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 June 30, 2001
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
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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 4,247,605
- ------------------------------- ------------------
(Class) (Outstanding at June 30, 2001)
SouthBanc Shares, Inc. and Subsidiaries
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and
September 30, 2000 (unaudited)................................... 3
Consolidated Statements of Income for the Nine Months Ended
June 30, 2001, and the Three Months Ended June 30, 2001
(unaudited)...................................................... 4
Consolidated Statements of Stockholders' Equity
for the Year Ended September 30, 2000 and
the Nine Months Ended June 30, 2001 (unaudited).................. 5
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2001 and 2000 (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 June 30,
2001 and 2000 and the Nine Months Ended June 30, 2001 and 2000.......... 9
Liquidity and Capital Resources....................................... 15
Capital Compliance.................................................... 16
Impact of New Accounting Pronouncements............................... 16
Effect of Inflation and Changing Prices............................... 16
Item 3. Market Risk Disclosure 17
Part II Other Information
Items:
1. Legal Proceedings................................................. 18
2. Changes in Securities and Use of Proceeds......................... 18
3. Defaults Upon Senior Securities................................... 18
4. Submission of Matters to a Vote of Senior Holders................. 18
5. Other Information................................................. 18
6. Exhibits and Reports on Form 8-K.................................. 18
Signatures............................................................ 19
2
SouthBanc Shares, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
Item I - Financial Statements
June 30, September 30,
------------------ ------------------
2001 2000
------------------ ------------------
ASSETS
Cash and cash equivalents $26,159,207 $21,784,653
Investment securities available for sale (amortized cost of
$33,668,427 at June 30, 2001, and $11,131,361 at
September 30, 2000) 36,327,244 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
$65,581,324 at June 30, 2001 and $61,916,848 at
September 30, 2000 67,051,056 72,659,003
Loans receivable, (net of allowance for loan losses of $7,324,222
at June 30, 2001 and $6,616,143 at September 30, 2000) 481,120,744 516,338,740
Investment in limited partnership 1,845,730 1,864,373
Real estate acquired in settlement of loans 1,940,403 1,091,609
Premises and equipment, net 2,009,873 2,133,598
Real estate held for development 11,013,724 10,776,074
Accrued interest receivable
Loans receivable 3,589,539 3,765,678
Mortgage-backed and other securities 886,167 726,503
Cash surrender value of life insurance 16,864,016 8,272,700
Other 3,598,389 10,927,970
------------------ ------------------
Total assets $659,931,092 $672,524,571
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $442,445,504 $451,913,200
Advances from the Federal Home Loan Bank ("FHLB") 107,365,435 98,332,948
Securities sold under agreements to repurchase 20,070,359 20,423,482
Advance payments by borrowers for property taxes and insurance 458,502 676,429
Accrued interest payable 2,792,040 2,041,265
Accrued expenses and other liabilities 6,698,914 19,026,707
------------------ ------------------
Total liabilities 579,830,754 592,414,031
------------------ ------------------
STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; authorized 250,000 shares; none
issued or outstanding at June 30, 2001 and September 30, 2000) - -
Common stock ($0.01 par value; authorized 7,500,000 shares;
issued 4,781,500 and 4,771,271 shares at June 30, 2001 and
September 30, 2000, respectively) 47,815 47,713
Additional paid-in capital 63,564,450 63,327,410
Retained earnings, restricted 23,535,714 19,357,050
Treasury stock - at cost (533,895 shares and 252,168
shares at June 30, 2001 and September 30, 2000, respectively) (9,647,795) (4,306,209)
Accumulated other comprehensive loss, net 2,766,839 1,917,931
Indirect guarantee other comprehensive loss, net (166,685) (233,355)
Deferred compensation for Management Recognition Plan (MRP) - -
------------------- ------------------
Total stockholders' equity 80,100,338 80,110,540
------------------- ------------------
Total liabilities and stockholders' equity $659,931,092 $672,524,571
=================== ==================
See accompanying notes to the consolidated financial statements.
3
SOUTHBANC SHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For The Nine Months Ended For The Three Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- ---------------- -------------- ----------------
Interest income:
Loans $31,489,396 $ 16,208,996 $ 9,898,164 $ 5,592,598
Mortgage-backed securities 3,736,338 2,530,124 1,131,909 840,300
Other investments 1,933,864 1,470,823 777,766 489,564
------------- --------------- ------------- -------------
Total interest income 37,159,598 20,209,943 11,807,839 6,922,462
Interest expense:
Interest on deposits:
Transaction accounts 522,572 683,839 151,171 222,886
Passbook accounts 1,231,708 528,083 390,211 194,865
Certificate accounts 14,776,094 5,824,681 4,799,776 2,127,923
------------- --------------- ------------- -------------
Total interest on deposits 16,530,374 7,036,603 5,341,158 2,545,674
Interest on borrowings 5,831,671 4,212,609 1,724,558 1,543,742
------------- --------------- ------------- -------------
Total interest expense 22,362,045 11,249,212 7,065,716 4,089,416
------------- --------------- ------------- -------------
Net interest income 14,797,553 8,960,731 4,742,123 2,833,046
Provision for loan losses 1,979,000 435,000 1,856,000 75,000
------------- --------------- ------------- -------------
Net interest income after provision for loan losses 12,818,553 8,525,731 2,886,123 2,758,046
------------- --------------- ------------- -------------
Other income:
Loan and deposit account service charges 3,446,443 2,950,894 1,151,208 994,800
Gain (loss) on sale of investments 1,814,092 (94,702) 307,464 -
Gain (loss) on sale of real estate acquired in (619,322) (1,564) (312,361) (6,188)
settlement of loans
Gain on sale of real estate held for development 60,054 84,183 42,631 1,534
Earnings on bank owned life insurance 629,968 343,884 239,614 110,328
Settlement of lawsuit 1,430,544 - 1,430,544 -
Other 647,574 876,704 185,070 291,162
------------- --------------- ------------- -------------
Total other income 7,409,353 4,159,399 3,044,170 1,391,636
General and administrative expenses:
Salaries and employee benefits 5,666,252 3,914,472 2,018,891 1,353,700
Occupancy 634,894 407,833 247,334 133,103
Furniture and equipment expense 1,321,560 789,262 440,316 265,152
FDIC insurance premiums 65,694 55,643 21,546 11,243
Advertising 459,852 148,858 232,221 63,464
Data processing 566,972 398,038 190,916 145,642
Office supplies 441,641 243,182 130,577 63,756
Profit improvement program - 94,280 - -
Other 1,876,533 963,213 707,770 370,134
------------- --------------- ------------- -------------
Total general and administrative expenses 11,033,398 7,014,781 3,989,571 2,406,194
Income before taxes 9,194,508 5,670,349 1,940,722 1,743,488
Income taxes 3,068,250 1,813,944 598,034 547,848
------------- --------------- ------------- -------------
Net income $ 6,126,258 $ 3,856,405 $ 1,342,688 $ 1,195,640
Basic earnings per common share $ 1.41 $ 1.30 $ 0.32 $ 0.42
Diluted earnings per common share $ 1.37 $ 1.23 $ 0.31 $ 0.40
Weighted average shares outstanding:
Basic 4,345,781 2,969,066 4,238,313 2,863,797
Diluted 4,457,016 3,136,679 4,360,511 3,023,757
Cash dividends per common share $ 0.60 $ 0.45 $ 0.15 $ 0.15
See accompanying notes to the consolidated financial statements.
