SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20052
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23751
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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)
(864) 225-0241
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(Registrant's Telephone Number, Including Area Code)
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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 ______
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$0.01 par value of common stock 3,179,256
- ------------------------------- ---------
(Class) (Outstanding at March 31, 1999)
SouthBanc Shares, Inc. and Subsidiary
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
September 30, 1998 (unaudited)................................ 3
Consolidated Statements of Income for the Six Months Ended
March 31, 1999, and the Three Months Ended March 31, 1999
(unaudited)................................................... 4
Consolidated Statements of Stockholders' Equity
for the Year Ended September 30, 1998 and
the Six Months Ended March 31, 1999 (unaudited)............... 5
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 1999 and 1998 (unaudited)..................... 6
Notes to Consolidated Financial Statements (unaudited)............ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended March 31,
1999 and 1998, and the Six Months Ended March 31, 1999 and 1998 .. 11
Liquidity and Capital Resources................................... 15
Capital Compliance................................................ 16
Impact of New Accounting Pronouncements........................... 17
Effect of Inflation and Changing Prices........................... 18
Year 2000 Considerations.......................................... 18
Item 3. Market Risk Disclosure............................................ 20
Part II Other Information
Items:
1. Legal Proceedings............................................. 21
2. Changes in Securities and Use of Proceeds..................... 21
3. Defaults Upon Senior Securities............................... 21
4. Submission of Matters to a Vote of Senior Holders............. 21
5. Other Materially Important Events............................. 21
Signatures........................................................ 22
2
SouthBanc Shares, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
Item I - Financial Statements
March 31 September 30,
- ------------------------------------------------------------------------------------------------------------
1999 1998
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Assets
- ------
Cash and cash equivalents $ 14,316,118 $ 21,197,419
Investment securities available for sale (amortized
cost of $22,309,844 at March 31, 1999,
$23,242,091 at September 30, 1998 22,123,605 23,300,684
Federal Home Loan Bank stock, at cost 4,050,000 3,289,200
Mortgage-backed securities available for sale
(amortized cost of $78,439,266 at
March 31, 1999, and $73,719,144 at
September 30, 1998 78,782,071 73,933,292
Loans receivable, (net of allowance for loan losses of
$2,507,049 at March 31, 1999, and
$2,374,044 at September 30, 1998) 231,760,584 219,896,116
Investment in limited partnership 825,373 825,373
Real estate acquired in settlement of loans 145,862 88,965
Real estate held for development 1,638,408 1,909,394
Premises and equipment, net 6,081,582 6,350,491
Accrued interest receivable
Loans receivable 1,828,675 1,697,058
Mortgage-backed and other securities 570,122 527,823
Cash surrender value of life insurance 7,666,162 7,473,136
Other 2,054,277 2,039,982
------------ ------------
Total Assets $371,842,839 $362,528,933
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $223,688,704 $207,790,775
Advances from the Federal Home Loan Bank ("FHLB") 71,000,000 56,000,000
Securities sold under agreements to repurchase 20,366,481 20,173,933
Advance payments by borrowers for property taxes and
insurance 225,038 333,681
Accrued interest payable 1,389,133 1,418,770
Accrued expenses and other liabilities 1,718,742 2,404,448
------------ ------------
Total Liabilities 318,388,098 288,121,607
------------ ------------
Commitments and contingencies - Note 17
Stockholders' Equity
- --------------------
Common stock ($0.01 par value; authorized 7,500,000 shares; issued and
outstanding 3,179,256 shares at March 31, 1999. $1.00 par value;
authorized 7,500,000 shares; issued and outstanding 4,306,410
shares at September 30, 1998) 43,208 43,064
Additional paid-in capital 57,595,025 57,470,324
Retained earnings, restricted 20,367,610 18,154,380
Treasury stock - at cost (753,710 shares) (22,903,655) -
Accumulated other comprehensive income, net (355,615) 180,009
Indirect guarantee of ESOP debt (666,694) (711,140)
Deferred compensation for Management
Recognition Plan (MRP) (625,138) (729,311)
------------ ------------
Total stockholders' equity 53,454,741 74,407,326
------------ ------------
Total liabilities and stockholders' equity $371,842,839 $362,528,933
============ ============
See accompanying notes to consolidated financial statements.
3
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
For The Six Months Ended For The Three Months
March 31, Ended March 31,
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1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans $9,338,789 $8,191,413 $4,625,625 $4,153,297
Mortgage-backed securities 2,456,344 1,725,999 1,285,106 1,052,481
Other investments 1,217,692 843,692 582,947 482,018
------------- ------------- ------------- -------------
Total interest income 13,012,825 10,761,104 6,493,678 5,687,796
------------- ------------- ------------- -------------
Interest expense:
Interest on deposits:
Transaction accounts 568,267 295,824 303,698 142,603
Passbook accounts 303,264 312,305 147,794 157,215
Certificate accounts 3,609,617 3,937,496 1,771,684 1,935,286
------------- ------------- ------------- -------------
Total interest on deposits 4,481,148 4,545,625 2,223,176 2,235,104
Interest on borrowings 2,295,857 1,352,060 1,220,778 921,202
------------- ------------- ------------- -------------
Total interest expense 6,777,005 5,897,685 3,443,954 3,156,306
------------- ------------- ------------- -------------
Net interest income 6,235,820 4,863,419 3,049,724 2,531,490
Provision for loan losses 160,000 262,500 80,000 174,500
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 6,075,820 4,600,919 2,969,724 2,356,990
------------- ------------- ------------- -------------
Other income:
Loan and deposit account service charges 1,594,820 999,129 716,037 530,532
Gain (Loss) on sale of investments 297,306 90,267 5,271 90,267
Gain (Loss) on sale of real estate acquired
in settlement of loans 23,282 9,936 25,077 16,596
Gain (Loss) on sale of loans, net 81,178 (3,928) 32,437 (15,551)
Gain (Loss) on sale of real estate held
for development 172,674 67,358 136,501 37,365
Gain (Loss) on sale of fixed assets, net - (2,892) - (2,892)
Other 541,831 507,635 291,243 292,960
------------- ------------- ------------- -------------
