....................... $18.19 $14.94 $0.15
September 30, 2000.................. $18.94 $15.06 $0.15
40
SouthBanc Shares, Inc. and Subsidiaries
CORPORATE INFORMATION
[PICTURE APPEARS HERE]
Officers of SouthBanc Shares, Inc. and
Perpetual Bank, A Federal Savings Bank:
Robert W. "Lujack" Orr
President/CEO
Thomas C. Hall
Senior Vice President
Treasurer/CFO
Barry C. Visioli
Senior Vice President
Sylvia B. Reed
Corporate Secretary
Officers of Heritage Federal Bank:
J. Edward Wells
President/CEO
William B. Ferguson
Senior Vice President
James H. Wasson, Jr.
Vice President/Secretary
Directors of SouthBanc Shares, Inc.:
J. Riley Bailes
Retired Merchant
Richard C. Ballenger
President, City Glass Company and D&B
Glass Company, Inc., a glass company
Martha S. Clamp
Certified Public Accountant
F. Stevon Kay
President, Hill Electric Company, Inc.,
an electrical contractor
Robert W. "Lujack" Orr
President/CEO, SouthBanc Shares, Inc.
John C. Owings, II
Owner, Laurens Lumber Company
Harold A. "Drew" Pickens, Jr.
Owner, Harold A. Pickens & Sons, Inc.,
a commercial construction contractor
J. Edward Wells
President, Heritage Federal Bank
Form 10-K:
A copy of the Company's Annual Report
on Form 10-K as filed with the Securities
and Exchange Commission for the year
ended September 30, 2000, may be
obtained without charge by writing to
Thomas C. Hall, Chief Financial Officer,
at the Corporate Address.
Annual Meeting of Stockholders:
The Annual Meeting of Stockholders will
be held on Wednesday, January 17, 2001,
at 10:00 A. M. Eastern Time at the Laurens
Office.
Independent Auditors:
Elliott, Davis & Company, L. L. P.
Legal Counsel:
McIntosh, Sherard and Sullivan
Special Securities Counsel:
Muldoon, Murphy & Faucette LLP
Transfer Agent:
ChaseMellon Shareholder Services
Corporate Offices:
SouthBanc Shares, Inc.
907 North Main Street
Anderson, South Carolina 29621
Perpetual Bank Financial Centers:
Main Office
907 North Main Street
Anderson, South Carolina 29621
Northtowne Branch
3898 Liberty Highway
Anderson, South Carolina 29621
Perpetual Square
2125 North Highway 81
Anderson, South Carolina 29621
Seneca Office
1007 Bypass 123
Seneca, South Carolina 29678
Watson Village
2821 South Main Street
Anderson, South Carolina 29624
Whitehall Office
104 Whitehall Road
Anderson, South Carolina 29624
Heritage Federal Bank Financial Centers:
Main Office
201 West Main Street
Laurens, South Carolina 29360
Belton Office
208 Anderson Street
Belton, SC 29627
Ware Shoals Office
81 North Greenwood Avenue
Ware Shoals, SC 29692
Simpsonville Office
514 Northeast Main Street
Simpsonville, SC 29681