4
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Stockholders; Equity
Year Ended September 30, 2000 and Nine Months Ended June 30, 2001 (Unaudited)
Accumulated
Other
Additional Retained Comprehensive
Common Common Paid-in Earnings Income (Loss)
Shares Stock Capital Restricted Net
--------- ------ ----------- ----------- -------------
Balance at September 30, 1999 4,322,030 43,220 $57,741,324 $22,351,722 $(2,028,033)
Net income - - - (942,972) -
Other comprehensive income:
Unrealized loss on securities,
net - - - - 1,916,185
Reclassification adjustment
for losses realized in net
income, net - - - - 2,029,779
- -----------
Total other comprehensive income/
(loss) - - - - 3,945,964
Comprehensive income - - - - -
Merger with Heritage 1,829,085 18,291 32,504,075 - -
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 - - - - -
--------- ------ ----------- ----------- ------------
Balance at September 30, 2000 4,771,271 47,713 63,327,410 19,357,050 1,917,931
========= ====== =========== =========== ============
Balance at September 30,2000
Net income - - - 6,126,258 -
Other comprehensive income:
Unrealized loss on securities,
net - - - - 2,046,209
Reclassification adjustment
for losses realized in net
income, net - - - - (1,197,301)
- ------------
Comprehensive income
Exercise of stock options 10,229 102 90,425 - -
Reduction of ESOP debt - - - - -
ESOP compensation expense - - 146,615 - -
Dividends on common stock - - - (1,947,594) -
Purchase of Treasury Stock - - - - -
--------- ------ ----------- ---------- ------------
Balance at June 30, 2001 4,781,500 47,815 $63,564,450 $23,535,714 $2,766,839
========= ====== =========== =========== ============
Indirect Deferred
Treasury Guarantee of Compensation
Stock ESOP Debt for MRP Total
------------ ------------ --------------- -----------
Balance at September 30, 1999 $(22,515,585) $(622,247) $(2,219,849) $52,750,552
Net income - - - (942,972)
Other comprehensive income:
Unrealized loss on securities,
net - - - 1,916,185
Reclassification adjustment
for losses realized in net
income, net - - - 2,029,779
-----------
Total other comprehensive income/
(loss) - - - 3,945,964
Comprehensive income - - - 3,085,791
-----------
Merger with Heritage 25,260,730 - - 30,143,055
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 (7,051,354) - - (7,051,354)
------------ --------- -------------- -----------
Balance at September 30, 2000 (4,306,209) (233,355) $80,110,540
============ ========= ============== ===========
Balance at September 30,2000
Net income - - - 6,126,258
Other comprehensive income:
Unrealized loss on securities,
net - - - 2,046,209
Reclassification adjustment
for losses realized in net
income, net - - - (1,197,301)
-----------
Comprehensive income 6,975,166
-----------
Exercise of stock options - - - 90,527
Reduction of ESOP debt - 66,670 - 66,670
ESOP compensation expense - - - 146,615
Dividends on common stock - - - (1,947,594)
Purchase of Treasury Stock (5,341,586) - - (5,341,586)
------------ -------------- --------------- -----------
Balance at June 30, 2001 $(9,647,795) $(166,685) $ 0 $80,100,338
============ ============== =============== ===========
See accompanying notes to the consolidated financial statements.