Total other income 2,711,091 1,667,505 1,206,566 949,277
------------- ------------- ------------- -------------
General and administrative expenses:
Salaries and employee benefits 2,275,273 2,266,171 1,125,204 1,170,765
Occupancy 246,292 231,490 126,770 117,435
Furniture and equipment expense 559,870 505,614 295,628 291,490
FDIC insurance premiums 60,446 61,474 31,258 31,210
Advertising 61,241 121,381 17,999 61,243
Data processing 281,815 205,596 172,357 108,878
Office supplies 139,033 164,647 92,250 97,558
Other 661,694 594,254 305,290 281,519
------------- ------------- ------------- -------------
Total general and administrative expenses 4,285,664 4,150,627 2,166,756 2,160,098
------------- ------------- ------------- -------------
Income before income taxes 4,501,247 2,117,797 2,009,534 1,146,169
Income taxes 1,474,558 725,992 604,769 389,579
------------- ------------- ------------- -------------
Net income $3,026,689 $1,391,805 $1,404,765 $756,590
============= ============= ============= =============
Basic earnings per share $0.83 $0.33 $0.43 $0.18
============= ============= ============= =============
Diluted earnings per share $0.79 $0.32 $0.40 $0.17
============= ============= ============= =============
Weighted average shares outstanding:
Basic 3,626,048 4,184,064 3,288,729 4,184,064
============= ============= ============= =============
Diluted 3,818,896 4,408,841 3,483,601 4,412,576
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
4
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Stockholder's Equity
Year Ended September 30, 1998, and Six Months Ended March 31, 1999 (Unaudited)
Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital Restricted
------------ ------------- ------------- -------------
Balance at September 30, 1997 1,508,873 $1,508,873 $11,651,917 $18,381,766
Net income 1,262,043
Other comprehensive income/(loss)
Unrealized loss on securities, net
Less reclassification adjustment for gains
realized in net income, net
Total other comprehensive
income/(loss)
Comprehensive income
Exercise of stock options 1,317 1,317 31,937
Reduction of ESOP debt
ESOP expense 187,592
Purchase of common stock
for MRP
Earned portion of MRP
Dividends on common stock (1,489,429)
Sale of common stock (less
offering expenses of
of $1,494,488) 2,281,312 22,813 44,108,939
Par Value 514,908 (1,489,939) 1,489,939
------------- ------------- ------------- -------------
Balance at September 30, 1998 4,306,410 43,064 57,470,324 18,154,380
Net income 3,026,689
Other comprehensive income/(loss)
Unrealized loss on securities, net
Less reclassification adjustment for gains
realized in net income, net
Total other comprehensive
income/(loss)
Comprehensive income
Exercise of stock options 14,369 144 56,984
Reduction of ESOP debt
ESOP expense 83,386
Earned portion of MRP
Dividends on common stock (813,459)
Offering expenses for the sale of
common stock (15,669)
Purchase of Treasury Stock (1,141,523)
------------- ------------- ------------- -------------
Balance at March 31, 1999 3,179,256 $43,208 $57,595,025 $20,367,610
============= ============= ============= =============
Accumulated Indirect
Other Guarantee Deferred
Comprehensive of Compensation
Income, Treasury ESOP for
Net of Taxes Stock Debt MRP Total
------------- ------------- ------------- ------------- -----------
Balance at September 30, 1997 $ 188,423 $0 ($804,024) ($325,212) $30,601,743
Net income 1,262,043
Other comprehensive income/(loss)
Unrealized loss on securities, net 108,662 $ 108,662
Less reclassification adjustment for gains
realized in net income, net (117,076) (117,076)
------------- -----------
Total other comprehensive
income/(loss) (8,414) (8,414)
Comprehensive income 1,253,629
Exercise of stock options 33,254
Reduction of ESOP debt 92,884 92,884
ESOP expense 187,592
Purchase of common stock
for MRP (616,558) (616,558)
Earned portion of MRP 212,459 212,459
Dividends on common stock (1,489,429)
Sale of common stock (less
offering expenses of
of $1,494,488) 44,131,752
Par Value
------------- ------------- ------------- ------------- -----------
Balance at September 30, 1998 180,009 $0 (711,140) (729,311) 74,407,326
Net income 3,026,689
Other comprehensive income/(loss)
Unrealized loss on securities, net (339,402) (339,402)
Less reclassification adjustment for gains
realized in net income, net (196,222) (196,222)
------------- -----------
Total other comprehensive
income/(loss) (535,624) (535,624)
Comprehensive income 2,491,065
Exercise of stock options 57,128
Reduction of ESOP debt 44,446 44,446
ESOP expense 83,386
Earned portion of MRP 104,173 104,173
Dividends on common stock (813,459)
Offering expenses for the sale of
common stock (15,669)
Purchase of Treasury Stock (22,903,655) (22,903,655)
------------- ------------- ------------- ------------- -----------
Balance at March 31, 1999 ($355,615) ($22,903,655) ($666,694) ($625,138) $53,454,741
============= ============= ============= ============= ===========
5
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999, and 1998 (Unaudited)
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1999 1998
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Cash flows from operating activities:
Net income $3,026,689 $1,391,805
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 435,928 427,681
Amortization (accretion), net (447,877) (211,245)
Provision for loan losses 160,000 262,500
(Earnings) on investment in
limited partnership - (124,545)
Gain on sale of investments, net (297,306) (90,267)
Gain on sale of real estate (23,282) (9,936)
Gain Loss on sale of loans, net (81,178) 3,928
Gain on sale of real estate held
for development (172,674) (67,358)
Loss on sale of fixed assets - 2,892
Deferred compensation 187,559 194,564
Increase in accrued interest
receivable and other assets (188,211) (1,708,447)
Increase (Decrease) in other
liabilities (715,343) 2,359,571
------------ ------------
Net cash provided by operating activities 1,884,305 2,431,143
------------ ------------
Cash flows from investing activities:
Increase in loans receivable, net (5,959,504) (12,224,459)
Purchases of loans receivable (19,588,942) (23,961,875)
Purchase of mortgage-backed securities (34,802,010) (56,793,971)
Purchases of investment securities (5,052,771) (8,742,151)
Purchases of investments in limited partnership - (181,125)
Purchase of life insurance - (1,386,538)
Purchase of FHLB stock (860,800) (1,113,500)
Purchase of premises and equipment (167,019) (719,134)
Sales of loans receivable 13,287,087 18,668,628
Proceeds from redemption of FHLB stock 100,000 163,500
Principal repayments on mortgage-backed securities 20,025,367 6,509,856
Proceeds from sale of mortgage-backed securities,
available for sale 9,384,356 9,798,760
Proceeds from maturities of investment securities 500,000 3,951,424
Proceeds from sale of investment securities,
available for sale 6,289,891 -
Proceeds from sale of real estate owned 284,454 175,949
Proceeds from sale of real estate held for
development 717,741 286,021
Proceeds from sale of premises and equipment - 17,800
