SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission Number: 0-23751
SOUTHBANC SHARES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2361245
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
907 N. Main Street, Anderson, South Carolina 29621-5526
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 225-0241
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
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(Title of Class)
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. YES X NO _____
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Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained herein, and will not be
contained, to the best of registrant's knowledge, in any definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
As of December 1, 1999, there were issued and outstanding 3,125,288 shares
of the Registrant's Common Stock. The registrant's voting stock is traded over-
the-counter and is listed on the Nasdaq National Market under the symbol "SBAN."
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based on the closing sales price of the Registrant's common stock as
quoted on the Nasdaq National Market on December 1, 1999 of $21.50, was
approximately $67.2 million. For the purposes of this calculation, officers and
directors of the registrant are considered nonaffiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1999 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders (Part III).
This report contains certain "forward-looking statements" concerning the
future operations of SouthBanc Shares Inc. Forward-looking statements are used
to describe future plans and strategies, including expectations of future
financial results. Management's ability to predict results or the effect of
future plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in the
market area in which SouthBanc Shares Inc. operates, as well as nationwide,
SouthBanc Shares Inc.'s ability to control costs and expenses, competitive
products and pricing, loan delinquency rates, changes in federal and state
legislation and regulation, and the impact of Year 2000 issues. These factors
should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements. SouthBanc Shares, Inc.
assumes no obligation to update any forward-looking statements.
Part I
Item 1. Business
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General
SouthBanc Shares, Inc. ("Company" or "SouthBanc Shares"), a Delaware
corporation, was organized on November 6, 1997 for the purpose of becoming the
holding company for Perpetual Bank, A Federal Savings Bank ("Bank") upon the
Bank's reorganization as a wholly owned subsidiary of the Company resulting from
the conversion of SouthBanc Shares, M.H.C., Anderson, South Carolina, from a
federal mutual holding company to a stock holding company ("Conversion and
Reorganization"). The Conversion and Reorganization was completed on April 14,
1998. In connection with the Conversion and Reorganization, the Company issued
2,281,312 shares of its common stock at $20.00 per share and each share of
common stock of the Bank issued and outstanding and held by persons other than
the SouthBanc Shares, M.H.C., Anderson, South Carolina ("Savings Bank Public
Stockholders") were exchanged for 2.85164 shares of common stock of the Company
(with cash issued in lieu of fractional shares at the rate of $20.00 per share).
The Company has not engaged in any significant activity other than holding the
stock of the Bank. Accordingly, the information set forth in this report,
including financial statement and related data, relates primarily to the Bank.
The Bank is primarily engaged in the business of attracting deposits from
the general public and originating mortgage loans, which are secured by one- to
four-family residential properties, or investing in mortgage-backed securities.
To a lesser extent, the Bank originates loans secured by commercial real estate
as well as commercial business and consumer loans. The Bank's savings accounts
are insured up to the applicable limits by the Federal Deposit Insurance
Corporation through the Savings Association Insurance Fund. The Bank is a
member of the Federal Home Loan Bank System. The Bank conducts its operations
through its main office and four branch offices located in Anderson.
Market Area
The Bank considers Anderson and Oconee Counties, South Carolina, as its
primary market area. Additional loan origination demand is generated from
customers living in contiguous counties. The Bank also purchases loans secured
by properties in South Carolina located outside its primary market area.
Anderson County is included in the Greenville/Spartanburg metropolitan
statistical area. The Cities of Greenville and Spartanburg are located 30 and
60 miles northeast of Anderson, respectively, and Atlanta, the closest major
city, is 120 miles to the southwest. Much of Anderson County is rural and
roughly half of the land area is used for agricultural purposes. Anderson
County has benefitted from the growth of the Greenville metropolitan area and is
experiencing significant residential and commercial development along Interstate
85, a major transportation route that crosses through Anderson County. Major
area employers include BMW Manufacturing Corp., Hoechst Celenese Corporation,
Owens Corning and Michelin Tire. Oconee is a smaller but rapidly growing county
located west of Anderson County.
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Lending Activities
General. Historically, the Bank's principal lending activity has been the
origination of residential real estate loans for the purpose of constructing or
financing one- to four-family residential properties. The Bank also invests in
commercial real estate loans, commercial business loans and construction loans.
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Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio at the dates indicated.
At September 30,
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1999 1998 1997
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Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
Mortgage loans:
One- to four-family (1)........................... $143,526 56.18% $131,117 59.63% $118,279 66.16%
Multi-family...................................... 1,909 0.75 1,290 0.59 1,245 0.70
Commercial real estate............................ 46,198 18.08 33,779 15.36 26,976 15.09
Construction...................................... 41,141 16.10 33,747 15.35 17,145 9.59
-------- ------ -------- ------ -------- ------
Total mortgage loans.......................... 232,774 91.11 199,933 90.93 163,645 91.54
-------- ------ -------- ------ -------- ------
Commercial business loans............................ 15,441 6.04 11,155 5.06 7,182 4.02
Consumer loans:
Home equity and second mortgage................... 1,454 0.57 2,122 0.97 3,405 1.90
Lines of credit................................... 12,943 5.07 11,538 5.25 9,156 5.12
Automobile loans.................................. 4,907 1.92 5,366 2.44 3,540 1.98
Other............................................. 4,220 1.65 3,815 1.73 3,072 1.72
-------- ------ -------- ------ -------- ------
Total consumer loans........................... 23,524 9.21 22,841 10.39 19,173 10.72
-------- ------ -------- ------ -------- ------
Total loans.................................... 271,739 106.36 233,929 106.38 190,000 106.28
Less:
Undisbursed proceeds for loans in process......... 13,316 (5.21) 11,886 (5.18) 8,985 (5.03)
Unearned discounts................................ 317 (0.12) 273 (0.12) 357 --
Allowance for loan losses......................... 2,618 (1.03) 2,374 (1.08) 1,886 (1.05)
-------- ------ -------- ------ -------- ------
Net loans receivable........................... $255,488 100.00% $219,896 100.00% $178,772 100.00%
======== ====== ======== ====== ======== ======
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1996 1995
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Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in thousands)
Mortgage loans:
One- to four-family (1)..................... $ 91,186 64.78% $ 81,226 69.70%
Multi-family................................ 1,010 0.72 630 0.54
Commercial real estate...................... 17,009 12.08 7,355 6.31
Construction................................ 19,509 13.86 11,523 9.89
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Total mortgage loans.................... 128,714 91.44 100,734 86.44
-------- ------ -------- ------
Commercial business loans...................... 5,529 3.93 3,657 3.13
Consumer loans:
Home equity and second mortgage............. 5,036 3.58 7,535 6.47
Lines of credit............................. 6,713 4.77 6,279 5.39
Automobile loans............................ 2,677 1.90 1,438 1.23
Other....................................... 2,490 1.77 2,293 1.97
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Total consumer loans..................... 16,916 12.02 17,545 15.06
-------- ------ -------- ------
Total loans.............................. 151,159 107.39 121,936 104.63
Less:
Undisbursed proceeds for loans in process... 8,866 (6.30) 4,119 (3.53)
Unearned discounts.......................... -- -- -- --
Allowance for loan losses................... 1,535 (1.09) 1,278 (1.10)
-------- ------ -------- ------
Net loans receivable..................... $140,758 100.00% $116,539 100.00%
======== ====== ======== ======
__________________________
(1) Includes construction loans converted to permanent loans and participation
loans.