5
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2001 and 2000
2001 2000
----------------- ------------------
Cash flows from operating activities
Net income $ 6,126,258 $ 3,856,405
Adjustments to reconcile net income to net cash provided
by operating activities
Equity loss in Limited Partnership 18,643 -
Depreciation 1,301,582 645,358
Accretion, net (915,107) (1,118,585)
Provision for loan losses 1,755,000 435,000
(Gain) loss on sale of investments, net (1,814,092) 94,702
Loss on sale of real estate 619,322 1,564
Gain on sale of real estate held for development (65,306) (84,183)
Gain on sale of premises and equipment (8,816) -
Deferred compensation 146,615 555,565
Increase in accrued interest receivable and other assets 7,438,352 (1,191,964)
Decrease in other liabilities (11,930,547) 1,144,961
----------------- ------------------
Net cash provided by operating activities 2,671,904 4,338,823
----------------- ------------------
Cash flows from investing activities
Decrease (increase) in loans receivable, net 48,317,005 (2,493,714)
Purchases of loans receivable (18,096,561) (25,000,555)
Purchase of cash surrender life insurance (8,000,000) -
Purchases of investment securities (26,551,426) (4,816,855)
Purchases of FHLB stock - (1,975,000)
Purchase of premises and equipment (1,539,232) (766,449)
Sales of loans receivable 437,546 -
Proceeds from redemption of FHLB stock - 1,650,000
Principal repayments on mortgage-backed securities 7,838,277 6,675,239
Proceeds from maturities of investment securities 1,000,000 3,000,000
Proceeds from sale of premises and equipment 8,816 -
Proceeds from sale of mortgage-backed securities, available for sale - 7,439,993
Proceeds from sale of investment securities, available for sale 4,938,284 -
Proceeds from sale of real estate owned 1,415,088 367,250
Capital improvements of real estate owned (78,197) -
Proceeds from sale of real estate held for development 439,654 541,727
Capital improvements of real estate held for development (255,875) (463,718)
----------------- ------------------
Net cash used in investing activities 9,873,379 (15,842,082)
----------------- ------------------
Cash flows from financing activities
Increase (decrease) in deposit accounts (9,467,696) 11,991,443
Proceeds from FHLB Advances 85,000,000 113,000,000
Repayment of FHL Advances (76,000,000) (110,000,000)
Proceeds from securities sold under agreements to repurchase (353,123) 198,044
Exercise of stock options 90,527 25,754
Purchase of Treasury stock (5,341,586) (5,124,457)
Repayments of ESOP loan 66,670 66,669
Dividends paid on common stock (1,947,594) (1,349,547)
Decrease in advance payments by borrowers for property taxes and insurance (217,927) (115,721)
----------------- ------------------
Net cash provided by financing activities (8,170,729) 8,692,185
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 4,374,554 (2,811,074)
6
(Continued)
(Continued)
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2001 and 2000
2001 2000
----------------- -----------------
Net increase (decrease) in cash and cash equivalents - brought forward 4,374,554 (2,811,074)
Cash and cash equivalents, beginning of year 21,784,653 15,546,360
----------------- -----------------
Cash and cash equivalents, end of year $26,159,207 $12,735,286
================= =================
Supplemental disclosures
Cash paid (refunded) for during the year
Interest $21,611,270 $11,039,984
================= =================
Taxes $ (383,589) $ 2,095,000
================= =================
Non cash investing activities
Additions to real estate acquired in settlement of loans $ 2,805,006 $ 584,027
================= =================
Change in unrealized net loss on securities available for sale, net of tax $ 848,908 $ (394,728)
================= =================
Decrease in Employee Stock Ownership Plan debt guaranteed by the Bank $ (66,670) $ (66,669)
================= =================
See accompanying notes to consolidated financial statements.
7
SouthBanc Shares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for
SouthBanc Shares, Inc. ("Company") were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include all
disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments, consisting
only of normal recurring accruals, which are, in the opinion of
management, necessary for fair presentation of the interim consolidated
financial statements have been included. The results of operations for
the period ended June 30, 2001 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, SouthBank ("Bank"), and the Bank's wholly
owned subsidiaries, Mortgage First Service Corporation and United
Service Corporation, and United Service Corporation's wholly owned
subsidiary, United Investment Services.
Between July 31, 2000 and June 29, 2001, the Company operated two
savings banks, Perpetual Bank and Heritage Federal Bank, as separate
subsidiaries. As of June 29, 2001 the two banking subsidiaries were
combined into one bank, and the name was changed to SouthBank. The
consolidated results for the quarter and nine months ended June 30,
2001 include the former Heritage Federal. However, since Heritage was
merged into SouthBank as of July 31, 2000, the consolidated results for
the three and nine months ended June 30, 2000 do not include Heritage's
results.
United Service Corporation is a wholly-owned subsidiary of the Bank. At
June 30, 2001, 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 Bank to pay dividends to the Company. The payment of
dividends by the Bank is subject to regulation by the Office of Thrift
Supervision ("OTS"). The Bank may not declare or pay a cash dividend if
the effect thereof would cause the capital of the Savings Bank to be
reduced below regulatory capital requirements imposed by the OTS or
below the liquidation account established by the Bank in connection
with the conversion of the Bank's former mutual holding company
(SouthBanc Shares, M.H.C.) from the mutual to stock form of
organization.
The Company's Board of Directors declared a cash dividend of $.15 per
share to its shareholders during the quarter ended June 30, 2001,
payable on July 16, 2001 to shareholders of record as of July 2, 2001.
4. Earnings Per Share
------------------
The Company calculates earnings per share in accordance with 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 Nine Months Ended For the Quarter Ended
June 30, 2001 June 30, 2001
----------------------------------------- --------------------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount rator) nator) Amount
-------------- ------------- ----------- ------------ ------------- ----------
Basic EPS $ 6,126,258 4,345,781 $ 1.41 $ 1,342,688 4,238,313 $ 0.32
Effect of Diluted Securities
Stock Options - 76,664 - 87,627
ESOP - 34,571 - 34,571
------------ ------------ ------------ -----------
Diluted EPS $ 6,126,258 4,457,016 $ 1.41 $ 1,342,688 4,360,511 $ 0.31
For the Nine Months Ended For the Quarter Ended
June 30, 2000 June 30, 2000
----------------------------------------- --------------------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount rator) nator) Amount
--------------- ------------ ----------- ------------ ------------- ----------
Basic EPS $ 3,856,405 2,969,066 $ 1.30 $ 1,195,640 2,863,797 $ 0.42
Effect of Diluted Securities
Stock Options - 85,305 - 77,652
ESOP - 82,308 - 82,308
------------ ------------ ------------ -----------
Diluted EPS $ 3,856,405 3,136,679 $ 1.23 $ 1,195,640 3,023,757 $ 0.40
5. Subsequent Event - Merger with National Commerce Financial Corporation
----------------------------------------------------------------------
On July 15, 2001, the Company signed a definitive agreement to be acquired
by National Commerce Financial Corporation ("NCF"). The transaction will
be accounted for as a purchase. Each SouthBanc shareholder can elect to
receive either $28.00 per share in cash, 1.1142 shares of NCF common
stock, or $14.00 per share in cash plus .5571 of a share of NCF common
stock as consideration. However, the total merger consideration must be
paid 50% in NCF stock and 50% in cash. The transaction is subject to
approval by regulators and shareholders, and is expected to close in the
fourth calendar quarter of 2001.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at March 31, 2001 and September 30, 2000
- --------------------------------------------------------------------------
General
- -------
Total assets decreased $12.6 million to $659.9 million at June 30, 2001 from
$672.5 million at September 30, 2000, primarily as a result of a decrease in
loans receivable and other assets. The decreases were offset by an increase in
cash surrender value of life insurance.