Capital improvements of real estate held for
development (274,081) (54,057)
------------ ------------
Net cash used in investing activities (16,116,231) (65,604,872)
------------ ------------
Continued
6
SouthBanc Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998 (Unaudited)
- ----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in deposit accounts 15,897,929 10,867,804
Proceeds from FHLB Advances 60,000,000 74,000,000
Repayment of FHLB Advances (45,000,000) (70,029,536)
Proceeds from securities sold under agreements
to repurchase 192,548 20,000,000
Proceeds from the sale of stock subscriptions - 96,398,970
Purchase of Treasury stock (22,903,655) -
Exercise of stock options 57,128 -
Payment of stock offering costs (15,669) -
Purchase of stock for MRP - (612,448)
Repayments of ESOP loan 44,446 48,438
Dividends paid on common stock (813,459) (776,317)
Decrease in advance payments by borrowers
for property taxes and insurance (108,643) (169,052)
------------- -------------
Net cash provided by financing activities 7,350,625 129,727,859
Net increase (decrease) in cash and cash equivalents (6,881,301) 66,554,130
Cash and cash equivalents, beginning of year 21,197,419 13,499,332
------------- -------------
Cash and cash equivalents, end of year $ 14,316,118 $ 80,053,462
============= =============
Supplemental disclosures:
Cash paid during the year for
Interest $ 6,710,679 $ 5,756,302
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Taxes $ 1,450,000 $ 687,750
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Noncash investing activities:
Additions to real estate acquired in settlement of loans $ 318,069 $ 120,208
============= =============
Loans receivable exchanged for mortgage-backed
securities - $ 588,981
============= =============
Change in unrealized net gain (loss) on securities
available for sale, net of tax ($535,624) $ 123,164
============= =============
Increase (decrease) in Employee Stock
Ownership Plan debt guaranteed by the
Bank $ 44,446 $ 48,438
============= =============
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 March 31, 1999, are not necessarily indicative of the
results that may be expected for the entire year. These consolidated
financial statements do not include all disclosures required by
generally accepted accounting principles and should be read in
conjunction with the Company's audited consolidated financial
statements and related notes for the year ended September 30, 1998.
2. Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include
the accounts of the Company, Perpetual Bank, A Federal Savings Bank,
"Savings Bank", and the Savings Bank's wholly owned subsidiaries,
Mortgage First Service Corporation and United Service Corporation, and
United Service Corporation's wholly owned subsidiary, United Investment
Services.
United Service Corporation is a wholly-owned subsidiary of the Savings
Bank. At March 31, 1999, United Service had assets of $2.7 million.
United Service is involved in two residential and two commercial real
estate development projects.
All significant intercompany items and transactions have been
eliminated in consolidation.
3. Payment of Dividends
--------------------
The payment of dividends by the Company depends primarily on the
ability of the Savings Bank to pay dividends to the Company. The
payment of dividends by the Savings Bank is subject to regulation by
the Office of Thrift Supervision ("OTS"). The Savings Bank may not
declare or pay a cash dividend if the effect thereof would cause the
capital of the Savings Bank to be reduced below regulatory capital
requirements imposed by the OTS or below the liquidation account
established by the Savings Bank in connection with the conversion of
the Savings Bank's former mutual holding company (SouthBanc Shares,
M.H.C.) from the mutual to stock form of organization.
The Company's Board of Directors declared a cash dividend of $.12 per
share to its shareholders during the quarter ended March 31, 1999,
payable to shareholders of record as of April 5, 1999.
4. Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public
market. This standard 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
8
4. Earnings Per Share (Continued)
------------------------------
basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
The dilutive effect of options outstanding under the Company's stock
option plan is reflected in diluted earnings per share by application
of the treasury stock method. SFAS No. 128 is effective for reporting
periods ending after December 15, 1997. The Company adopted SFAS No.
128 during the quarter ended December 31, 1997. Accordingly, all prior
period earnings per share have been restated for the purchase of
Treasury Stock.
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND
DILUTED EPS COMPUTATIONS:
FOR THE QUARTER ENDED MARCH 31, 1999
-------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
BASIC EPS $1,404,765 3,288,729 $0.43
Effect of Diluted Securities:
Stock Options 0 89,518
ESOP 0 105,354
---------- ---------
Diluted EPS $1,404,765 3,483,601 $0.40
FOR THE QUARTER ENDED MARCH 31, 1998
-------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
BASIC EPS $756,590 4,184,064 $0.18
Effect of Diluted Securities:
Stock Options 0 109,813
ESOP 0 118,699
---------- ---------
Diluted EPS $756,590 4,412,576 $0.17
9
4. Earnings Per Share (Continued)
------------------------------
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND
DILUTED EPS COMPUTATIONS:
FOR THE SIX MONTHS ENDED MARCH 31, 1999
---------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
BASIC EPS $3,026,689 3,626,048 $0.83
Effect of Diluted Securities:
Stock Options 0 87,494
ESOP 0 105,354
---------- ----------
Diluted EPS $3,026,689 3,818,896 $0.79
FOR THE SIX MONTHS ENDED MARCH 31, 1998
---------------------------------------
INCOME SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
BASIC EPS $1,391,805 4,184,064 $0.33
Effect of Diluted Securities:
Stock Options 0 106,078
ESOP 0 118,699
----------- ----------
Diluted EPS $1,391,805 4,408,841 $0.32
10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at March 31, 1999 and September 30, 1998
Total assets increased 2.57% or $9.3 million to $371.8 million at March 31,
1999, from $362.5 million at September 30, 1998, as a result of an increase in
loans receivable and mortgage-backed securities available for sale. Loans
receivable increased 5.41% or $11.9 million to $231.8 million at March 31, 1999,
from $219.9 million at September 30, 1998. The increase in loans receivable
resulted from growth in first mortgage residential which increased $5.2 million
to $136.3 million at March 31, 1999, from $131.1 million at September 30, 1998,
commercial real estate which increased $4.9 million to $40.0 million at March
31, 1999, from $35.1 million at September 30, 1998, commercial loans which
increased $1.4 million to $12.6 million at March 31, 1999, from $11.2 million at
September 30, 1998, and consumer loans which increased $0.4 million to $23.2
million at March 31, 1999, from $22.8 million at September 30, 1998.
