SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20052
__________________________________________________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23751
--------
________________________________________________________________________
SouthBanc Shares, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 58-2361245
------------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
907 N. Main Street
Anderson, South Carolina 29621
------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(8 6 4 ) 2 2 5 - 0 2 4 1
----------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes __X__ No _____
$0.01 par value of common stock 4,464,012
- ------------------------------- -------------
(Class) (Outstanding at December 31, 2000)
SouthBanc Shares, Inc. and Subsidiary
FORM 10-Q
FOR THE QUARTER ENDED December 31, 2000
TABLE OF CONTENTS
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and
September 30, 2000 (unaudited)................................... 3
Consolidated Statements of Income for the Three Months Ended
December 31, 2000, and the Three Months Ended December 31, 1999
(unaudited)...................................................... 4
Consolidated Statements of Stockholders' Equity
for the Year Ended September 30, 2000 and
the Three Months Ended December 31, 2000 (unaudited)............. 5
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2000 and 1999 (unaudited)..................... 6
Notes to Consolidated Financial Statements (unaudited)............. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended December 31,
2000 and 1999..................................................... 10
Liquidity and Capital Resources................................... 13
Capital Compliance................................................ 14
Impact of New Accounting Pronouncements........................... 15
Effect of Inflation and Changing Prices........................... 15
Item 3. Market Risk Disclosure........................................... 15
Part II Other Information
Items:
1.Legal Proceedings................................................ 16
2.Changes in Securities and Use of Proceeds........................ 16
3.Defaults Upon Senior Securities.................................. 16
4.Submission of Matters to a Vote of Senior Holders................ 16
5.Other Materially Important Events................................ 16
Signatures......................................................... 18
2
SouthBanc Shares, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
Item I - Financial Statements
December 31 September 30,
2000 2000
---- ----
Assets
- ------
Cash and cash equivalents $ 22,296,581 $ 21,784,653
Investment securities available for sale (amortized
cost of $11,112,572 at December 31, 2000,
$11,131,361 at September 30, 2000) 14,514,170 14,658,670
Federal Home Loan Bank stock, at cost 7,525,000 7,525,000
Mortgage-backed securities available for sale
(amortized cost of $71,585,271 at December 31,
2000, and $61,916,848 at Septemer 30, 2000) 72,184,421 72,659,003
Loans receivable, (net of allowance for loan losses of
$6,471,702 at December 31, 2000, and
$6,616,143 at September 30, 2000) 507,952,143 516,338,740
Investment in limited partnership 1,864,373 1,864,373
Real estate acquired in settlement of loans 2,008,120 1,091,609
Real estate held for development 2,220,347 2,133,598
Premises and equipment, net 11,136,252 10,776,074
Accrued interest receivable
Loans receivable 3,860,819 3,765,678
Mortgage-backed and other securities 712,144 726,503
Cash surrender value of life insurance 16,417,564 8,272,700
Other 6,025,448 10,927,970
------------- -------------
Total Assets $ 668,717,382 $ 672,524,571
============= ============
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $ 437,220,722 $ 451,913,200
Advances from the Federal Home Loan Bank ("FHLB") 117,343,896 98,332,948
Securities sold under agreements to repurchase 20,435,283 20,423,482
Advance payments by borrowers for property taxes and
insurance 162,304 676,429
Accrued interest payable 3,775,962 2,041,265
Unsettled security purchases - 11,000,000
Accrued expenses and other liabilities 7,919,886 8,026,707
------------- -------------
Total Liabilities 586,858,053.0 592,414,031.0
============= =============
Commitments and contingencies - Note
Stockholders' Equity
- --------------------
Preferred stock ($0.01 par value; authorized 250,000 shares;
none issued or outstanding at December 31, 2000, and
September 30, 2000) - -
Common stock ($0.01 par value; authorized 7,500,000
shares; issued 4,774,180 and 4,771,271 shares
at December 31,and September 30, 2000, respectively) 47,742 47,713
Additional paid-in capital 63,401,739 63,327,410
Retained earnings, restricted 21,489,116 19,357,050
Treasury stock - at cost (310,168 shares) (5,348,724) (4,306,209)
Accumulated other comprehensive income, net 2,480,588 1,917,931
Indirect guarantee of ESOP debt (211,132) (233,355)
------------- -------------
Total stockholders' equity 81,859,329 80,110,540
------------- -------------
Total liabilities and stockholders' equity $ 668,717,382 $ 672,524,571
============= =============
See accompanying notes to consolidated financial statements.