9
Loans receivable decreased 6.8% or $35.2 million to $481.1 million at June 30,
2001, from $516.3 million at September 30, 2000. The decrease in loans
receivable resulted primarily from a decrease in first mortgage residential and
construction loans. The Company is currently holding fixed rate loans originated
in its portfolio due to the prepayment of residential loans and a decrease in
construction loan production.
Mortgage-backed securities available-for-sale decreased 7.7% or $5.6 million to
$67.1 at June 30, 2001 from $72.7 million at September 30, 2000. Principal
repayments on mortgage-backed securities were $7.8 million during the nine
months ended June 30, 2001.
Investment securities available for sale increased 146.9% or $21.6 million to
$36.3 million at June 30, 2001 from $14.7 million at September 30, 2000. Certain
securities had been sold following the merger with Heritage Bancorp., Inc. in
July 2000 in an effort to balance the investment portfolios of the two banks and
to better manage interest rate risk. During 2001 the Bank purchased securities
of $26.6 with available funds, including $16.0 million of municipal bonds and
$2.6 million of trust preferred bonds, $2.0 million of Federal National Mortgage
Association preferred stock, $2.0 million of Federal Home Loan Mortgage
Corporation preferred stock, $1.0 million of a U. S. Treasury note and a $3.0
million Federal Home Loan Mortgage Corporation callable note.
Cash and cash equivalents increased 20.2% or $4.4 million to $26.2 at June 30,
2001 from $21.8 million at September 30, 2000. At June 30, 2001, $15.7 million
was invested in interest-bearing overnight investment accounts yielding 3.76%.
Real estate held for development decreased slightly to $2.0 million at June 30,
2001. The Company is presently developing two single-family residential
subdivisions and two commercial real estate development projects. Two lots were
sold during the quarter in the single-family residential subdivisions and five
lots were sold in one of the commercial real estate projects. Development costs
of $256,000 were incurred in one of the commercial real estate projects during
the quarter.
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 June 30, 2001.
Cash surrender value of life insurance was $16.9 million at June 30, 2001, an
increase of $8.6 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 officers of the former Heritage Federal during the
quarter ended December 31, 2000.
Deposits decreased $9.5 million to $442.4 at June 30, 2001 from $451.9 million
at September 30, 2000. Non-interest bearing checking accounts decreased 7.38% or
$1.1 million to $13.8 million at June 30, 2001, from $14.9 million at September
30, 2000. Interest bearing checking accounts increased 6.47% or $2.9 million to
$47.7 million at June 30, 2001, 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 10.346%
or $5.2 million to $55.5 million at June 30, 2001 from $50.3 million at
September 30, 2000. Certificates of deposit decreased 4.83% or $16.5 million to
$325.4 at June 30, 2001 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 decreased 1.47% or $300,000 to
$20.1 million at June 30, 2001 from $20.4 million at September 30, 2000. The
Company pledged $21.0 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 3.85%, with a maturity date of December 12, 2001.
Advances from the Federal Home Loan Bank increased $9.1 million to $107.4
million at June 30, 2001 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.
10
Stockholders equity was $80.1 million at June 30, 2001 and at September 30,
2000. Retained earnings was increased by net income of $6.1 for the nine months
ended June 30, 2001, and decreased by dividends paid in the amount of $1.9
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 nine months of fiscal 2001, the Company repurchased
281,813 shares at an average cost of $18.95 per share and a total cost of $5.3
million. Accumulated other comprehensive income, net, increased $849,000 to $2.8
million at June 30, 2001 from $1.9 million at September 30, 2000 due to an
increase in the market value of investment securities available for sale.
The Company contributed $67,000 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 June 30, 2001,
and 2000
Net Income
- ----------
Net income for the three months ended June 30, 2001, increased to $1.3 million
or $0.32 basic earnings per share and $0.31 diluted earnings per share, compared
to $1.2 million or $0.42 basic earnings per share and $0.40 diluted earnings per
share for the same three months a year ago. The primary reasons for the increase
in income was the acquisition of Heritage Federal in July 2000 and the
settlement of a lawsuit. 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. The additional net
interest income attributable to the merger was offset by an increase in the
provision of loan losses. Earnings per share was also impacted by the shares of
Company common stock issued in connection with the merger.