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One- to Four-Family and Multi-Family Mortgage Loans. The Bank originates
permanent conventional mortgage loans secured by one- to four-family residential
properties with original loan-to-value ratios up to 90% of the appraised value
or the purchase price of the property, whichever is less. At September 30,
1999, the Bank had $143.5 million, or 56.18% of total loans, in one- to four-
family mortgage loans. The Bank requires hazard insurance on the property
securing the loan. All one- to four-family mortgage loans require a title
examination or abstract of title. Title insurance is required on all fixed-rate
mortgage loans so that they may be sold in the secondary market. One- to four-
family mortgage loans are generally underwritten to conform to Federal Home Loan
Mortgage Corporation guidelines. Loan to value ratios are limited to 80% but
may be increased to 95%, provided that private mortgage insurance coverage is
obtained for amounts over 80%.
The Bank offers both fixed-rate mortgages and adjustable rate mortgage
loans with terms of 15 to 30 years. At September 30, 1999, adjustable rate
mortgage loans totaled $75.9 million, or 52.9% of the one- to four-family loan
portfolio. Borrower demand for adjustable rate mortgages versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations of
changes in the level of interest rates and the difference between the interest
rates and loan fees for fixed-rate mortgage loans and interest rates and loan
fees for adjustable rate mortgages. Fixed-rate loans are originated for sale in
the secondary market, though loans with terms of 15 years occasionally are
retained in the Bank's portfolio. The relative amount of fixed-rate and
Adjustable rate mortgage loans that can be originated at any time is largely
determined by the demand for each in the prevailing competitive environment.
The Bank has purchased one- to four-family mortgage loans from a mortgage
banking company located in Hilton Head Island, South Carolina, and a mortgage
banking company located in Greenville, South Carolina. These purchases account
for a substantial portion of the growth in the one- to four-family loan
portfolio in recent periods. During the year ended September 30, 1999, the Bank
purchased $16.5 million of one- to four-family mortgage loans. Substantially
all of these purchases were from the Greenville mortgage company. In future
periods, the Bank expects that a substantial portion of purchased loan volume
will come from that company, rather than the Hilton Head Island mortgage
company, because of the increasing competition in the Hilton Head Island market.
At September 30, 1999, the Bank had $2.1 million of purchased loans secured
by residential properties on Hilton Head Island, South Carolina, all of which
were one-year adjustable rate mortgage loans. These loans were all purchased
from the same mortgage company, located on Hilton Head Island. Prior to
purchase, the Bank reviews each loan for conformance to the Bank's underwriting
criteria. At September 30, 1999, the largest loan had an outstanding balance of
$655,000. Although all such loans were performing according to their terms at
September 30, 1999, they do possess certain risks due to the average size of
such loans and the location of the properties outside the Bank's primary market
area.
At September 30, 1999, the Bank had $40.9 million of purchased one- to
four-family mortgage loans secured by residential properties located primarily
in Greenville, South Carolina. These loans were all purchased from the mortgage
company in which a service corporation subsidiary of the Bank has an equity
investment. See "-- Subsidiary Activities." Prior to purchase, the Bank
reviews each loan for conformity with the Bank's underwriting criteria. Subject
to market conditions, the Bank expects to purchase additional such loans.
The Bank does not actively solicit multi-family loans but extends them as
an accommodation to existing customers. At September 30, 1999, multi-family
loans totaled $1.9 million, or 0.75% of net loans receivable, and consisted of 7
loans, the largest of which had an outstanding balance of $1.1 million. All
such loans are secured by properties located in the Bank's primary market area.
At September 30, 1999, all multi-family loans were performing according to their
terms.
Construction Loans. The construction loan portfolio was $41.1 million, or
16.10% of the total loan portfolio at September 30, 1999. The Bank intends to
continue emphasizing and expanding this type of lending. Such loans are
primarily combined construction and permanent mortgage loans. The construction
portion of the loan is for a period of up to 12 months on an interest only basis
and at a maximum loan to value ratio of 95%. The permanent mortgage is made for
up to 30 years. Construction-permanent loans are made at the same fixed- or
adjustable-rates of interest that
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are offered for permanent residential mortgage loans made by the Bank. The
majority of construction loans are made against binding sales contracts for the
home being built. The Bank also originates speculative construction loans to a
small number of residential builders in its primary market area well known to
the Bank. At September 30, 1999, the Bank had $41.1 million, or 16.10% of total
loans, in construction loans, of which $12.6 million were speculative
construction loans.
Construction lending generally is considered to involve a higher degree of
credit risk than long-term financing of residential properties. The risk of
loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction. If the estimate of
construction cost and the marketability of the property upon completion of the
project prove to be inaccurate, the Bank may be compelled to advance additional
funds to complete the development. If the borrower is unable to sell the
completed project in a timely manner or obtain adequate proceeds to repay the
loan, the loan may become non-performing. Furthermore, if the estimate of value
proves to be inaccurate, the Bank may be confronted with, at or prior to the
maturity of the loan, a project with a value which is insufficient to assure
full repayment. The ability of the developer or builder to sell developed lots
or completed dwelling units will depend on, among other things, demand, pricing
and availability of comparable properties, and economic conditions.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the project,
the independent appraisal and review of cost estimates, the pre-construction
sale and leasing information, and the cash flow projections of the borrower. In
addition, except for the purchased construction loans on Hilton Head Island,
South Carolina, the majority of the construction loans granted by the Bank are
secured by property in the Bank's primary market area. The Bank reviews such
purchased construction loans for conformity with the Bank's underwriting
criteria before purchase.