3
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
For the Three Months Ended
December 31,
2000 1999
---- ----
Interest Income:
Loans $ 11,012,419 $ 5,223,922
Mortgage-backed securities 1,300,440 915,758
Other investments 548,638 523,503
---------- ---------
Total interest income 12,861,497 6,663,183
---------- ---------
Interest expense:
Interest on deposits:
Transaction accounts 203,790 236,270
Passbook accounts 432,419 164,760
Certificate accounts 5,024,226 1,777,562
---------- ---------
Total interest on deposits 5,660,435 2,178,592
Interest on borrowings 2,166,162 1,325,685
---------- ---------
Total interest expense 7,826,597 3,504,277
---------- ---------
Net interest income 5,034,900 3,158,906
Provision for loan losses 43,000 150,000
---------- ---------
Net interest income after provision for
loan losses 4,991,900 3,008,906
---------- ---------
Other income:
Loan and deposit account service charges 1,194,300 998,414
Gain (Loss) on sale of investments 1,169,106 (94,702)
(Loss) on sale of real estate acquired
in settlement of loans 568 (5,150)
Gain (loss) on sale of loans, net (640) -
Gain on sale of real estate held
for development 16,202 53,001
Earnings on bank owned life insurance 157,566 107,670
Other 249,144 250,461
---------- ---------
Total other income 2,786,246 1,309,694
---------- ---------
General and administrative expenses:
Salaries and employee benefits 1,768,631 1,277,822
Occupancy 190,378 127,792
Furniture and equipment expense 445,301 246,119
FDIC insurance premiums 22,211 32,833
Advertising 102,185 46,561
Data processing 178,694 126,883
Office supplies 173,333 104,041
Profit improvement program - 70,000
Other 607,235 286,730
---------- ---------
Total general and administrative expenses 3,487,968 2,318,781
---------- ---------
Income before income taxes 4,290,178 1,999,819
Income taxes 1,496,424 653,242
---------- ---------
Net income $ 2,793,754 $ 1,346,577
========== =========
Basic earnings per share $ 0.63 $ 0.44
========== =========
Diluted earnings per share $ 0.61 $ 0.41
========== =========
Weighted average shares outstanding:
Basic 4,469,403 3,060,241
========== =========
Diluted 4,579,705 3,257,956
========== =========
Dividends per share $ 0.15 $ 0.15
========== =========
See accompanying notes to consolidated financial statements.
4
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Year Ended September 30, 2000 and Three Months Ended December 31, 2000
(Unaudited)
Accumulated
Other
Additional Retained Comprehensive
Common Common Paid-in Earnings Income (Loss), Treasury
Shares Stock Capital Restricted Net Stock
---------------------------------------------------------------------------------------------------
Balance at September 30, 1999 4,322,030 $ 43,220 $ 57,741,324 $22,351,722 $(2,028,033) $(22,515,585)
Net income (loss) - - - (942,972) - -
Other comprehensive income
Unrealized gain on
securities, net - - - - 1,916,185 -
Reclassification adjustment
for losses realized in net
income, net - - - - 2,029,779 -
----------
Comprehensive income - - - - -
Stock issued in merger with
Heritage Bancorp 1,829,085 18,291 32,504,075 - - -
Treasury stock acquired in
merger with Heritage Bancorp - - - - - (2,379,313)
Retirement of treasury shares (1,382,754) (13,827) (27,626,214) - - 27,640,041
Exercise of stock options 2,910 29 25,725 - - -
Reduction of ESOP debt - - - - - -
ESOP compensation expense - - 157,616 - - -
ESOP payment - - 524,884 - - -
Earned portion of MRP - - - - - -
Dividends on common stock - - - (2,051,700) - -
Purchase of Treasury Stock - - - - - (7,051,352)
---------- ------- ---------- -------- --------- ---------
Balance at September 30, 2000 4,771,271 $ 47,713 $ 63,327,410 $19,357,050 $ 1,917,931 $ (4,306,209)
Net Income - - - 2,793,754 - -
Other comprehensive income:
Unrealized gain on
securities, net - - - - 1,323,885 -
Reclassification adjustment
for gains realized in net
income, net - - - - (761,228) -
Comprehensive income - - - - -
Exercise of stock options 2,909 29 25,716 - - -
Reduction of ESOP debt - - - - - -
ESOP compensation expense - - 48,613 - - -
Dividends on common stock - - - (661,688) - -
Purchase of Treasury Stock - - - - - ($1,042,515)
---------- ------- ---------- -------- --------- ---------
Balance at December 31, 2000 4,774,180 $ 47,742 $ 63,401,739 $21,489,116 $ 2,480,588 $ (5,348,724)
========== ======= ========== ========== ========= =========
Indirect
Guarantee Deferred
of Compensation
ESOP for
Debt MRP Total
--------------------------------------------
Balance at September 30, 1999 $(622,247) $(2,219,849) $52,750,552
Net income (loss) - - (942,972)
Other comprehensive income