Net Interest Income
- -------------------
Net interest income was $4.7 million for the three months ended June 30, 2001
and $2.8 million for the three months ended June 30, 2000. Heritage Federal
added approximately $248 million in total loans in 2000. Total interest income
increased 70.6% or $4.9 million to $11.8 million for the three months ended June
30, 2001, from $6.9 million for the three months ended June 30, 2000, due
primarily to a higher average balance of outstanding loans which increased
$217.5 million or 78.5% to an average of $494.5 million yielding 8.01% for the
three months ended June 30, 2001, from $277.0 million yielding 8.08% for the
three months ended June 30, 2000. Interest income on mortgage-backed securities
increased 34.7% or $292,000 to $1.1 million for the three months ended June 30,
2001, as the average balance increased $23.8 million to $69.0 million for the
three months ended June 30, 2001 from $45.2 million for the three months ended
June 30, 2000. Much of the increase in average balances is due to the addition
of Heritage Federal to the consolidated Company and to changes in the relative
mix of assets in the combined Company's balance sheet. Approximately $8.5
million of mortgage-backed securities were on Heritage Federal's balance sheet
at June 30, 2000. In addition, as loans decreased during the quarter, investable
funds were used to purchase investment securities. Interest income on other
investments increased 58.87% or $288,000 due primarily to a higher balance of
investment securities and interest bearing deposits which increased 107.9% or
$27.3 million, to an average balance of $52.6 million yielding 5.92% for the
three months ended June 30, 2001, from $25.3 million yielding 7.74% for the
three months ended June 30, 2000. The increase in average balances was only
partially offset by the decrease in yield on these investments, causing interest
income to increase.
Interest Expense
- ----------------
Interest expense on deposits increased 109.8% or $2.8 million as the average
outstanding balance increased 96.2% or $223.1 million to $455.1 million at an
average cost of 4.69% for the three months ended June 30, 2001, from $232.0
million at an average cost of 4.39% for the three months ended June 30, 2000.
The Heritage merger added over $200 million of deposits in July 2000. In
addition, weighted average interest rates were higher during the 2001 quarter
than in the 2000 quarter. Interest on borrowings increased $181,000 to $1.7
million for the three months ended June 30, 2001, from $1.5 million for the
three months ended June 30, 2000, as the average borrowings increased 30.5% or
$29.0 million to $124.1 million at an average cost of 5.56% for the three months
ended June 30, 2001, from $95.1 million at an average cost of 6.49% for the
three months ended June 30, 2000. The total cost of average interest bearing
liabilities for the quarter ended June 30, 2001 was 4.88%.
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 increased $1.8 million to $1.9 million for the
three months ended June 30, 2001, from $75,000 for the three months ended June
30, 2000 due to charge-offs of $735,000 for the quarter ended June 30, 2001
compared to $26,000 for the quarter ended June 30, 2000. Charge-offs included
residential mortgages of $356,000 consumer loans of $4,000, commercial loans of
$82,000 and commercial real estate loans of $293,000. Non-performing assets
represented 1.53% of total assets at June 30, 2001. The allowance for loan
losses was 1.50% of total loans at June 30, 2001 and 1.28% at September 31,
2000.
Non-performing assets at June 30, 2001 were $10.1 million consisting of $3.9
million of residential mortgage construction loans, $1.9 million of real estate
acquired in settlement of loans, $3.9 million of single family residential
loans, $257,000 of commercial real estate loans, $65,000 of commercial other
loans and $9,000 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. Due
to a decrease in total loans, the allowance for loan losses has increased as a
percentage of total loans at June 30, 2001 compared to previous periods.
However, due to the amount of charge-offs and types of non-performing assets
held by the Bank, management believes the allowance is adequate as of June 30,
2001.
Other Income
- ------------
Gain on sale of real estate held for development was $43,000 for the three
months ended June 30, 2001 as two residential lots were sold by the United
Service Corporation in The Meadows residential subdivision and five lots in the
North Park Industrial Park compared to $1,500 for the three months ended June
30, 2000 as two residential lots and one residential house were sold.
Total other income increased 118.8% or $1.6 million to $3.0 million for the
three months ended June 30, 2001, from $1.4 million for the three months ended
June 30, 2000. Loan and deposit service charges increased $156,000 to $1.2
million from $995,000 for the three months ended June 30, 2000, as a result of
the larger portfolio of accounts held by the Company following the addition of
Heritage Federal. Gain (loss) on sale of investments was a gain of $307,500 for
the three months ended June 30, 2001. There was no gain or loss on the sale of
investments for the three months ended June 30, 2000. Gain (loss) on real estate
acquired in settlement of loans was a loss of $312,000 for the three months
ended June 30, 2001, compared to a loss of $6,000 for the three months ended
June 30, 2000. During the third quarter of 2001 certain properties acquired in
settlement of loans were written down to net realizable value following new
appraisals of the properties.
Earnings on bank owned life insurance increased 117.2% or $129,000 to $239,000
for the three months ended June 30, 2001 from $110,000 for the three months
ended June 30, 2000, due to the purchase of $8.0 million of additional officers
life insurance for the former officers of Heritage Federal in the first fiscal
quarter of 2001. The Company settled a lawsuit during the quarter, receiving
$1.4 million, net of attorney's fees. The terms of the settlement are
confidential.
Other income in 2000 included an increase in the value of the Company's
investment in a limited partnership of $90,000. The quarter ended June 30, 2001
included a decrease of $19,000.
General and Administrative Expense
- ----------------------------------
Salaries and employee benefits increased 49.1% or $665,000 to $2.0 million for
the three months ended June 30, 2001, from $1.4 million for the three months
ended June 30, 2000. The Company increased the number of employees as a result
of the merger by 63 full time equivalent employees to 189 at June 30, 2001 from
126 at June 30, 2000. Office occupancy increased 85.8% or $114,000 to $247,000
for the three months ended June 30, 2001, from $133,000 for the three months
ended June 30, 2000, due to an increase in office building depreciation expense
and building repair and maintenance. Furniture and equipment expenses increased
66.1% or $175,000 to $440,000 for the three months ended June 30, 2001, from
$265,000 for the three months ended June 30, 2000. The Company owned six office
buildings in June 2000 and eleven office buildings in 2001. Advertising
increased 265.9% or $169,000 to $232,000 for the three months ended June 30,
2001, from $63,000 for the three months ended June 30, 2000
12
due to the free checking program promotion that began at Heritage Federal in
October 2000 and the promotion of the name change to SouthBank. Data processing
increased 30.8% or $45,000 to $191,000 for the three months ended June 30, 2001,
from $146,000 for the three months ended June 30, 2000. Office supplies
increased 104.8% or $67,000 to $131,000 for the three months ended June 30,
2001, from $64,000 for the three months ended June 30, 2000, due to the addition
of the former Heritage Federal to the consolidated results. Other operating
expenses increased 91.2% or $338,000 to $708,000 for the three months ended June
30, 2001, from $370,000 for the three months ended June 30, 2000. The increases
are primarily due to the acquisition of the former Heritage Federal, and several
types of other expenses are affected. The largest increases were in legal
expenses of $40,000, transfer agent expenses of $32,000, consultant expenses for
a human resources project of $87,000, an increase in directors and officers
liability insurance of $26,000, telephone expenses of $60,000, postage of
$18,000 and expenses related to real estate acquired in foreclosure of $36,000.