Commercial Real Estate Loans. The Bank originates and purchases commercial
real estate loans. Commercial real estate loans totaled $46.2 million, or
18.08% of the total loan portfolio, at September 30, 1999. Currently, the Bank
originates commercial real estate loans only to select borrowers known to the
Bank and secured by properties in its primary market area and generally in
amounts between $100,000 and $500,000. At September 30, 1999, the largest
commercial real estate loan originated by the Bank had an outstanding balance of
$1.5 million and was secured by a church. The loan was performing according to
its terms at that date. At September 30, 1999, the largest purchased commercial
real estate loan had an outstanding balance of $1.5 million and was secured by a
commercial real estate located in Beaufort, South Carolina. The loan was
performing according to its terms at that date.
Of primary concern in commercial real estate lending is the borrower's
creditworthiness and the feasibility and cash flow potential of the project.
The Bank's income property collateral is not concentrated in any one industry or
area. Examples of the types of collateral securing the income property loans
include office buildings and residential rental properties. Loans secured by
income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are often dependent on successful operation or management of the
properties. As a result, repayment of such loans may be subject, to a greater
extent than residential real estate loans, to supply and demand in the market in
the type of property securing the loan and, therefore, may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced, the borrowers ability to repay the loan may be impaired.
Commercial Business Loans. At September 30, 1999, the Bank had $15.4
million of commercial business loans, which represented 6.04% of total loans.
Commercial business loans generally include equipment loans with terms of up to
five years and lines of credit secured by savings accounts and unsecured line of
credit. Such loans are generally made in amounts up to $100,000 and carry
adjustable rates of interest. The Bank generally requires annual financial
statements from its commercial business borrowers and personal guarantees if the
borrower is a corporation. At September 30, 1999, the largest outstanding
commercial business loan was a $3.5 million line of credit that was secured by
residential mortgage loans. At September 30, 1999, there was an outstanding
balance of $500,000 on the line of credit.
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Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
Consumer Loans. The Bank originates a wide variety of consumer loans,
which are made primarily on a secured basis to existing customers. Consumer
loans include savings account loans, direct automobile loans, direct boat loans,
renewable lines of credit and unsecured loans. These loans are made at both
fixed- and variable-rates of interest, adjustable annually, and with varying
terms depending on the type of loan. In addition, the Bank offers unsecured
consumer loans. Consumer loans totaled $23.5 million at September 30, 1999, or
9.21% of the Bank's total loan portfolio.
At September 30, 1999, the largest components of the consumer loan
portfolio were home equity and second mortgage loans and lines of credit. At
September 30, 1999, such loans totaled $14.2 million, or 5.56% of the total loan
portfolio. At September 30, 1999, commitments to extend credit under lines of
credit totaled $18.9 million.
Home equity and second mortgage loans are generally for the improvement of
residential properties. The majority of these loans are made to existing loan
customers and are secured by a first or second mortgage on residential property.
The Bank actively solicits these types of loans by contacting their borrowing
customers directly. The loan-to-value ratio on these properties is typically
below 80%, including the first mortgage and home equity or second mortgage loan.
Home equity and second mortgage loans are typically variable rate loans with a
fixed payment that matures over 15 years. Rates adjust monthly; however, the
payment remains constant over the loan term and any rate adjustment is reflected
in an increase in the loan term. The interest rate is tied to the prime lending
rate.
Lines of credit are generally secured by a second mortgage on residential
property and are generally made to existing customers. Credit lines are
generally 80% of the appraised value of the collateral property. Terms range
from five to 15 years and the interest rate is generally tied to the prime
lending rate.
The Bank views consumer lending as an important component of its business
operations because consumer loans generally have shorter-terms and higher
yields, thus reducing exposure to changes in interest rates. In addition, the
Bank believes that offering consumer loans helps to expand and create stronger
ties to its customer base. The Bank intends to continue emphasizing this type
of lending.
The Bank employs strict underwriting standards for consumer loans. These
procedures include an assessment of the applicant's payment history on other
debts and ability to meet existing obligations and payments on the proposed
loans. Although the applicant's creditworthiness is a primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, to the proposed loan amount. The Bank underwrites and
originates all of its consumer loans internally, which management believes
limits exposure to credit risks relating to loans underwritten or purchased from
brokers or other outside sources.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
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application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by the
borrower against the Bank as the holder of the loan, and a borrower may be able
to assert claims and defenses which it has against the seller of the underlying
collateral.
Loan Maturity. The following table sets forth certain information at
September 30, 1999 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include unearned
discounts, unearned income and allowance for loan losses.
One Year After 3 Years After 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
----------- --------- ------------- -------------- ----------- -----------
(In thousands)
Residential mortgage (1).............. $ 2,068 $10,200 $10,446 $13,255 $107,556 $143,525
Commercial real estate................ 15,494 7,479 17,538 3,403 4,193 48,107
Commercial business................... 6,735 3,235 4,314 1,157 -- 15,441
Construction.......................... 17,026 10,800 -- -- -- 27,826
Automobile............................ 262 2,233 2,361 54 -- 4,910
Savings account loans................. 948 173 91 144 -- 1,356
Other................................. 13,620 2,044 511 898 185 17,258
------- ------- ------- ------- -------- --------
Total loans..................... $56,153 $36,164 $35,261 $18,911 $111,934 $258,423
======= ======= ======= ======= ======== ========
________________
(1) Includes one- to four-family and multi-family loans.
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates
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(In thousands)
Residential mortgage (1).................... $ 65,575 $75,882
Commercial real estate...................... 30,208 2,405
Commercial business......................... 6,738 1,968
Construction................................ 7,392 3,408
Automobile.................................. 4,648 --
Savings account loans....................... 408 --
Other....................................... 2,334 1,304
-------- -------
Total loans........................... $117,303 $84,967
======== =======
________________
(1) Includes one- to four-family and multi-family loans.
Loan Soliciting and Processing. Loan originations come from a number of
sources. The Bank's customary sources of loans are from realtors, walk-in
customers, referrals and existing customers. A formal business development
program has been implemented where loan officers and sales personnel make
regular sales calls on building contractors and realtors.
The Banks' Loan Committee approves loan applications up to and including
$500,000. Loan applications in excess of $500,000 must be approved by the full
Board of Directors.
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Loan Purchases and Sales and Servicing. The Bank is an active purchaser of
loans. The Bank purchases one- to four-family, commercial real estate and
construction loans from a mortgage company in which a service corporation
subsidiary of the Bank has an equity investment. Furthermore, the Bank
purchases periodically participation interests in permanent real estate loans
and construction loans. Any participation interest purchased must meet the
Bank's own underwriting standards. The Bank purchases loans from institutions
in the State of South Carolina.