Unrealized gain on
securities, net - - 1,916,185
Reclassification adjustment
for losses realized in net
income, net - - 2,029,779
---------
Comprehensive income - - 3,002,992
Stock issued in merger with
Heritage Bancorp - - 32,522,366
Treasury stock acquired in
merger with Heritage Bancorp - - (2,379,313)
Retirement of treasury shares - - -
Exercise of stock options - - 25,754
Reduction of ESOP debt 388,892 - 388,892
ESOP compensation expense - - 157,616
ESOP payment - - 524,884
Earned portion of MRP - 2,219,849 2,219,849
Dividends on common stock - - (2,051,700)
Purchase of Treasury Stock - - (7,051,352)
------- --------- ---------
Balance at September 30, 2000 $(233,355) $ - $80,110,540
----------
Net Income - - 2,793,754
Other comprehensive income:
Unrealized gain on
securities, net - - 1,323,885
Reclassification adjustment
for gains realized in net
income, net - - (761,228)
-------
Comprehensive income - - 3,356,411
Exercise of stock options - - 25,745
Reduction of ESOP debt 22,223 - 22,223
ESOP compensation expense - - 48,613
Dividends on common stock - - (661,688)
Purchase of Treasury Stock - - (1,042,515)
------- --------- ---------
Balance at December 31, 2000 $(211,132) $ - $81,859,329
======= ========= ==========
5
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2000 and 1999 (Unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net income $2,132,066 $1,346,577
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 296,092 210,229
Amortization and accretion, Net (312,703) (255,158)
Provision for loan losses 43,000 150,000
(Gain) loss on sale of investments, net (1,169,106) 94,702
(Gain) loss on sale of real estate (16,326) 5,150
Gain on sale of loans, net 640 -
Gain on sale of real estate held for
development (16,202) (53,001)
Gain on sale of premises and equipment (1,200) -
Deferred compensation 48,613 193,362
(Increase) decrease in accrued interest
receivable and other assets 4,837,498 (237,565)
Increase (decrease) in other liabilities (9,645,655) (575,757)
---------- --------
Net cash provided by (used in) operating activities (3,803,283) 878,539
---------- --------
Cash flows from investing activities:
(Increase) decrease in loans receivable, net 12,985,680 (3,703,905)
Purchases of loans receivable (5,542,160) (8,468,672)
Purchase of cash surrender value of life insurance (8,000,000) -
Purchases of investment securities - (877,943)
Purchases of FHLB stock - (1,300,000)
Purchase of premises and equipment (656,270) (119,020)
Proceeds from sales of premises and equipment 1,200 -
Proceeds from sales of investment securities
available for sale 1,187,140 -
Proceeds from redemption of FHLB stock - 1,000,000
Principal repayments on mortgage-backed securities 1,621,977 2,748,005
Proceeds from maturities of investment securities - 2,000,000
Proceeds from sale of mortgage-backed securities,
available for sale - 7,439,993
Proceeds from sale of real estate owned 49,056 224,750
Capital improvements of real estate owned (65,563) -
Proceeds from sale of real estate held for
development 59,249 67,860
Capital improvements of real estate held for
development (135,749) (174,991)
--------- ----------
Net cash provided by (used in) investing activities 1,504,560 (1,163,923)
--------- ----------
Continued
6
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2000 and 1999 (Unaudited)
2000 1999
---- ----
Cash flows from financing activities:
Increase (decrease) in deposit accounts (14,692,478) (2,059,498)
Proceeds from FHLB Advances 36,000,000 83,000,000
Repayment of FHLB Advances (23,000,000) (77,000,000)
Proceeds from securities sold under agreements
to repurchase 11,801 199,053
Proceeds from other borrowings 6,000,000 -
Exercise of stock options 25,745 -
Purchase of Treasury stock (1,042,515) (2,484,266)
Repayments of ESOP loan 22,223 22,223
Dividends paid on common stock - (465,367)
Decrease in advance payments by borrowers
for property taxes and insurance (514,125) (296,369)
---------- ----------
Net cash provided by (used in) financing activities 2,810,651 915,776
Net increase (decrease) in cash and cash equivalents 511,928 630,392
Cash and cash equivalents, beginning of year 21,784,653 15,546,360
---------- ----------
Cash and cash equivalents, end of year $22,296,581 $16,176,752
========== ==========
Supplemental disclosures:
Cash paid during the year for
Interest $ 7,849,896 $ 3,540,231
========== ==========
Taxes $(2,000,000) $ 760,000
========== ==========
Noncash investing activities:
Additions to real estate acquired in settlement of loans $ 899,437 $ 208,150
========== ==========
Loans receivable exchanged for mortgage-backed
securities $ - $ -