Cash and cash equivalents decreased 32.55% or $6.9 million to $14.3 million at
March 31, 1999, from $21.2 million at September 30, 1998. These funds were used
to fund the common stock repurchase program. The Company received regulatory
approval to repurchase up to 26.53% (or 1,141,523 shares) of its outstanding
shares of common stock. The repurchases commenced on November 2, 1998, and were
completed by March 10, 1999, at an average cost of $20.06 per share.
Investment securities available-for-sale decreased 5.15% or $1.2 million to
$22.1 million at March 31, 1999, from $23.3 million at September 30, 1998. The
Company sold $1.9 million of an equity investment and $1.0 million of a trust
preferred security, and purchased $696,000 of an equity investment and $1.0
million of U. S. Treasury rate maturing in March 2000, yielding 4.91%. The
Company also purchased $3.3 million of a Federal Home Loan Mortgage Corporation
note yielding 6.10% that was called in February 1999.
Mortgage-backed securities available-for-sale increased 6.63% or $4.9 million to
$78.8 million at March 31, 1999, from $73.9 million at September 30, 1998. The
Company purchased $2.0 million of collateralized mortgage obligations with a
fixed coupon of 7.00% and purchased $32.8 million of Government National
Mortgage Association (GNMA) fixed rate mortgage-backed securities with a coupon
of 7.00% maturing in thirty years. The Company sold $9.4 million GNMA adjustable
rate mortgage-backed securities with coupon rates between 5.50% and 6.50%
maturing in thirty years. Principal repayments on mortgage-backed securities
were $20.0 million.
The investment in the limited partnership at March 31, 1999 remains at its
December 31, 1998 and September 30, 1998 level based upon an ongoing review and
analysis of market and cash flow method valuations. Future adjustments to the
valuation reserve will be recorded as deemed necessary.
Real estate held for development decreased $0.3 million to $1.6 million at March
31, 1999, from $1.9 million at September 30, 1998. United Service Corporation
sold twenty single-family residential lots in The Meadows Subdivision at a cost
of $622,000. Eight lots remain available for sale in Phase I in The Meadows
residential subdivision. United Service Corporation sold one five-acre tract of
land in the commercial real estate in Perpetual Square at a cost of $160,000.
One tract of 8.0 acres and another tract of 5.0 acres remain available for sale
in Perpetual Square.
Deposits increased 7.65% or $15.9 million to $223.7 million at March 31, 1999,
from $207.8 million at September 30, 1998. Non interest bearing checking
accounts increased 13.16% or $2.0 million to $17.2 million at March 31, 1999,
from $15.2 million at September 30, 1998. Interest bearing checking accounts
increased 27.65% or $9.9 million to $45.7 million at March 31, 1999, from $35.8
million at September 30, 1998, as the Company continues to offer checking
products that are more aggressively priced than those offered by competitors.
Statement savings accounts decreased 0.04% or $100,000 to $25.1 million at March
31, 1999, from $25.2 million at September 30, 1998. Certificates of deposits
increased 3.19% or $4.2 million to $135.8 million at March 31, 1999, from $131.6
million at September 30, 1998.
11
Advances from the Federal Home Loan Bank increased 26.79% or $15.0 million to
$71.0 million at March 31, 1999, from $56.0 million at September 30, 1998. The
advances were used to fund the common stock repurchase program and to fund loan
originations and loan purchases from Mortgage First Service Corporation, a
subsidiary of the Savings Bank.
Stockholders equity decreased 28.09% or $20.9 million to $53.5 million at March
31, 1999, from $74.4 million at September 30, 1998. Common stock repurchased
through the common stock repurchase program is recorded on the Company's balance
sheet as Treasury Stock, a contra-equity account, which was $22.9 million at
March 31, 1999. Retained income was offset by dividends paid in the amount of
$813,459. Subsequent to quarter end, the Company received regulatory approval to
purchase up to 10% (or 317,270 shares) of its outstanding shares of common
stock. The repurchases commenced on April 14, 1999, and are expected to be
completed by October 14, 1999.
Comparison of Operating Results for the Three Months Ended March 31, 1999, and
1998
Net Income
- ----------
Net income for the three months ended March 31, 1999, increased 85.60% to $1.4
million or $0.43 basic earnings per share and $0.40 diluted earnings per share,
compared to no change or $0.18 basic earnings per share and $0.17 diluted
earnings per share for the same three months a year ago.
Net Interest Income
- -------------------
Net interest income increased $519,000 to $3.1 million for the three months
ended March 31, 1999, from $2.5 million for the three months ended March 31,
1998. Total interest income increased 14.17% or $806,000 to $6.5 million for the
three months ended March 31, 1999, from $5.7 million for the three months ended
March 31, 1998, due primarily to a higher average balance of outstanding loans
which increased $40.3 million or 20.89% to an average of $233.2 million yielding
7.94% for the three months ended March 31, 1999, from $192.9 million yielding
8.61% for the three months ended March 31, 1998. Interest income on
mortgage-backed securities increased 22.15% or $233,000 to $1.3 million for the
three months ended March 31, 1999, from $1.1 million for the three months ended
March 31, 1998, as the average balance of mortgage-backed securities increased
21.73% or $14.5 million. Interest income on other investments increased 20.95%
or $101,000 as the average balance of investment securities and interest bearing
deposits increased 19.87% or $6.2 million.