The Bank periodically sells one- to four-family mortgage loans to the
Federal Home Loan Mortgage Corporation in order to comply with the regulations
limiting the amount of loans to one borrower or to reduce the amount of fixed-
rate loans in the Bank's portfolio. The Bank generally sells all fixed-rate, 30-
year residential mortgage loans.
The Bank participates in loan servicing activities both directly and
indirectly. Direct servicing activities arise in connection with loans that the
Bank originates but sells with servicing rights retained. The Bank generally
receives a fee payable monthly of 1/4% to 3/8% per annum of the unpaid balance
of each loan for which it retains servicing rights. At September 30, 1999, the
Bank was servicing loans for others aggregating $60.0 million. During the year
ended September 30, 1999, the Bank earned servicing fee income of $193,000.
The Bank participates indirectly in loan servicing activities through its
equity investment, through a service corporation subsidiary, in a mortgage
banking company (see "-- Subsidiary Activities") and through an investment in a
limited partnership. At September 30, 1999, the mortgage banking company was
servicing 980 loans for others aggregating $134.0 million.
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The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
Years Ended September 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Total loans at beginning of period.......................... $219,896 $190,000 $151,159
-------- -------- --------
Loans originated:
One- to four-family....................................... 28,977 50,582 18,783
Multi-family.............................................. -- 119 240
Commercial real estate.................................... 16,367 12,604 11,912
Construction loans........................................ 14,548 17,140 10,934
Commercial business....................................... 16,846 7,481 10,731
Consumer.................................................. 16,789 20,134 24,739
-------- -------- --------
Total loans originated................................... 93,527 108,060 77,339
-------- -------- --------
Loans purchased:
One- to four-family....................................... 30,518 47,829 23,581
Commercial real estate.................................... 106 6,226 3,146
-------- -------- --------
Total loans purchased.................................... 30,624 54,055 26,727
-------- -------- --------
Loans sold:
Total whole loans sold..................................... (7,477) (33,684) (5,747)
-------- -------- --------
Total loans sold.......................................... (7,477) (33,684) (5,747)
Mortgage loan principal repayments.......................... (64,831) (98,535) (59,478)
Net loan activity........................................... 51,843 29,896 38,841
-------- -------- --------
Total loans at end of period................................ $271,739 $219,896 $190,000
======== ======== ========
Equity Investment in Limited Partnership. In December 1996, the Bank
purchased for approximately $5.0 million a 20.625% equity interest in a limited
partnership that invests in mortgage servicing rights. Through this limited
partnership, the Bank invests in servicing rights tied to a national portfolio
of residential mortgage loans. The value of the Bank's investment in the limited
partnership would be adversely affected by credit quality deterioration of the
underlying mortgage loans. The value of the investment would also be adversely
affected by a change in market interest rates. Under either circumstance, the
Bank may be required to accelerate its amortization of this investment, or even
write-off the full value of the investment in a given period, which would have a
material adverse effect on the Bank. See Note 3 of Notes to Consolidated
Financial Statements.
Loan Commitments. The Bank issues commitments for fixed- and adjustable-
rate single-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and are honored for up to 30 days from approval, depending on the
type of transaction. The Bank had outstanding loan commitments (including
commitments to fund letters of credit) of approximately $53.9 million at
September 30, 1999. See Note 18 of Notes to Consolidated Financial Statements.
Loan Origination and Other Fees. The Bank, in most instances, receives loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan that are charged to the borrower for
funding the loan. The Bank usually charges origination fees of 0.5% to 1.0% on
one- to four-family residential real estate loans and 1.0% to 2.0% on long-term
commercial real estate loans. Current accounting standards require fees received
for originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Deferred fees associated with loans that are sold
are recognized as income at the time of sale.
-9-
The Bank offsets all loan origination fees and certain related direct loan
origination costs against all fees and costs associated with loan origination.
The resulting net amount is deferred and amortized over the contractual life of
the related loans as an adjustment to the yield on such loans, unless
prepayments of a large group of similar loans are probable and the timing and
amount of prepayments can be reasonably estimated. The Bank offsets commitment
fees against related direct costs and the resulting net amount is recognized
over the contractual life of the related loans as an adjustment of yield if the
commitment is exercised. If the commitment expires unexercised, the fees
collected are recognized as non-interest income upon expiration of the
commitment.
Delinquencies. The Bank's collection procedures provide for a series of
contacts with delinquent borrowers. After a delinquency of 15 days, a late
charge is assessed. If the delinquency continues, subsequent efforts will be
made to contact the delinquent borrower. The Bank's collection procedures
provide that when a loan is 30 days overdue, and again on the 45th day, the
borrower will be contacted by mail and payment will be requested. If a loan
continues in a delinquent status for 90 days or more, the Bank generally
initiates foreclosure proceedings. In certain instances, however, the Board may
decide to modify the loan or grant a limited moratorium on loan payments to
enable the borrower to reorganize his financial affairs.
The following table sets forth information with respect to the Bank's non-
performing assets for the periods indicated. During the periods shown, the Bank
had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
At September 30,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage............................................. $2,145 $ 948 $ 220 $ 190 $ 348
Consumer............................................. 86 21 -- -- 124
Commercial........................................... 126 206 183 126 --
------ ------ ------ ------ ------
2,357 1,175 403 316 472
------ ------ ------ ------ ------
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential....................................... -- -- 6 467 82
Consumer............................................. -- -- 8 2 9
Commercial........................................... -- -- 465 10 --
------ ------ ------ ------ ------
-- -- 479 479 91
------ ------ ------ ------ ------
Total of non-accrual and
past due 90 days or more............................. 2,357 1,175 882 795 563
------ ------ ------ ------ ------
Real estate owned, net.................................. 230 89 163 3 32
------ ------ ------ ------ ------
total nonperforming assets.............................. $2,587 $1,264 $1,045 $ 798 $ 595
====== ====== ====== ====== =======
Total loans delinquent 90 days
or more to net loans................................. 0.92% 0.53% 0.49% 0.56% 0.48%
Total loans delinquent 90 days
or more to total assets.............................. 0.63% 0.32% 0.34% 0.38% 0.32%
Total nonperforming assets to
total assets......................................... 0.70% 0.35% 0.41% 0.38% 0.33%
At September 30, 1999, non-accrual mortgage loans consisted of one
speculative residential construction loan with an aggregate outstanding balance
of $88,000, 15 single-family residential mortgage loans with an aggregate
outstanding balance of $1.2 million, and three commercial real estate mortgage
loans with an aggregate outstanding balance of $873,000. All 19 properties are
located in the Bank's primary market area. Non-accrual consumer loans consisted
of two home improvements loans with an aggregate outstanding balance of $12,000,
one automobile loan with an outstanding balance of $12,000, and three lines of
credit loans with an aggregate outstanding balance of $62,000.