========== ==========
Change in unrealized net gain on securities
available for sale, net of tax $ 562,657 $ 311,190
========== ==========
Decrease in Employee Stock
Ownership Plan debt guaranteed by the
Bank $ 22,223 $ 22,223
========== ==========
7
SouthBanc Shares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for SouthBanc
Shares, Inc. ("Company") were prepared in accordance with instructions for
Form 10-Q and, therefore, do not include all disclosures necessary for a
complete presentation of financial condition, results of operations, and
cash flows in conformity with generally accepted accounting principles. All
adjustments, consisting only of normal recurring accruals, which are, in
the opinion of management, necessary for fair presentation of the interim
consolidated financial statements have been included. The results of
operations for the period ended December 31, 2000 are not necessarily
indicative of the results that may be expected for the entire year. These
consolidated financial statements do not include all disclosures required
by generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial statements
and related notes for the year ended September 30, 2000.
2. Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of the Company, Perpetual Bank, A Federal Savings Bank,
("Perpetual Bank"), Heritage Federal Bank ("Heritage Federal")
(collectively the "Banks") and Perpetual Bank's wholly owned subsidiaries,
Mortgage First Service Corporation and United Service Corporation, and
United Service Corporation's wholly owned subsidiary, United Investment
Services.
United Service Corporation is a wholly-owned subsidiary of the Savings
Bank. At December 31, 2000, United Service had assets of $2.3 million.
United Service is involved in two residential and two commercial real
estate development projects.
All significant intercompany items and transactions have been eliminated in
consolidation.
3. Payment of Dividends
--------------------
The payment of dividends by the Company depends primarily on the ability of
the Banks to pay dividends to the Company. The payment of dividends by the
Banks is subject to regulation by the Office of Thrift Supervision ("OTS").
The Banks may not declare or pay a cash dividend if the effect thereof
would cause the capital of the Banks to be reduced below regulatory capital
requirements imposed by the OTS or below the liquidation account
established by the Banks in connection with their respective conversions
from the mutual to stock form of organization.
The Company's Board of Directors declared a cash dividend of $0.15 per
share to its shareholders during the quarter ended December 31, 2000,
payable to shareholders of record as of January 2, 2001.
4. Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public market.
8
4. Earnings Per Share (Continued)
------------------------------
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares
had been issued. The dilutive effect of options outstanding under the
Company's stock option plan is reflected in diluted earnings per share by
application of the treasury stock method.
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND DILUTED
EPS COMPUTATIONS:
FOR THE QUARTER ENDED DECEMBER 31, 2000
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
BASIC EPS $2,793,754 4,469,403 $0.63
Effect of Diluted Securities:
Stock options - 75,731
ESOP - 34,571
---------- ---------
Diluted EPS $2,793,754 4,579,705 $0.61
FOR THE QUARTER ENDED DECEMBER 31, 1999
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
BASIC EPS $1,346,577 3,060,241 $0.44
Effect of Diluted Securities:
Stock options - 105,530
ESOP - 92,185
---------- ---------
Diluted EPS $1,346,577 3,257,956 $0.41
9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at December 31, 2000 and September 30, 2000
- -----------------------------------------------------------------------------
General
- -------
Total assets decreased $3.8 million at December 31, 2000 to $668.7 million at
December 31, 2000 from $672.5 million at September 30, 2000, primarily as a
result of a decrease in loans receivable and other assets.
Loans receivable decreased 1.61% or $8.3 million to $508.0 million at December
31, 2000, from $516.3 million at September 30, 2000. The decrease in loans
receivable resulted primarily from a decrease in first mortgage residential
loans caused by a decrease in new home sales in the local market.
Mortgage-backed securities available-for-sale decreased 0.69% or $0.5 million to
$72.2 at December 31, 2000 from $72.7 million at September 30, 2000. Principal
repayments on mortgage-backed securities were $1.6 million.