Interest Expense
- ----------------
Interest expense on deposits decreased 0.54% or $12,000 as the average cost of
deposits decreased to 4.04% for the three months ended March 31, 1999, from
4.33% for the three months ended March 31, 1998, and the average outstanding
balance increased 6.78% or $14.0 million. Interest on borrowings increased
32.57% or $300,000 to $1.2 million for the three months ended March 31, 1999,
from $921,000 for the three months ended March 31, 1998, as the average
borrowings increased 30.67% or $22.3 million to $95.0 million for the three
months ended March 31, 1999, from $72.7 million for the three months ended March
31, 1998.
Provisions for Loan Losses
- --------------------------
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
management's best estimate of inherent loan losses. In determining the adequacy
of the allowance for loan losses, management evaluates various factors including
the market value of the underlying collateral, growth, and composition of the
loan portfolio, the relationship of the allowance for loan losses to outstanding
loans, loss experience, delinquency trends and economic conditions. Management
evaluates the carrying value of loans periodically, and the allowance for loan
losses is adjusted accordingly.
The provision for loan losses decreased 54.15% or $94,500 to $80,000 for the
three months ended March 31, 1999, from $174,500 for the three months ended
March 31, 1998, as the outstanding loan balance decreased 1.35% or $3.2
12
million for the three months ended March 31, 1999, compared to an increase of
3.73% or $7.1 million for the three months ended March 31, 1998. The allowance
for loan losses to total loans was 1.07% at March 31, 1999, and at September 30,
1998.
Non-performing assets at March 31, 1999, were $2.1 million consisting of
$471,000 of residential mortgage construction loans, $146,000 of real estate
acquired in settlement of loans, $490,000 of single family residential loans,
$779,000 of a commercial real estate loan, $49,000 of land loans, $126,000 of
commercial loans, and $75,000 of consumer loans.
Non-performing assets at September 30, 1998, were $1.3 million consisting of
$383,000 of residential mortgage construction loans, $90,000 of real estate
acquired in settlement of loans, $499,000 of single family residential loans,
$35,000 of commercial real estate loans, $31,000 of land loans, $206,000 of
commercial loans, and $20,000 of consumer loans.
Other Income
- ------------
Total other income increased 27.19% or $258,000 to $1.2 million for the three
months ended March 31, 1999, from $949,000 for the three months ended March 31,
1998. Loan and deposit service charges increased $185,000 to $716,000 from
$531,000 for the three months ended March 31, 1998, as a result of an increase
in the number of checking accounts and changes to the fee structure of deposit
accounts. Gain on sale of investments was $5,000 for the three months ended
March 31, 1999, compared to a gain of $90,000 for the three months ended March
31, 1998. Gain or loss on sale of real estate acquired in settlement of loans
was a gain of $25,000 for the three months ended March 31, 1999, compared to a
gain of $17,000 for the three months ended March 31, 1998.
Gain on sale of loans was $32,000 for the three months ended March 31, 1999,
compared to a loss of $16,000 for the three months ended March 31, 1998. Gain on
sale of real estate held for development was $136,000 for the three months ended
March 31, 1999, as five residential lots were sold by the United Service
Corporation in The Meadows residential subdivision and one five-acre tract of
commercial real estate sold in Perpetual Square compared to $37,000 for the
three months ended March 31, 1998, as four residential lots were sold in The
Meadows and no commercial real estate was sold in Perpetual Square. Other income
decreased $2,000 to $291,000 for the three months ended March 31, 1999, compared
to $293,000 for the three months ended March 31, 1998.
General and Administrative Expense
- ----------------------------------
Salaries and employee benefits decreased 3.93% or $46,000 to $1.1 million for
the three months ended March 31, 1999, from $1.2 million for the three months
ended March 31, 1998, as staff realignments in an effort to reduce costs
resulted in a decrease of fifteen employees to 108 employees for the three
months ended March 31, 1999, from 123 for the three months ended March 31, 1998.
Office occupancy increased 8.55% or $10,000 to $127,000 for the three months
ended March 31, 1999, from $117,000 for the three months ended March 31, 1998,
due to increases in property taxes and building maintenance. Furniture and
equipment expenses increased 1.72% or $5,000 to $296,000 for the three months
ended March 31, 1999, from $291,000 for the three months ended March 31, 1998.
Advertising decreased 70.49% or $43,000 to $18,000 for the three months ended
March 31, 1999, from $61,000 for the three months ended March 31, 1998, as a
result of winding down the Free Checking Advertising Campaign that began in
October 1994. Data processing increased 57.80% or $63,000 to $172,000 for the
three months ended March 31, 1999, from $109,000 for the three months ended
March 31, 1998, as a result of increased volume and cost of ATM and debit card
processing and Year 2000 computer and computer software testing costs of
$29,000. Office supplies decreased 6.12% or $6,000 to $92,000 for the three
months ended March 31, 1999, from $98,000 for the three months ended March 31,
1998, due to a decrease in the purchase of data processing supplies. Other
operating expenses increased 8.16% or $23,000 to $305,000 for the three months
ended March 31, 1999, from $282,000 for the three months ended March 31, 1998,
due to consultant fees for sales training, staff realignment and product fee
enhancements.
13
Income Taxes
- ------------
Income taxes increased 55.13% or $215,000 to $605,000 for the three months ended
March 31, 1999, from $390,000 for the three months ended March 31, 1998. This
was due to an increase in income before taxes of 75.39% or $864,000 to $2.0
million from $1.1 million for the three months ended March 31, 1999, and 1998,
respectively.
Comparison of Operating Results for the Six Months Ended March 31, 1999, and
1998
Net Income
- ----------
Net income for the six months ended March 31, 1999, increased 117.46% to $3.0
million or $0.83 basic earnings per share and $0.79 diluted earnings per share,
compared to $1.4 million or $0.33 basic earnings per share and $0.32 diluted
earnings per share for the same six months a year ago.