-10-
Non-accrual commercial loans consisted of one equipment loan with a balance of
$37,000 and one equipment lease with a balance of $89,000.
The Bank does not accrue interest loans, including impaired loans under
SFAS No. 114, for which management deems the collection of additional interest
to be doubtful. If interest on these non-accrual loans had been accrued,
interest income of approximately $209,000 would have been recorded for the year
ended September 30, 1999.
Asset Classification. Office of Thrift Supervision regulations require that
each insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, Office of
Thrift Supervision examiners have authority to identify problem assets and, if
appropriate, require them to be classified. There are three classifications for
problem assets: substandard, doubtful and loss. "Substandard" assets must have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
"loss" is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. The regulations have also created
a "special mention" category, described as assets which do not currently expose
an insured institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss or charge-off such amount. A portion of
general loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
The aggregate amounts of the Bank's classified assets and of the Bank's
general and specific loss allowances and charge-offs for the period then ended,
were as follows:
At or For the Year Ended
September 30,
----------------------------
1999 1998 1997
------ ------ ------
(In thousands)
Loss.............................. $ 30 $ 56 $ 140
Doubtful.......................... 12 50 8
Substandard assets................ 2,419 1,254 1,227
Special mention................... -- -- 58
------ ------ ------
$2,461 $1,360 $1,433
====== ====== ======
General loss allowances........... $2,588 $2,318 $1,746
Specific loss allowances.......... 30 56 140
Net charge-offs................... 237 119 304
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in- lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the fair
value of the property received. Subsequently, it is carried at the lower of its
new cost basis or fair value, less estimated selling costs. The Bank had
$230,000 of real estate owned at September 30, 1999.
Allowance for Loan Losses. The Bank's management evaluates the need to
establish allowances against losses on loans each year based on estimated losses
on specific loans when a decline in value has occurred. Such evaluation includes
a review of all loans for which full collectibility may not be reasonably
assured and considers, among other
-11-
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
At September 30, 1999, the Bank had an allowance for loan losses of $2.6
million, or 1.01% of total loans. Based on past experience and future
expectations, management believes that the allowance for loan losses is adequate
at September 30, 1999.
While the Bank believes it has established its existing allowance for loan
losses in accordance with generally accepted accounting principles ("GAAP"), the
allowance is based on estimates which are subject to change based upon changes
in the loan portfolio and economic conditions, among other things. Furthermore,
there can be no assurance that the Bank's regulators, in reviewing the Bank's
loan portfolio, will not request that the Bank increase its allowance for loan
losses, thereby negatively affecting the Bank's financial condition and earnings
based upon information available to the regulators at the time of their
examination.
The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and the
amount of loss realized has been charged or credited to current income.
Years Ended September 30,
-----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Allowance at beginning of period............... $2,374 $1,886 $1,535 $1,278 $ 962
------ ------ ------ ------ ------
Provision for loan losses...................... 481 607 655 349 362
Recoveries:
Residential mortgage........................ -- -- 4 6 --
Consumer.................................... 23 20 24 17 6
Commercial.................................. 15 35 -- -- --
------ ------ ------ ------ ------
Total recoveries......................... 38 55 28 23 6
------ ------ ------ ------ ------
Charge-offs:
Residential mortgage........................ -- -- 4 18 --
Consumer.................................... 131 83 100 97 52
Commercial.................................. 144 91 228 -- --
------ ------ ------ ------ ------
Total charge-offs........................ 275 174 332 115 52
------ ------ ------ ------ ------
Net charge-offs.......................... 237 119 304 92 46
------ ------ ------ ------ ------
Allowance at end of period..................... $2,618 $2,374 $1,886 $1,535 $1,278
====== ====== ====== ====== ======
Ratio of allowance to total loans
outstanding at the end of the period........ 1.01% 1.07% 1.04% 1.08% 1.08%
Ratio of net charge-offs to average
loans outstanding during the period......... 0.10% 0.06% 0.18% 0.07% 0.04%
-12-
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At September 30,
---------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -----------------------------
As a % % of As a % % of As a % % of
Of Out- Loans in Of Out- Loans in Of Out- Loans in
Standing Category Standing Category Standing Category
Loans in to Total Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- ------- ------ -------- --------- ------ -------- --------
(Dollars in thousands)
Real estate mortgage........ $ 976 0.52% 68% $ 851 0.50% 70% $ 766 0.60% 70%
Commercial real estate
and commercial business.... 1,085 1.76 23 953 2.12 20 737 2.16 19
Consumer.................... 557 2.37 9 570 2.50 10 383 2.00 11
------ ---- --- ------ ---- --- ------ ---- ---
Total allowance for
loan losses....... $2,618 1.01% 100% $2,374 1.07% 100% $1,886 1.04% 100%
====== ==== === ====== ==== === ====== ==== ===
-----------------------------------------------------------------
1996 1995
------------------------------ -----------------------------
As a % % of As a % % of
Of Out- Loans in Of Out- Loans in
Standing Category Standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
------ -------- -------- ------- -------- --------
Real estate mortgage.......... $ 726 0.71% 72% $ 573 0.57% 83%
Commercial real estate
and commercial business...... 465 2.06 16 297 8.12 3
Consumer...................... 344 2.03 12 408 2.32 14
------ ---- --- ------ ---- ---
Total allowance for
loan losses......... $1,535 1.08% 100% $1,278 1.08% 100%
====== ==== === ====== ==== ===
-13-
Investment Activities
The Company has made significant investments in mortgage-backed securities,
including collateralized mortgage obligations. The Bank had mortgage-backed
securities with an amortized cost of $60.0 million and a market value of $58.4
million at September 30, 1999, all of which were invested in U.S. Government
agency securities, investment grade securities, and securities guaranteed by the
funding arm of the Resolution Trust Corporation.