Investment securities available for sale decreased 1.36% or $0.2 million to
$14.5 million at December 31, 2000 from $14.7 million at September 30, 2000.
Cash and cash equivalents increased 2.29% or $0.5 million to $22.3 at December
31, 2000 from $21.8 million at September 30, 2000. At December 31, 2000, $14.6
million was invested in interest-bearing overnight investment accounts yielding
6.05%.
Real estate held for development increased $0.1 to $2.2 million at December 31,
2000 from $2.1 million at September 30, 2000. The Company is presently
developing two single-family residential subdivisions and two commercial real
estate development projects.
Other assets at September 30, 2000 included accounts receivable related to
settlement of security sales prior to September 30, 2000. The sales were settled
in October 2000, and no such receivables existed as of December 31, 2000.
Cash surrender value of life insurance was $16.4 million at December 31, 2000,
an increase of $8.1 million from $8.3 million at September 30, 2000. The
Company owns life insurance policies as part of the Supplemental Executive
Retirement Agreements maintained on certain key officers of the Company. The
Company purchased $8.0 million of cash surrender value of life insurance to
cover employee benefit expenses of Heritage Federal during the quarter ended
December 31, 2000.
Deposits decreased 3.25% or $14.7 million to $437.2 at December 31, 2000 from
$451.9 million at September 30, 2000. Non-interest bearing checking accounts
decreased 3.36% or $0.5 to $14.4 million at December 31, 2000, from $14.9
million at September 30, 2000. Interest bearing checking accounts increased
1.33% or $0.6 million to $45.4 million at December 31, 2000, from $44.8 million
at September 30, 2000, as the Company continues to offer checking products that
are more aggressively priced than those offered by competitors. Statement
savings accounts increased 0.99% or $0.5 million to $50.8 million at December
31, 2000 from $50.3 million at September 30, 2000. Certificates of deposit
decreased 4.47% or $15.3 million to $326.6 at December 31, 2000 from $341.9
million at September 30, 2000, as the Company did not meet higher interest rates
offered by local competitors.
Borrowings through reverse repurchase agreements were $20.4 at December 31, 2000
and $20.4 million at September 30, 2000. The Company pledged $21.1 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 6.66%,
with a maturity date of May 12, 2001.
Advances from the Federal Home Loan Bank increased $19.0 million to $117.3
million at December 31, 2000 from $98.3 million at September 30, 2000. The
additional borrowings were used to fund the $8.0 million purchase of cash
surrender value of life insurance and to offset the decrease in deposits.
10
Stockholders equity increased $1.8 million to $81.9 million at December 31, 2000
from $80.1 million at September 30, 2000. Retained earnings was increased by
net income of $2.8 and decreased by dividends paid in the amount of $0.7
million. Common stock repurchased through the common stock repurchase programs
is recorded on the Company's balance sheet as Treasury Stock, a contra-equity
account. During the first quarter of fiscal 2001, the Company repurchased
58,000 shares at an average cost of $17.97 per share and a total cost of $1.04
million. Accumulated other comprehensive income, net, increased $0.6 million to
$2.5 million at December 31, 2000 from $1.90 million at September 30, 2000 due
to the increase in value of investment securities available for sale.
The Company contributed $22,000 to the employee stock ownership plan reducing
the contra-equity account related to the plan's debt.
Comparison of Operating Results for the Three Months Ended December 31, 2000,
and 1999
Net Income
- ----------
Net income for the three months ended December 31, 2000, increased to $2.8
million or $0.63 basic earnings per share and $0.61 diluted earnings per share,
compared to $1.3 million or $0.44 basic earnings per share and $0.41 diluted
earnings per share for the same three months a year ago. The primary reason for
the increase was the acquisition of Heritage Federal in July 2000. See the
Company's September 30, 2000 audited consolidated financial statements for a
discussion of the merger with Heritage Bancorp, Inc., former parent company of
Heritage Federal.
Net Interest Income
- -------------------
Net interest income was $5.0 million for the three months ended December 31,
2000, and $3.2 million for the three months ended December 31, 1999. Heritage
Federal added approximately $248 million in total loans in 2000. Total interest
income increased 92.54% or $6.2 million to $12.9 million for the three months
ended December 31, 2000, from $6.7 million for the three months ended December
31, 1999, due primarily to a higher average balance of outstanding loans which
increased $255.4 million or 98.6% to an average of $514.5 million yielding 8.56%
for the three months ended December 31, 2000, from $259.1 million yielding 8.06%
for the three months ended December 31, 1999. Interest income on mortgage-
backed securities increased 41.92% or $384,000 to $1.3 million for the three
months ended December 31, 2000, as the average balance increased $20.5 million
to $72.2 million for the three months ended December 31, 2000 from $51.7 million
for the three months ended December 31, 1999. Much of the increase in average
balances is due to the addition of Heritage Federal to the consolidated company.