Net Interest Income
- -------------------
Net interest income increased $1.4 million to $6.2 million for the six months
ended March 31, 1999, from $4.9 million for the six months ended March 31, 1998.
Total interest income increased 20.93% or $2.3 million to $13.0 million for the
six months ended March 31, 1999, from $10.8 million for the six months ended
March 31, 1998, due primarily to a higher average balance of outstanding loans
which increased $47.5 million or 25.42% to an average of $234.3 million yielding
7.97% for the six months ended March 31, 1999, from $186.8 million yielding
8.77% for the six months ended March 31, 1998. Interest income on
mortgage-backed securities increased 42.29% or $730,000 to $2.5 million for the
six months ended March 31, 1999, from $1.7 million for the six months ended
March 31, 1998, due primarily to a higher average balance of mortgage-backed
securities available for sale which increased $23.5 million or 43.68% to an
average of $77.3 million yielding 6.36% for the six months ended March 31, 1999,
from $53.8 million yielding 6.42% for the six months ended March 31, 1998.
Interest income on other investments increased 44.33% or $374,000 as the average
balance of investment securities and interest bearing deposits increased 45.80%
or $12.0 million.
Interest Expense
- ----------------
Interest expense on deposits decreased 1.43% or $65,000 as the average cost of
deposits decreased to 4.13% for the six months ended March 31, 1999, from 4.46%
for the six months ended March 31, 1998, and the average outstanding balance
increased 6.33% or $12.9 million. Interest on borrowings increased 69.82% or
$944,000 to $2.3 million for the six months ended March 31, 1999, from $1.4
million for the six months ended March 31, 1998, as the average borrowings
increased 73.05% or $37.4 million to $88.6 million for the six months ended
March 31, 1999, from $51.2 million for the six months ended March 31, 1998.
Provision For Loan Losses
- -------------------------
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered adequate by management 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 39.05% or $102,500 to $160,000 for the
six months ended March 31, 1999, from $262,500 for the six months ended March
31, 1998, as the outstanding loan balance increased 5.08% or $11.3 million for
the six months ended March 31, 1999, compared to an increase of 9.13% or $16.5
million for the six months ended March 31, 1998.
14
Other Income
- ------------
Total other income increased 62.53% or $1.0 million to $2.7 million for the six
months ended March 31, 1999, from $1.7 million for the six months ended March
31, 1998. Loan and deposit service charges increased $596,000 to $1.6 million
for the six months ended March 31, 1999, from $999,000 for the six months ended
March 31, 1998, as a result of an increase in the number of checking accounts
and changes to the fee structures of deposit accounts. Gain on sale of
investments was $297,000 for the six months ended March 31, 1999, from the
profit of $292,000 on the sale of an equity investment, compared to a gain of
$90,000 for the six months ended March 31, 1998. Gain on sale of real estate
acquired in settlement of loans was a gain of $23,000 for the six months ended
March 31, 1999, compared to a gain of $10,000 for the six months ended March 31,
1998. Gain (loss) on sale of loans, net, was a gain of $81,000 for the six
months ended March 31, 1999, compared to a loss of ($4,000) for the six months
ended March 31, 1998. Gain on sale of real estate held for development was
$173,000 for the six months ended March 31, 1999, as six residential lots were
sold by the United Service Corporation in The Meadows residential subdivision
and one five-acre tract of commercial real estate was sold in Perpetual Square
compared to a gain of $67,000 for the six months ended March 31, 1998, as two
residential lots were sold in The Meadows and one eight-acre tract of commercial
real estate was sold in Perpetual Square. Other income increased $34,000 to
$542,000 for the six months ended March 31, 1999, compared to $508,000 for the
six months ended March 31, 1998.
General and Administrative
- --------------------------
General and administrative expenses increased 3.25% or $135,000 to $4.3 million
for the six months ended March 31, 1999, from $4.2 million for the six months
ended March 31, 1998. Salaries and employee benefits increased 0.40% or $9,000
due to normal salary increases, which were offset by staff realignments in an
effort to reduce costs, which resulted in a decrease of fifteen employees to 108
employees for the six months ended March 31, 1999, compared to 123 employees for
the six months ended March 31, 1998. Office occupancy increased 6.49% or $15,000
to $246,000 for the six months ended March 31, 1999, from $231,000, due to
increases in property taxes and building maintenance. Furniture and equipment
expenses increased 10.67% or $54,000 to $560,000 for the six months ended March
31, 1999, from $506,000 for the six months ended March 31, 1998, due to upgrades
in data processing equipment and software resulting in an increase of
depreciation expense of $15,000 and an increase in service contracts of $41,000.
Advertising decreased 49.59% or $60,000 to $61,000 for the six months ended
March 31, 1999, from $121,000 for the six months ended March 31, 1998, as a
result of winding down the Free Checking Advertising Campaign that began in
October 1994. Data processing increased 36.89% or $76,000 to $282,000 for the
six months ended March 31, 1999, from $206,000 for the six months ended March
31, 1998, as a result of increased volume and cost of ATM and debit card
processing, and Year 2000 computer and computer software testing costs of
$30,000. Office supplies decreased 15.76% or $26,000 to $139,000 for the six
months ended March 31, 1999, from $165,000 for the six months ended March 31,
1998, due to a decrease in the purchase of data processing supplies. Other
operating expenses increased 11.45% or $68,000 to $662,000 for the six months
ended March 31, 1999, from $594,000 for the six months ended Mach 31, 1998, due
to the initial Delaware franchise tax expense of $39,000 and consultant fees for
sales training, staff realignment, and product fee enhancements.
Income Taxes
- ------------
Income taxes increased 103.17% or $749,000 to $1,475,000 for the six months
ended March 31, 1999, from $726,000 for the six months ended March 31, 1998.