At September 30, 1999, the Company had invested $21.6 million in
collateralized mortgage obligations ($10.1 million in U.S. Government agency
issues and $11.5 million in investment grade private issues) with an average
estimated life varying from six months to 30 years and an average yield of
7.05%. At September 30, 1999, collateralized mortgage obligations consisted of
Fannie Mae, Ginnie Mae and Freddie Mac issues, as well as investment grade
private issues. Collateralized mortgage obligations may be used as collateral
for borrowings and, through repayments, as a source of liquidity. Management
considers collateralized mortgage obligations to be advantageous since they
offer yields above those available for investments of comparable credit quality
and duration and qualify as thrift investments under the qualified thrift lender
test. See "Regulation and Supervision -- Federal Savings Institution Regulation
- -- Qualified Thrift Lender Test." At September 30, 1999, the collateralized
mortgage obligation portfolio consisted of various tranches but no residuals.
In recent years, the Company has used the proceeds from the paydown of
collateralized mortgage obligations to invest in one- to four-family and other
types of lending, and expects to continue to do so in the future, subject to
market conditions.
Collateralized mortgage obligations are subject to repayment by the
mortgagors of the underlying collateral at any time. Such prepayment may
subject the Bank's collateralized mortgage obligations to yield and price
volatility. To assess this volatility, the Office of Thrift Supervision
requires the Bank to test annually its collateralized mortgage obligations to
determine whether they are high-risk or non-high-risk securities. The policy
established a three-part risk measurement test for fixed-rate and a one-part
test for floating-rate collateralized mortgage obligations and other mortgage
derivative securities. Securities failing any one of the tests are deemed to be
high-risk securities. The Office of Thrift Supervision may require an
institution to dispose of one or all of the collateralized mortgage obligations
failing such tests. At September 30, 1999, all of the Bank's collateralized
mortgage obligations met the criteria established by the policy designated as
non-high-risk securities for continuing classification as suitable investments.
However, changes in interest rates may cause one or more of the Bank's
collateralized mortgage obligations to fail a stress test. The Office of Thrift
Supervision may then require the Bank to dispose of the collateralized mortgage
obligations failing the test. This may affect the classification of such
securities under SFAS No. 115.
Changes in the level of interest rates can have an adverse effect on the
mortgage-backed securities and collateralized mortgage obligation portfolio,
thereby exposing the Bank to repayment risk and reinvestment risk.
-14-
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
At September 30,
--------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost (1) Portfolio Cost (1) Portfolio Cost (1) Portfolio
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
U.S. agency securities...................... $ 8,158 11% $ 5,706 6% $10,191 22%
Certificates of deposit..................... -- -- -- -- -- --
U.S. Treasury securities.................... 1,009 1 500 1 998 2
Equity mutual fund.......................... 1,043 1 994 1 -- --
Common stock - savings and loans............ 150 -- 1,733 2 -- --
Municipal bonds............................. 3,290 4 6,129 6 -- --
Bank preferred stock........................ -- -- 3,152 3 -- --
Trust preferred bonds....................... 4,023 5 5,028 5 -- --
Mortgage-backed securities
and Collateralized mortgage obligations.. 60,028 78 73,719 76 35,714 76
------- --- ------- --- ------- ---
Total................................. $77,701 100% $96,961 100% $46,903 100%
======= === ======= === ======= ===
____________________________
(1) The market value of the Bank's investment portfolio amounted to $74.6
million, $97.2 million and $47.2 million at September 30, 1999, 1998 and
1997, respectively.
The following table sets forth the maturities and weighted average yields
of the debt securities in the Bank's investment securities portfolio at
September 30, 1999.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
----------------- --------------- --------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ------ ------- ----- ------- ----- ------ -----
(Dollars in thousands)
U.S. agency securities................ $ -- --% $ -- --% $ -- --% $ 8,158 7.06%
U.S. Treasury securities.............. 1,009 5.10 -- -- -- -- -- --
Equity mutual fund.................... -- -- -- -- -- -- 1,043 --
Common stock - savings and loans...... -- -- -- -- -- -- 150 --
Municipal bonds....................... -- -- -- -- -- -- 3,290 7.09
Bank preferred stock.................. -- -- -- -- -- -- -- --
Trust preferred stock................. -- -- -- -- -- -- 4,023 8.49
Mortgage-backed securities
and collateralized mortgage
obligations........................ -- -- -- -- 169 9.69 59,859 6.96
------ ------ ------- -------
Total........................... $1,009 5.10% $ -- --% $169 9.69% $76,523 6.95%
====== ====== ======= =======
-15-
The following table sets forth certain information with respect to each
security (other than U.S. Government and agency securities) which had an
aggregate amortized cost in excess of 10% of the Bank's stockholders' equity at
the dates indicated.
At September 30,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
--------- -------- --------- --------- --------- --------
(In thousands)
RTC mortgage-backed securities................... $ 340 $ 333 $ 795 $ 795 $ 899 $ 888
Collateralized mortgage obligations.............. 21,657 21,243 41,098 41,047 21,138 21,211
------- ------- ------- ------- ------- -------
Total...................................... $21,997 $21,576 $41,893 $41,842 $22,027 $22,099
======= ======= ======= ======= ======= =======
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
loan principal repayments. Loan repayments are a relatively stable source of
funds while deposit inflows and outflows may be significantly influenced by
general interest rates and money market conditions. The Bank also has access to
advances from the Federal Home Loan Bank-Atlanta. These advances can be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources or they may be used on a longer-term basis for general
business purposes. The Bank has also on occasion utilized repurchase
agreements.
Deposit Accounts. Local deposits are and traditionally have been the
primary source of the Bank's funds for use in lending and other general business
purposes. The Bank offers a number of deposit accounts, including passbook,
individual retirement accounts, money market deposits and certificate accounts
currently ranging in maturity from three months to five years. Deposit accounts
vary as to terms, with the principal differences being the minimum balance
required, the time period the funds must remain on deposit and the interest
rate. From time to time, the Bank offers premiums to attract deposits. The
Bank is a member of an automated teller machine network, which is available to
the Bank's checking account depositors.
In recent years, the Bank has offered newly authorized types of short-term
accounts and other savings alternatives that are more responsive to changes in
market rates of interest than passbook accounts and longer maturity fixed-rate,
fixed-term certificates that were the Bank's primary source of deposits prior to
1978. There has been some shifting of deposit mix which has primarily resulted
from the progressive elimination of federally imposed rate ceilings on various
types of deposits offered by federally insured financial institutions such as
the Bank. The deregulation of various federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and has given it more
flexibility to meet the threat of net deposit outflows. The Bank reviews the
interest rates offered on various savings accounts periodically so as to remain
competitive with other financial institutions in its market area.