Approximately $14.0 million of mortgage-backed securities were on Heritage
Federal's balance sheet at December 31, 2000. Interest income on other
investments increased 4.77% or $25,000 due primarily to a higher balance of
investment securities and interest bearing deposits which increased 16.84% or
$5.0 million, to an average balance of $34.7 million yielding 6.33% for the
three months ended December 31, 2000, from $29.7 million yielding 7.06% for the
three months ended December 31, 1999.
Interest Expense
- ----------------
Interest expense on deposits increased 159.75% or $3.5 million as the average
outstanding balance increased 100.86% or $222.1 million to $442.3 million at an
average cost of 5.12% for the three months ended December 31, 2000, from $220.2
million at an average cost of 3.96% for the three months ended December 31,
1999. Heritage Federal added over $200 million of deposits at the time of the
merger in July 2000. In addition, interest rates were higher during the 2000
quarter than in the 1999 quarter. Interest on borrowings increased $0.8 million
to $2.1 million for the three months ended December 31, 2000, from $1.3 million
for the three months ended December 31, 1999, as the average borrowings
increased 36.23% or $34.2 million to $128.6 million at an average cost of 6.74%
for the three months ended December 31, 2000, from $94.4 million at an average
cost of 5.62% for the three months ended December 31, 1999.
11
Provisions for Loan Losses
- --------------------------
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan losses, management evaluates various factors including
the market value of the underlying collateral, growth, and composition of the
loan portfolio, the relationship of the allowance for loan losses to outstanding
loans, loss experience, delinquency trends and economic conditions. Management
evaluates the carrying value of loans periodically, and the allowance for loan
losses is adjusted accordingly.
The provision for loan losses decreased 71.33% or $107,000 to $43,000 for the
three months ended December 31, 2000, from $150,000 for the three months ended
December 31, 1999, due to an decrease in non-performing assets during the
quarter ended December 31, 2000.
Non-performing assets at December 31, 2000, were $12.6 million consisting of
$4.0 million of residential mortgage construction loans, $2.0 million of real
estate acquired in settlement of loans, $4.9 million of single family
residential loans, $1.6 million of commercial real estate loans, $1,000 of
commercial loans, and $55,000 of consumer loans.
Non-performing assets at September 30, 2000, were $13.4 million consisting of
$5.3 million of residential mortgage construction loans, $1.1 million of real
estate acquired in settlement of loans, $5.1 million of single family
residential loans, $1.5 million of commercial real estate loans, $354,000 of
commercial loans, and $63,000 of consumer loans.
The allowance for loan losses to total loans was 1.26% at December 31, 2000, and
1.20% at September 30, 2000.
Other Income
- ------------
Total other income increased 115.38% or $1.5 million to $2.8 million for the
three months ended December 31, 2000, from $1.3 million for the three months
ended December 31, 1999. Loan and deposit service charges increased $196,000 to
$1.2 million from $998,000 for the three months ended December 31, 1999, as a
result of an increase to the fee structure of deposit accounts. Gain (loss) on
sale of investments was a gain of $1.2 million for the three months ended
December 31, 2000, compared to a loss of $95,000 for the three months ended
December 31, 1999. The gain resulted from the sale of equity investments. Gain
(loss) on sale of real estate acquired in settlement of loans was a gain of $568
for the three months ended December 31, 2000, compared to a loss of $5,000 for
the three months ended December 31, 1999.
There was a loss on sale of loans of $640 for the three months ended December
31, 2000, compared to no loss for the three months ended December 31, 1999.
Gain on sale of real estate held for development was $16,000 for the three
months ended December 31, 2000, as three residential lots were sold by the
United Service Corporation in The Meadows residential subdivision compared to
$53,000 for the three months ended December 31, 1999, as thirteen residential
lots were sold in The Meadows. Earnings on bank owned life insurance increased
46.30% or $50,000 to $158,000 for the three months ended December 31, 2000 from
$108,000 for the three months ended December 31, 1999, due to the purchase of
$8.0 million of additional officers life insurance for Heritage Federal. Other
income decreased $1,000 to $249,000 for the three months ended December 31,
2000, compared to $250,000 for the three months ended December 31, 1999.