This was due to an increase in income before taxes of 112.51% or $2.4 million to
$4.5 million from $2.1 million for the six months ended March 31, 1999, and
1998, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, repayment of loan
principal, and repayment of mortgage backed securities and collateralized
mortgage obligations, and, to a lesser extent, maturities of investment
securities, and short-term investments and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, general
economic conditions, and competition. The Company attempts to price its deposits
to meet its asset/liability objectives consistent with local market conditions.
Excess balances are invested in overnight funds. In addition, the
15
Company is eligible to borrow funds from the FHLB of Atlanta. Under OTS
regulations, a member thrift institution is required to maintain an average
daily balance of liquid assets (cash, certain time deposits and savings
accounts, bankers' acceptances, and specified U. S. government, state or federal
agency obligations and certain other investments) equal to a monthly average of
not less than a specified percentage of its net withdrawable accounts plus
short-term borrowings. This liquidity requirement, which is currently 4.0%, may
be changed from time to time by the OTS to any amount within the range of 4.0%
to 10.0%, depending upon economic conditions and the savings flow of member
associations. Monetary penalties may be imposed for failure to meet liquidity
requirements. The liquidity of the Company at March 31, 1999, was 25.86%.
The primary investing activity of the Company is lending. During the six months
ended March 31, 1999, the Company originated $61.3 million of loans, $7.5
million of which were sold. The Company also purchased $19.6 million of loans.
The retained originations were primarily funded by increases in deposits,
principal repayments of loans and mortgage-backed securities and collateralized
mortgage obligations, Federal Home Loan Bank Advances, and reverse repurchase
agreements.
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 March 31, 1999, the
Company had outstanding commitments to originate loans of approximately $54.5
million.
Certificates of deposit scheduled to mature in one year or less at March 31,
1999, totaled $114.3 million. Based upon management's experience and familiarity
with the customers involved and the Company's pricing policy relative to that of
its perceived competitors, management believes that a significant portion of
such deposits will remain with the Company.
The Company plans to repurchase up to 317,270 shares of its common stock before
October 14, 1999. The Company intends to fund the repurchase program through
cash on hand and/or liquidation of some of its other interest earning assets.
Capital Compliance
- ------------------
The Company is not subject to any regulatory capital requirements. The Savings
Bank's actual capital and ratios as required by the OTS, as well as those
required to be considered well capitalized according to the Prompt Corrective
Action Provisions are presented in the following table. As of March 31, 1999,
the most recent notification from the OTS categorized the Savings Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Savings Bank must maintain minimum total
risk-based, Tier I risked-based, and Tier I core ("leverage") ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Savings Bank's category.
16
Capital Compliance Continued
- ----------------------------
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 March 31, 1999:
- --------------------
Tangible Capital (To Total Assets) $38,195 10.69% $ 5,393 1.50% $ - -%
Core Capital (To Total Assets) $38,195 10.69% $14,381 4.00% $17,976 5.00%
Tier I Capital (To Risk-Based Assets) $38,195 17.35% - - $13,207 6.00%
Risk-Based Capital (To Risk-Based
Assets) $40,478 18.39% $17,609 8.00% $22,011 10.00%
If the Savings Bank were to fail to meet the minimum capital requirements, it
will be required to file a written capital restoration plan with regulatory
agencies and would be subject to various mandatory and discretionary
restrictions on its operations.
Impact of New Accounting Pronouncements
- ---------------------------------------
Reporting Comprehensive Income
- ------------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. The purpose of SFAS 130 is to address
concerns over the practice of reporting elements of comprehensive income
directly in equity. This SFAS requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with the
other financial statements. This statement is effective for periods beginning
after December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. The Company adopted
the provisions of this SFAS beginning with the quarter ending December 31, 1998,
and has included the appropriate components in the Company's Consolidated
Statement of Stockholders' Equity.
Disclosures about Segments of an Enterprise and Related Information
- -------------------------------------------------------------------
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in June 1997. This statement applies to all public
entities. The provisions of SFAS 131 require certain disclosures regarding
material industry segments within an entity. Due to the Company's structure,
SFAS 131 is not expected to have a material impact. The Company plans to adopt
this SFAS for the period ending September 30, 1999.
Employers' Disclosures about Pensions and Other Postretirement Benefits
- -----------------------------------------------------------------------
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The new statement revises required
disclosures for employee benefit plans, but does not change the measurement or
recognition of such plans. While the new standard requires some additional
information about benefit plans, it helps preparers of financial statements by
eliminating certain disclosures and by standardizing the disclosures for
pensions and other Post-retirement benefits to the extent practicable. SFAS 132
supersedes the disclosure requirements in SFAS 87, "Employers' Accounting for
Pensions", SFAS 88, "Employers Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and SFAS 106
"Employers Accounting for Postretirement Benefits Other than Pensions". The new
disclosures are effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS will not have a material impact on the financial statements
of the Company due to the disclosure only requirements.
17
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new accounting and reporting requirements for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. The standard requires all derivatives to be
measured at fair value and recognized as either assets or liabilities in the
statement of condition. Under certain conditions, a derivative may be
specifically designated as a hedge. Accounting for the changes in fair value of
a derivative depends on the intended use of the derivative. Adoption of this
standard is required for all fiscal years and quarters beginning after June 15,
1999. Because the Company has a limited use of derivative transactions,
management does not expect that this standard would have a material effect on
the Company's financial statements.
Accounting for Mortgage-Backed Securities Retained after the Securitization of
- ------------------------------------------------------------------------------
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
- -------------------------------------------------------------
In October 1998, FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective for the first fiscal quarter
beginning after December 15, 1998. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. The adoption of this standard is not expected to have a
material effect on the Company's financial statements.
Effect of Inflation and Changing Prices
- ---------------------------------------
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP") which require the measurement of financial position and
operating results in terms of historical dollars, without considering the
changes in relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
Year 2000 Considerations
- ------------------------
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be effected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company's Year 2000 Committee consists of the Information Services Steering
Committee, consisting of a representative of each user department. The committee
coordinator makes a quarterly or, as major events are completed, progress report
to the Board of Directors. The committee has developed and is implementing a
comprehensive plan to make all information and non-information technology assets
Year 2000 compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on Year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Company's Year 2000 preparedness. Additional emphasis will be
placed on customer awareness during the third and fourth quarters of
1999 as the end of the year approaches.