Since early 1995, the Bank has increased its core deposit base by
aggressively promoting checking accounts. At September 30, 1999, checking
account balances totaled $59.0 million.
At September 30, 1999, certificate of deposits scheduled to mature within
one year totaled $117.7 million. Although no assurances can be given, based on
past experience, the Bank believes that a substantial portion of these
certificates of deposit will be renewed.
At September 30, 1999, the Bank had no brokered deposits.
-16-
The following table sets forth information concerning the Bank's deposits
at September 30, 1999.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- ------ -------------------- -------- -------- ---------
(Dollars in thousands)
2.18% None Negotiable order of withdrawal ("NOW") accounts $ 100 $ 43,256 19.55%
-- None Non-interest-bearing accounts 100 15,729 7.11
2.48 None Savings accounts 100 26,387 11.93
Certificates of Deposit
-----------------------
5.21 Within 6 months Fixed-term, fixed-rate 1,000 85,685 38.73
5.15 7 - 12 months Fixed-term, fixed-rate 1,000 32,038 14.48
5.20 13 - 36 months Fixed-term, fixed-rate 1,000 16,890 7.63
5.22 37 - 120 months Fixed-term, fixed-rate 1,000 1,273 0.57
-------- ------
$221,258 100.00%
======== ======
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at September 30, 1999. Jumbo certificates of
deposit require minimum deposits of $100,000 and have negotiable interest rates.
Certificates
Maturity Period of Deposit
- --------------- --------------
(In thousands)
Three months or less................................ $ 6,568
Over three months through six months................ 5,762
Over six months through twelve months............... 5,397
Over twelve months.................................. 2,448
-------
Total......................................... $20,175
=======
Deposit Flow. The following table sets forth the balances of deposits in
the various types of accounts offered by the Bank at the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- --------------------------------
Percent Increase Percent Increase Percent Increase
Amount of Total (Decrease) Amount of Total (Decrease) Amount of Total (Decrease)
-------- -------- ---------- -------- --------- ---------- --------- -------- ----------
(Dollars in thousands)
Non-interest-bearing.......... $ 15,729 7.11% $ 531 $ 15,198 7.31% $ 3,386 $ 11,812 5.88% $ 3,464
NOW checking.................. 43,256 19.55 7,460 35,796 17.23 9,800 25,996 12.93 1,703
Regular savings accounts...... 26,387 11.93 1,183 25,204 12.13 844 24,360 12.12 1,249
Fixed-rate certificates
which mature in the
year ending (1)(2):
Within 1 year.............. 117,723 53.21 20,857 96,866 46.62 (18,785) 115,651 57.53 31,881
After 1 year, but
within 2 years.......... 15,025 6.79 (17,641) 32,666 15.72 15,667 16,999 8.46 1,148
After 2 years, but
within 5 years.......... 3,138 1.41 1,077 2,061 0.99 (4,123) 6,184 3.08 1,902
-------- ------ -------- -------- ------ -------- -------- ------ -------
Total................. $221,258 100.00% $ 13,467 $207,791 100.00% $ 6,789 $201,002 100.00% $41,367
======== ====== ======== ======== ====== ======== ======== ====== =======
________________
(1) At September 30, 1999, 1998 and 1997, jumbo certificates amounted to $20.2
million, $17.4 million and $18.5 million, respectively.
(2) IRA accounts included in certificate balances are $20.9 million, $19.7
million and $18.8 million at September 30, 1999, 1998 and 1997,
respectively.
-17-
Time Deposits by Rates and Maturities. The following table sets forth the
time deposits in the Bank classified by rates at the dates indicated.
At September 30,
--------------------------------
1999 1998 1997
--------- --------- --------
(In thousands)
Below 3.00%..................... $ 159 $ 165 $ 194
3.00 - 5.00%.................... 58,368 1,392 2,012
5.01 - 7.00%.................... 77,022 129,629 136,400
7.01 - 9.00%.................... 337 407 228
-------- -------- --------
Total..................... $135,886 $131,593 $138,834
======== ======== ========
The following table sets forth the amount and maturities of time deposits
at September 30, 1999.
Amount Due
-----------------------------------------------------------
Percent
Over Two Over Three Over Five of Total
Less Than One to to Three to Five to Ten Certificate
One Year Two Years Years Years Years Total Accounts
--------- --------- -------- ---------- --------- --------- -----------
(Dollars in thousands)
2.50 - 5.00%.................... $ 51,569 $ 4,679 $1,089 $1,190 $ -- $ 58,527 43.07%
5.01 - 7.00%.................... 66,083 10,184 754 1 -- 77,022 56.68
7.01 - 9.00%.................... 71 162 22 82 -- 337 0.25
-------- ------- ------ ------ --------- -------- ------
Total..................... $117,723 $15,025 $1,865 $1,273 $ -- $135,886 100.00%
======== ======= ====== ====== ========= ======== ======
Deposit Activity. The following table sets forth the savings activities of
the Bank for the periods indicated.
Years Ended September 30,
-------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Beginning balance........................................... $207,791 $201,002 $160,244
-------- -------- --------
Net increase (decrease) before interest credited............ 4,746 (1,223) 32,599
Interest credited........................................... 8,721 8,012 8,159
Net increase in savings deposits............................ 13,467 6,789 40,758
-------- -------- --------
Ending balance.............................................. $221,258 $207,791 $201,002
======== ======== ========
Borrowings
Historically, the Bank has relied on repurchase agreements as a source of
borrowings to finance the purchase of investment securities. Funding for
lending activities has been provided from deposits and borrowings from the
Federal Home Loan Bank-Atlanta. Under repurchase agreements, the Bank "sells"
securities (generally U.S. Treasury securities and federal agency obligations
and mortgage-backed securities) under an agreement to buy them back at a
specified price at a later date. Repurchase agreements are subject to renewal,
and are deemed to be borrowings collateralized by the securities sold. The Bank
had $20.3 million of repurchase agreements outstanding at September 30, 1999.
The Bank has issued retail and commercial repurchase agreements and would
consider issuing them again in the future in an appropriate interest rate
environment. Under commercial repurchase agreements, the Bank sells the
-18-
investment security to broker dealers who may then loan the security to other
parties in the normal course of operations. Commercial repurchase agreements
generally mature within 90 days from the date of the transaction.