Income Taxes
- ------------
Income taxes increased 9.2% or $50,000 to $598,000 for the three months ended
June 30, 2001, from $548,000 for the three months ended June 30, 2000. This was
due to an increase in income before taxes of 11.3% or $200,000 to $1.9 million
from $1.7 million for the three months ended June 30, 2001, and 2000,
respectively, primarily due to the merger with Heritage Bancorp in July 2000.
Comparison of Operating Results for the Nine Months Ended June 30, 2001, and
2000
Net Income
- ----------
Net income for the nine months ended June 30, 2001, increased to $6.1 million or
$1.41 basic earnings per share and $1.37 diluted earnings per share, compared to
$3.9 million or $1.30 basic earnings per share and $1.23 diluted earnings per
share for the same nine 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. Another factor in the increased net income was the settlement of a
lawsuit in June 2001 in the amount of $1.4 million, net of attorney's fees. The
increases in net interest income were partially offset by an increase in the
provision for loan losses.
Net Interest Income
- -------------------
Net interest income was $14.8 million for the nine months ended June 30, 2001
and $9.0 million for the nine months ended March 31, 2000. The acquisition of
Heritage Federal added approximately $248 million in total loans to the
Company's interest earning assets in the fourth quarter of fiscal 2000. Total
interest income increased 83.9% or $17.0 million to $37.2 million for the nine
months ended June 30, 2001, from $20.2 million for the nine months ended June
30, 2000, due primarily to a higher average balance of outstanding loans which
increased $236.7 million or 88.0% to an average of $505.8 million yielding 8.30%
for the nine months ended June 30, 2001, from $269.1 million yielding 8.03% for
the nine months ended June 30, 2000. Interest income on mortgage-backed
securities increased 47.7% or $1.2 million to $3.7 million for the nine months
ended June 30, 2001, as the average balance increased $23.0 million to $70.9
million for the nine months ended June 30, 2001 from $47.9 million for the nine
months ended June 30, 2000. Much of the increase in average balances is due to
the addition of the former Heritage Federal to the consolidated Company.
Approximately $8.5 million of mortgage-backed securities were on Heritage
Federal's balance sheet at the time of the merger in July, 2000. In addition,
since the acquisition of Heritage Federal in the fourth quarter of fiscal 2000,
the Company has restructured its investments to manage interest rate risk while
maximizing earnings, causing certain investments to be divested and other assets
to be purchased. Interest income on other investments increased 31.5% or
$463,000 due primarily to a higher balance of investment securities and interest
bearing deposits which increased 58.5% or $15.5 million, to an average balance
of $42.0 million yielding 6.15% for the nine months ended June 30, 2001 from
$26.5 million yielding 7.39% for the nine months ended June 30, 2000. The
increase in the balances is mainly due to the merger with Heritage Bancorp. The
reason for the decrease in rate is the overall decrease in market interest rates
in the second quarter of 2001 and due to changes in the mix of assets among
investment securities, interest bearing deposits and FHLB stock.
Interest Expense
- ----------------
Interest expense on deposits increased 134.9% or $9.5 million as the average
outstanding balance increased 98.0% or $221.1 million to $446.6 million at an
average cost of 4.93% for the nine months ended June 30, 2001, from $225.5
million at an average cost of 4.16% for the nine months ended June 301, 2000.
Heritage Federal added over $200 million of deposits at the time of the merger
in July 2000. In addition, weighted average interest rates on time deposits in
the Bank's portfolio were higher during the
13
2001 quarter than in the 2000 quarter. Average rates of interest paid on
certificates of deposit during the first nine months of fiscal 2001 were 5.96%
compared to 5.48% paid on certificates of deposit during the first nine months
of fiscal 2000. Interest on borrowings increased $1.6 million to $5.8 million
for the nine months ended June 30, 2001, from $4.2 million for the nine months
ended June 30, 2000, as the average borrowings increased 36.7% or $34.5 million
to $128.5 million at an average cost of 6.05% for the nine months ended June 30,
2001, from $94.0 million at an average cost of 5.98% for the nine months ended
June 30, 2000.
Provisions for Loan Losses
- --------------------------
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan losses, management evaluates various factors including
the market value of the underlying collateral, growth, and composition of the
loan portfolio, the relationship of the allowance for loan losses to outstanding
loans, loss experience, delinquency trends and economic conditions. Management
evaluates the carrying value of loans periodically, and the allowance for loan
losses is adjusted accordingly.
The provision for loan losses increased 354.9% or $1.6 million to $2.0 million
for the nine months ended June 30, 2001, from $435,000 for the nine months ended
June 30, 2000, due to charge-offs of $1.3 million for the nine months ended June
30, 2001 compared to $176,000 for the nine months ended June 30, 2000.
Charge-offs included $582,000 of residential mortgage loans, $39,000 of consumer
loans, $278,000 of commercial loans, and $408,000 of commercial real estate
loans.