General and Administrative Expense
- ----------------------------------
Salaries and employee benefits increased 38.46% or $0.5 to $1.8 million for the
three months ended December 31, 2000, from $1.3 million for the three months
ended December 31, 1999. The company increased the number of employees as a
result of the merger, increasing by 49 full time equivalent employees to 161 at
December 31, 2000 from 112 at December 31, 1999. Office occupancy increased
48.44% or $62,000 to $190,000 for the three months ended December 31, 2000, from
$128,000 for the three months ended December 31, 1999, due to a increase in
building maintenance. Furniture and equipment expenses increased 78.86% or
$194,000 to $440,000 for the three months ended December 31, 2000, from $246,000
for the three months ended December 31, 1999. The Company owned six office
buildings in December 1999 and ten office buildings in 2000. Advertising
increased 117.02% or $55,000 to
12
$102,000 for the three months ended December 31, 2000, from $47,000 for the
three months ended December 31, 1999. Heritage Federal began a new product
promotion
General and Administrative Expense - Continued
- ----------------------------------------------
in October 2000 to increase non interest bearing deposits and lower overall cost
of funds. 535 new accounts were opened during the quarter as a result of the
promotional campaign. Data processing increased 40.16% or $51,000 to $178,000
for the three months ended December 31, 2000, from $127,000 for the three months
ended December 31, 1999. Office supplies increased 66.35% or $69,000 to
$173,000 for the three months ended December 31, 2000, from $104,000 for the
three months ended December 31, 1999, due to the addition of Heritage Federal.
There was no profit improvement program expense for the three months ended
December 31, 2000 compared to $70,000 for the three months ended December 31,
1999. The profit improvement program included consultant fees for sales
training, staff realignment, and product fee enhancement. Other operating
expenses increased 111.50% or $320,000 to $607,000 for the three months ended
December 31, 2000, from $287,000 for the three months ended December 31, 1999.
The increases are primarily due to the acquisition of Heritage Federal, and
several types of other expenses are affected. The largest increases were in
office supplies, $69,000, legal expenses at $62,000 and expenses related to real
estate acquired in foreclosure of $46,000.
Income Taxes
- ------------
Income taxes increased 129.10% or $843,000 to $1,496,000 for the three months
ended December 31, 2000, from $653,000 for the three months ended December 31,
1999. This was due to an increase in income before taxes of 115.00% or $2.3
million to $4.3 million from $2.0 million for the three months ended December
31, 2000, and 1999, respectively, primarily due to the merger with Heritage
Bancorp in July 2000.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, repayment of loan
principal, and repayment of mortgage backed securities and collateralized
mortgage obligations, and, to a lesser extent, maturities of investment
securities, and short-term investments, and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, general
economic conditions, and competition. The Company attempts to price its
deposits to meet its asset/liability objectives consistent with local market
conditions. Excess balances are invested in overnight funds. In addition, the
Company is eligible to borrow funds from the FHLB of Atlanta. Under OTS
regulations, a member thrift institution is required to maintain an average
daily balance of liquid assets (cash, certain time deposits and savings
accounts, bankers' acceptances, and specified U. S. government, state, or
federal agency obligations, and certain other investments) equal to a monthly
average of not less than a specified percentage of its net withdrawable accounts
plus short-term borrowings. This liquidity requirement, which is currently
4.0%, may be changed from time to time by the OTS to any amount within the range
of 4.0% to 10.0%, depending upon economic conditions and the savings flow of
member associations. Monetary penalties may be imposed for failure to meet
liquidity requirements. The liquidity of the Banks at December 31, 2000 was
11.73% for Perpetual Bank and 7.87% for Heritage Federal.
The primary investing activity of the Company is lending. During the three
months ended December 31, 2000, the Company originated $26.5 million of loans
and no loans were sold. The Company also purchased $5.5 million of loans. The
retained originations were primarily funded by principal repayments of loans,
mortgage-backed securities, and collateralized mortgage obligations, and Federal
Home Loan Bank advances.
Liquidity management is both a short and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) projected loan sales, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) liquidity of its asset/liability management program. Excess liquidity is
generally invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires funds beyond its
ability to generate them internally, it has additional borrowing capacity with
the FHLB and collateral eligible for repurchase agreements.
13
The Company anticipates that it will have sufficient funds available through
normal loan repayments to meet current loan commitments. At December 31, 2000,
the Company had outstanding commitments to originate loans of approximately
$93.8 million.