18
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as
of September 30, 1997.
3. Renovation - Review of vendor and service providers responses to the
Company's Year 2000 inquiries and development of a follow-up plan and
timeline. This phase was completed as of December 31, 1998.
4. Validation - Testing all systems and third-party vendors for Year 2000
compliance. The Company is currently in this phase of its plan.
Testing was successfully completed on mission critical systems as of
December 10, 1998. Baseline, future date and user acceptance tests
were performed at a test site, using six critical dates, covering all
applications used by the Company. The Company is currently in the
process of testing third party vendors to prove compliance. In the
event that testing reveals that the third party systems are not Year
2000 compliant, the Company will either transfer to other systems that
are Year 2000 compliant or provide additional resources to resolve the
Year 2000 issues. Third party vendors were identified by software
inventory and department interviews conducted by the Year 2000
coordinator. Other parties whose Year 2000 compliance may effect the
Company include the Federal Home Loan Bank of Atlanta, brokerage
firms, the Company's ATM network provider, and the Company's pension
plan administrator. These third parties have indicated their
compliance or intended compliance. Where it is possible to do so, the
Company has scheduled testing with these third parties. Where testing
is not possible, the Company will rely on certifications from vendors
and service providers. The responses from third party vendors are
monitored and tracked using a computer tracking system.
5. Implementation - Replacement or repair of non-compliant technology. As
the Company progresses through the validation phase, the Company
expects to determine necessary remedial actions and provide for their
implementation. The Company has already upgraded to a Year 2000
compliant teller system and has verified the Year 2000 compliance of
its computer hardware and other equipment. The Company's plan provides
for Year 2000 readiness to be completed by June 30, 1999.
The Company estimates its total cost to replace computer equipment, software
programs or other equipment that were not Year 2000 compliant to be
approximately $150,000, of which $85,500 has been incurred as of March 31, 1999.
System maintenance or modification costs are charged to expense as incurred,
while the cost of new hardware, software or other equipment is capitalized and
amortized over their estimated useful lives. The Company does not separately
track the internal costs and time that its own employees spend on Year 2000
issues, which are principally payroll costs.
Because the Company depends substantially on its computer systems and those of
third parties, the failure of these systems to be Year 2000 compliant could
cause substantial disruption of the Company's business and could have a material
adverse financial impact on the Company. Failure to resolve Year 2000 issues
presents the following risks to the Company which the Company believes is the
most reasonably likely worst - case scenario:
1. The Company could lose customers to other financial institutions,
resulting in a loss of revenue, if the Company's in-house
computer system is unable to properly process customer
transactions;
2. Governmental agencies, such as the Federal Home Loan Bank, and
correspondent institutions could fail to provide funds to the
Company, which could materially impair the Company's liquidity
and affect the Company's ability to fund loans, and deposit
withdrawals;
3. Concern on the part of depositors that Year 2000 issues could
impair access to their deposit account balances could result in
the Company experiencing deposit outflows prior to December 31,
1999; and
19
4. The Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems
would have otherwise performed. Management believes that it is
not possible to estimate the potential lost revenue due to the
Year 2000 issue, as the extent and longevity of any potential
problem cannot be predicted.
The Company has formulated a company-wide contingency plan covering all possible
scenarios, and contingency testing is expected to begin during the third quarter
of 1999. Since all mission critical systems have passed testing, the worst case
scenario would be the loss of power to the building housing the mainframe
computer. The leasing of a generator to restore power is under consideration.
Because substantially the Company's entire loan portfolio consists of loans to
individuals rather than commercial enterprises, management believes that Year
2000 issues will not impair the ability of the Company's borrowers to repay
their debt. An evaluation of the Company's commercial portfolio has been made
and a determination made that in the event of losses from the commercial loans
that could possibly be affected by Year 2000 failure, it would not have a
significant impact on the Company's financial condition at this particular time.
Each commercial borrower must complete a Y2K work sheet and business plan
referencing their Year 2000 plan no later than June 30, 1999.
The Company has no plans to contract with an independent or outside firm to
conduct an analysis of its Year 2000 exposure. The Company's Year 2000 risk
analysis and exposure are currently being assessed by the internal auditor and
Year 2000 coordinator.
There can be no assurances that the Company's Year 2000 plan will effectively
address the Year 2000 issue, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of the Company or its third-party vendors and service providers to
be Year 2000 compliant will not have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 3 - Market Risk Disclosure
- -------------------------------
There have been no material changes to the market risk information set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Market Risk and Asset Liability Management" in the Company's
Annual Report dated September 30, 1998.
20
PART II
Item 1. Legal Proceedings
- ----------------------------
The Company is not a party to any legal proceedings at this time. The Savings
Bank from time to time and currently is involved as plaintiff or defendant in
various legal actions incident to its business. These actions are not believed
to be material, either individually or collectively, to the consolidated
financial condition or results of operations of the Savings Bank.
Item 2. Changes in Securities and Use of Proceeds
- ----------------------------------------------------
None
Item 3. Defaults Upon Senior Securities
- ------------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------
None
Item 5. Other Information
- -----------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------
A. Exhibits:
--------
3(a) Certificate of Incorporation of the Company *
3(b) Bylaws of the Company *
10(a) Employment Agreement with Robert W. Orr **
10(b) Employment Agreement with Thomas C. Hall **
10(c) Employment Agreement with Barry C. Visioli **
10(d) Company's 1998 Stock Option Plan ***
10(e) Company's Management Recognition and
Development Plan ***
27 Financial Data Schedule
* Incorporated by reference to the Company's
Registration Statement on Form S-1, as amended (File
No. 333-42517).
** Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1998.
*** Incorporated by reference to the Company's Definitive
Proxy Statement dated December 18, 1998.
B. Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
SouthBanc Shares, Inc.
Date: May 11, 1999 /s/ Robert W. Orr
--------------------------------------
Robert W. Orr
President and Managing Officer
(Duly Authorized Representative)
Date: May 11, 1999 /s/ Thomas C. Hall
--------------------------------------
Thomas C. Hall
Chief Financial Officer
22