Non-performing assets at June 30, 2001, were $10.1 million consisting of $3.9
million of residential mortgage construction loans, $1.9 million of real estate
acquired in settlement of loans, $3.9 million of single family residential
loans, $257,000 of commercial real estate loans, $65,000 of commercial other
loans and $9,000 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. Due
to the decrease in overall loans, the allowance as a percentage of total loans
has increased. The allowance for loan losses to total loans was 1.50% at June
30, 2001 and 1.28% at September 30, 2000. However, due to the increase in
charge-offs in 2001 and due to the current level of non-performing assets,
management believes that the higher reserve level is warranted.
Other Income
- ------------
Total other income increased 78.1% or $3.2 million to $7.4 million for the nine
months ended June 30, 2001, from $4.2 million for the nine months ended June 30,
2000. Loan and deposit service charges increased $400,000 to $3.4 million from
$3.0 million for the nine months ended June 30, 2000, as a result of an increase
to the fee structure of deposit accounts and an increase in the number of
checking accounts. Gain (loss) on sale of investments was a gain of $1.8 million
for the nine months ended June 30, 20001 compared to a loss of $95,000 for the
nine months ended June 30, 2000. The gain resulted from the sale of equity
investments. Gain (loss) on real estate acquired in settlement of loans was a
loss of $619,000 for the nine months ended June 30 2001, compared to a loss of
$1,500 for the nine months ended June 30, 2000.
Gain on sale of real estate held for development was $60,000 for the nine months
ended June 30 2001, as profit was recognized on seven residential lots were sold
by the United Service Corporation in The Meadows residential subdivision and six
lots in the Northpark Industrial Park compared to $84,000 for the nine months
ended June 30, 2000, as profit was recognized on nineteen residential lots in
The Meadows and one lot in the Northpark Industrial Park. Earnings on bank owned
life insurance increased 83.1% or $286,000 to $630,000 for the nine months ended
June 30, 2001 from $344,000 for the nine months ended June 30, 2000 due to the
purchase of $8.0 million of additional officers life insurance for the former
officers of Heritage Federal during the first quarter of fiscal 2001. Other
income also included the settlement of a lawsuit in the amount of $1.4 million,
net of attorney's fees. Other income increased $229,000 to $648,000 for the nine
months ended June 30, 2001, compared to $897,000 for the nine months ended June
30, 2000. Other income in 2000 included a positive change in the market value of
the Company's investment in limited partnership.
General and Administrative Expense
- ----------------------------------
Salaries and employee benefits increased 44.8% or $1.8 million to $5.7 million
for the nine months ended June 30, 2001, from $3.9 million for the nine months
ended June 30, 2000. The Company increased the number of employees as a result
of the merger, increasing by 63 full time equivalent employees to 189 at June
30, 2001 from 126 at June 30, 2000. Office occupancy increased
14
55.7% or $227,000 to $635,000 for the nine months ended June 30, 2001, from
$408,000 for the nine months ended June 30, 2000, due to a increase in the
number of buildings operated by the consolidated Company. The Company owned six
office buildings during the period ended June 30, 2000 and eleven office
buildings for the same period in 2001. Furniture and equipment expenses
increased 67.4% or $532,000 to $1.3 million for the nine months ended June 30,
2001, from $789,000 for the nine months ended June 30, 2000. Advertising
increased 208.9% or $311,000 to $460,000 for the nine months ended June 30,
2001, from $149,000 for the nine months ended June 30, 2000. Advertising costs
increased as a result of the merger and due to the free checking product
campaign during the months immediately following the merger. Data processing
increased 42.4% or $169,000 to $567,000 for the nine months ended June 30, 2001,
from $398,000 for the nine months ended June 30, 2000. Data processing expenses
increased for the consolidated Company at a rate lower than the increases in
other types of expenses due to the fact that both Banks use the same computer
software system. The Company experienced an increase in the number of computers
used by associates, but was able to discontinue certain types of software
maintenance costs incurred by Heritage as a result of the merger. Office
supplies increased 81.6% or $199,000 to $442,000 for the nine months ended June
30, 2001, from $243,000 for the nine months ended June 30, 2000, due to the
addition of Heritage Federal. There was no profit improvement program expense
for the nine months ended June 30, 2001 compared to $94,000 for the nine months
ended June 30, 2000. The profit improvement program included consultant fees for
sales training, staff realignment, and product fee enhancement. Other operating
expenses increased 94.8% or $913,000 to $1.9 million for the nine months ended
June 30, 2001, from $963,000 for the nine months ended June 30, 2000. The
increases are primarily due to the acquisition of Heritage Federal, and several
types of other expenses are affected. The largest increases were in legal
expenses of $143,000, transfer agent expense of $56,000, consultant expense for
a human resources project of $75,000, an increase in directors and officers
liability insurance expense of $81,000, telephone expenses of $85,000, postage
of $42,000 and expenses related to real estate acquired in foreclosure of
$101,000.
Income Taxes
- ------------
Income taxes increased 69.1% or $1.3 million to $3.1 for the nine months ended
June 30, 2001, from $1.8 million for the nine months ended June 30, 2000. This
was due to an increase in income before taxes of $3.5 million to $9.2 million
from $5.7 million for the nine months ended June 30, 2001, and 2000,
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 Federal Home Loan Bank ("FHLB") of Atlanta.
Recent legislation repealed the OTS's minimum liquidity ratio requirement. OTS
regulations now require the Banks to maintain sufficient liquidity to ensure
their safe and sound operation.
The primary investing activity of the Company is lending. During the three
months ended June 30, 2001, the Company originated $41.5 million of loans and no
loans were sold. The Company also purchased $1.1 million of loans. Principal
repayments of loans, mortgage-backed securities, and collateralized mortgage
obligations and Federal Home Loan Bank advances primarily funded the retained
originations.
Liquidity management is both a short and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) projected loan sales, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) liquidity of its asset/liability management program. Excess liquidity is
generally invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires funds beyond its
ability to generate them internally, it has additional borrowing capacity with
the FHLB and collateral eligible for repurchase agreements.