Liquidity and Capital Resources- Continued
- ------------------------------------------
Certificates of deposit scheduled to mature in one year or less at December 31,
2000, totaled $272.6 million. Based upon management's experience and
familiarity with the customers involved and the Company's pricing policy
relative to that of its perceived competitors, management believes that a
significant portion of such deposits will remain with the Company.
Capital Compliance
- ------------------
The Company is not subject to any regulatory capital requirements. The Banks'
actual capital and ratios as required by the OTS, as well as those required to
be considered well capitalized according to the Prompt Corrective Action
Provisions are presented in the following table. As of December 31, 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 total risk-based, Tier I
risked-based, and Tier I core ("leverage") ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the Banks' category.
Perpetual Bank, A Federal Savings Bank
- --------------------------------------
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- ----------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ------------- -------------- --------- -------
(Dollars in thousands)
As of December 31, 2000:
- ------------------------
Tangible Capital (To Total Assets) $35,953 9.84% $ 5,478 1.50% $ - -%
Core Capital (To Total Assets) $35,953 9.84% $14,608 4.00% $18,260 5.00%
Tier I Capital (To Risk-Based Assets) $35,953 15.04% $ - -% $14,342 6.00%
Risk-Based Capital (To Risk-Based
Assets) $38,610 16.15% $19,123 8.00% $23,904 10.00%
Heritage Federal Bank
- ---------------------
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- ----------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ------------- -------------- --------- -------
(Dollars in thousands)
As of December 31, 2000:
- -----------------------
Tangible Capital (To Total Assets) $33,146 11.45 % $ 4,343 1.50% $ - -%
Core Capital (To Total Assets) $33,146 11.45 % $11,582 4.00% $14,478 5.00%
Tier I Capital (To Risk-Based Assets) $33,146 17.56 % $ - -% $11,326 6.00%
Risk-Based Capital (To Risk-Based $37,729 19.99 % $15,101 8.00% $18,876 10.00%
Assets)
14
If the Banks were to fail to meet the minimum capital requirements, they will be
required to file a written capital restoration plan with regulatory agencies and
would be subject to various mandatory and discretionary restrictions on its
operations.
Impact of New Accounting Pronouncements
- ---------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." All
derivatives are to be measured at fair market 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. The 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.
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.
ITEM 3 - Market Risk Disclosure
- -------------------------------
There have been no material changes to the market risk information set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Market Risk and Asset Liability Management" in the Company's
2000 Annual Report to stockholders.
15
PART II
Item 1. Legal Proceedings
- ------- -----------------
The Company is not a party to any legal proceedings at this time. The Banks
from time to time and currently are involved as plaintiff or defendant in
various legal actions incident to their business. These actions are not
believed to be material, either individually or collectively, to the
consolidated financial condition or results of operations of the Banks.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
None
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. Exhibits:
---------
3.1 Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
10.1 Employment Agreement between SouthBanc Shares, Inc. and Robert W. Orr(2)
10.2 Employment Agreement between SouthBanc Shares, Inc. and Thomas C. Hall(2)
10.3 Employment Agreement between SouthBanc Shares, Inc. and Barry C.
Visioli(2)
10.4 Employment Agreement between Perpetual Bank, A Federal Savings Bank and
Robert W. Orr(2)
10.5 Employment Agreement between Perpetual Bank, A Federal Savings
Bank and Thomas C. Hall(2)
10.6 Employment Agreement between Perpetual Bank, A Federal Savings
Bank and Barry C. Visioli(2)
10.7 1998 Stock Option Plan(3)
10.8 1998 Management Development and Recognition Plan(3)
10.9 Supplemental Executive Retirement Agreement with Robert W. Orr(2)
10.10 Supplemental Executive Retirement Agreement with Thomas C. Hall(2)
10.11 Supplemental Executive Retirement Agreement with Barry C. Visioli(2)
10.12 Employment Agreement between SouthBanc Shares, Inc. and J. Edward Wells(4)
10.13 2001 Stock Option Plan(5)
16
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 333-42517).
(2) Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999.
(3) Incorporated by reference to the Company's Definitive Proxy
Statement dated December 18, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended September 30, 2000.
(5) Incorporated by reference to the Company's Definitive Proxy Statement
dated December 14, 2000.
B. Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 2000.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SouthBanc Shares, Inc.
Date: February 11, 2001 /s/ Robert W. Orr
-----------------
Robert W. Orr
President and Chief Executive Officer
(Duly Authorized Representative)
Date: February 11, 2001 /s/ Thomas C. Hall
------------------
Thomas C. Hall
Chief Financial Officer
18