The Company anticipates that it will have sufficient funds available through
normal loan repayments to meet current loan commitments. At June 30, 2001, the
Company had outstanding commitments to originate loans of approximately $80.3
million.
Certificates of deposit scheduled to mature in one year or less at June 30,
2001, totaled $205.7 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.
15
Capital Compliance
- ------------------
The Company is not subject to any regulatory capital requirements. The Bank's
actual capital and ratios as required by the OTS, as well as those required to
be considered well capitalized according to the Prompt Corrective Action
Provisions are presented in the following table. As of June 30, 2001, the most
recent notification from the OTS categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risked-based, and Tier I core ("leverage") ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of June 30, 2001:
- --------------------
Tangible Capital (To Total Assets) $63,418 9.86% $ 9,652 1.50% $ - -%
Core Capital (To Total Assets) 63,418 9.86% 25,740 4.00% 32,175 5.00%
Tier I Capital (To Risk-Based Assets) 63,418 14.85% - 25,622 6.00%
Risk-Based Capital (To Risk-Based
Assets) 71,743 16.80% 34,613 8.00% 42,704 10.00%
If the Bank were to fail to meet the minimum capital requirements, it will be
required to file a written capital restoration plan with regulatory agencies and
would be subject to various mandatory and discretionary restrictions on its
operations.
Impact of New Accounting Pronouncements
- ---------------------------------------
In July 2001, the SEC issued Staff Accounting Bulletin (SAB) No. 101 - Selected
Loan Loss Allowance Methodology and Documentation Issues. This staff accounting
bulletin clearly defines the required development, documentation, and
application of a systematic methodology for determining allowances for loan and
lease losses in accordance with generally accepted accounting principles. The
Company believes that it is in compliance with SAB 102.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 - Business Combinations. This
SFAS addresses accounting and reporting for all business combinations and
defines the purchase method as the only acceptable method. This statement is
effective for all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142 - Goodwill and other Intangible
Assets. This SFAS addresses how goodwill and other intangible assets should be
accounted for at their acquisition (except for those acquired in a business
combination) and after they have been initially recognized in the financial
statements. The statement is effective for all fiscal years beginning after
December 15, 2001. The Company believes the effect of this SFAS will not have a
material impact on the financial position of the Company.
Additional accounting standards that have been issued or proposed by the FASB
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.
16
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
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 or
decrease in interest rates may adversely impact the Company's earnings to the
extent that the interest rates on interest-bearing assets and interest-bearing
liabilities do not change at the same rate, to the same extent or on the 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 and by measuring the Banks' interest sensitivity gap ("Gap"). Net
portfolio value is defined as the net present value of assets, liabilities and
off-balance contracts. Gap is the amount of interest sensitive assets repricing
or maturing over the next twelve months compared to the amount of interest
sensitive liabilities maturing or repricing in the same period.
For the three month period ended June 30, 2001, the Banks interest rate spread,
defined as the average yield on interest-bearing assets less the average rate
paid on interest bearing liabilities was 2.79%. As of the quarter ended March
31, 2001, the interest rate spread was 2.85%. The Company's management believes
that the interest rate spread has decreased as the yield on interest earning
assets declined more than the cost of interest bearing liabilities. The prime
rate quoted by major United States ("US") banks as of January 1, 2001 was 9.5%,
but had decreased to 6.75% as of June 29, 2001, and the rate on 90 day US
treasury bills as of January 1, 2001 was 5.88%, but had decreased to 3.57% as of
June 29, 2001. The Banks' interest bearing liabilities are currently repricing
or maturing at a faster rate than their interest earning assets, and are
repricing at lower interest rates, thereby improving the Banks' interest rate
spread.
17
PART II
Item 1. Legal Proceedings
- --------------------------
The Company is not a party to any legal proceedings at this time. The Savings
Bank from time to time and currently is involved as plaintiff or defendant in
various legal actions incident to its business. These actions are not believed
to be material, either individually or collectively, to the consolidated
financial condition or results of operations of the Savings Bank.
Item 2. Changes in Securities and Use of Proceeds
- ---------------------------------------------------
None
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits:
--------
2 Agreement and Plan of Merger *
3(a) Certificate of Incorporation of the Company **
3(b) Bylaws of the Company **
10.1 Employment Agreement between SouthBanc Shares,
Inc. and Robert W. Orr ***
10.2 Employment Agreement between SouthBanc Shares,
Inc. and Thomas C. Hall ***
10.3 Employment Agreement between SouthBanc Shares,
Inc. and Barry C. Visioli ***
10.4 Employment Agreement between Perpetual Bank,
A Federal Savings Bank and Robert W. Orr ***
10.5 Employment Agreement between Perpetual Bank,
A Federal Savings Bank and Thomas C. Hall ***
10.6 Employment Agreement between Perpetual Bank,
A Federal Savings Bank and Barry C. Viosoli ***
10.7 1998 Stock Option Plan ****
10.8 1998 Management Development and Recognition Plan ****
10.9 Supplemental Executive Retirement Agreement with
Robert W. Orr ***
10.10 Supplemental Executive Retirement Agreement with
Thomas C. Hall ***
10.11 Supplemental Executive Retirement Agreement with
Barry C. Visioli ***
27 Financial Data Schedule
* Incorporated by reference to the Company's Current
Report on Form 8-K filed February 22, 2000
** Incorporated by reference to the Company's
Registration Statement on Form S-1, as amended (File
No. 333-42517)
18
*** Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended September 30,
1999.
**** Incorporated by reference to the Company's Definitive
Proxy Statement dated December 18, 1998.
B. Reports on Form 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
SouthBanc Shares, Inc.
/s/ Robert W. Orr
Date: August 14, 2001 ______________________________________
Robert W. Orr
President and Managing Officer
(Duly Authorized Representative)
/s/ Thomas C. Hall
Date: August 14, 2001 ______________________________________
Thomas C. Hall
Chief Financial Officer
19