Advances from the Federal Home Loan Bank are typically secured by the
Bank's first mortgage loans. At September 30, 1999, the Bank was eligible to
borrow up to $93.9 million from the Federal Home Loan Bank-Atlanta. The Bank
had Federal Home Loan Bank advances of $73.0 million outstanding at September
30, 1999. See Note 9 of Notes to Consolidated Financial Statements.
The Federal Home Loan Bank functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member, the Bank is required to own capital stock in the
Federal Home Loan Bank and is authorized to apply for advances on the security
of such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the U.S. Government)
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different programs. Each credit program has its
own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the Federal Home Loan Bank's assessment of the
institution's creditworthiness. Under its current credit policies, the Federal
Home Loan Bank generally limits advances to 20% of a member's assets, and short-
term borrowings of less than one year may not exceed 10% of the institution's
assets. The Federal Home Loan Bank determines specific lines of credit for each
member institution.
The following table sets forth certain information regarding borrowings by
the Bank at the end of and during the periods indicated:
At September 30,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Weighted average rate paid on:
Federal Home Loan Bank-Atlanta advances............ 5.21% 5.03% 6.24%
Securities sold under agreements to repurchase..... 5.54 5.54 --
Years Ended September 30,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase........................ $20,366 $20,185 $ --
Federal Home Loan Bank-Atlanta advances............................... 78,000 61,784 15,000
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase........................ 20,245 17,912 --
Federal Home Loan Bank-Atlanta advances............................... 65,975 40,241 23,951
Approximate weighted average rate paid on:
Securities sold under agreements to repurchase........................ 5.04% 5.61% --
Federal Home Loan Bank-Atlanta advances............................... 5.61% 5.54% 5.75%
Competition
Anderson and Oconee Counties have a relatively large number of financial
institutions, many of which are branches of large southeast regional financial
institutions, and thus the Bank faces strong competition in the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Its most direct competition
-19-
for savings deposits and loans has historically come from other thrift
institutions, credit unions and commercial banks located in its market area.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities and mutual funds. The
Bank's competition for loans comes principally from other thrift institutions,
credit unions, commercial banks, finance companies, mortgage banking companies
and mortgage brokers.
Subsidiary Activities
The Company has one wholly owned subsidiary, the Bank. The Bank had an
ownership interest in three service corporations at September 30, 1999. Under
Office of Thrift Supervision regulations, the Bank is authorized to invest up to
3% of its assets in service corporations, with amounts in excess of 2% only if
used primarily for community purposes. At September 30, 1999, the Bank's net
investment of approximately $3.3 million in its service corporations did not
exceed this investment authority.
The Bank has three service corporations: United Service Corporation of
Anderson, Inc. ("United Service"), United Investments Services, Inc. ("United
Investments") and Mortgage First Service Corporation ("Mortgage First").
United Service is a wholly-owned subsidiary of the Bank. At September 30,
1999, United Service had assets of $2.6 million. United Service is involved in
the following residential and commercial real estate development projects:
Perpetual Square. A 33-acre commercial development in Anderson County
purchased in January 1996 for a purchase price of $970,000. The purchase price
and infrastructure improvement costs (i.e., installation of roads, utilities,
etc.) were financed by a loan from the Bank that had an outstanding balance of
$38,000 at September 30, 1999. As of September 30, 1999, approximately 20 acres
have been sold and the Bank had no outstanding loans to purchasers. In October
1997, the Bank established a branch office at this location. See "--Properties."
At September 30, 1999, the Bank's net investment in this project was
approximately $548,000.
The Meadows Development. A 99-acre residential subdivision consisting of
approximately 108 lots located in Anderson County purchased in October 1996 for
a purchase price of $600,000. The purchase price and infrastructure improvement
costs were financed by a loan from the Bank that had an outstanding balance of
$1.1 million at September 30, 1999. The Bank has entered into a contractual
agreement with the local office of a national realtor to market the subdivision
lots, and marketing began in September 1997. The realtor has no investment in
the project. As of September 30, 1999, 60 lots were sold and the Bank had
outstanding loans to purchasers totaling $395,000. At September 30, 1999, the
Bank's net investment in this project was approximately $1.2 million.
Ashton Place Subdivision. A 24-acre multi-family housing development
consisting of 44 lots located in Anderson County purchased in January 1996 for a
purchase price of $164,000. The purchase price and infrastructure improvement
costs were financed by a loan from the Bank that had been paid off as of
September 30, 1999. The lots are being developed in four phases of 11 lots each.
As of September 30, 1999, 40 lots have been sold and four lots remain unsold in
phase IV. At September 30, 1999, the Bank had loans outstanding to purchasers
totaling $855,000. At September 30, 1999, the Bank's net investment in this
project was approximately $65,000.
North Park. A 57-acre industrial park located in Anderson County purchased
in June 1996 at a purchase price of $248,000. The purchase price and
infrastructure improvement costs were financed by a loan from the Bank that had
no outstanding balance as of September 30, 1999. As of September 30, 1999, 20
acres had been sold and the Bank had outstanding loans to purchasers totaling
$366,000, all of which were permanent mortgage loans. At September 30, 1999, the
Bank's net investment in this project was approximately $285,000.
United Investments, a wholly-owned subsidiary of United Service, offers
full service brokerage services. On a consolidated basis United Service and
United Investments had net income of $177,000 for the year ended September 30,
1999.
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Mortgage First is a wholly-owned subsidiary of the Bank. In August 1996,
Mortgage First made a $400,000 equity investment in a start-up regional mortgage
banking company known as "First Trust Mortgage Corporation of the South" ("First
Trust"), with offices in Rock Hill, Columbia, Clemson and Greenville, South
Carolina. During the year ended September 30, 1999, First Trust closed 1,538
loans totaling $215.6 million.
The Bank has purchased loans from First Trust in recent periods. See "--
Lending Activities -- Loan Purchases and Sales and Servicing." All loans are
purchased from First Trust subject to the Bank's underwriting standards. The
Bank intends to purchase at least $1.8 million of loans from First Trust
monthly. At September 30, 1999, the Bank's financial commitment to First Trust
and its maximum exposure to share in any losses incurred by First Trust were
limited solely to the amount of its equity investment through Mortgage First.
The Bank, either directly or through Mortgage First, may undertake future
additional financial commitments that would increase its loss exposure to First
Trust's operations; however, there are no such agreements, plans or
understandings at present. The Bank recorded a gain of approximately $179,000
related to First Trust's operations for the year ended September 30, 1999.
Robert W. Orr, President and Chief Executive Officer of the Company and the
Bank, and Barry C. Visioli, Senior Vice President of the Company and the Bank,
are directors of First Trust.
Personnel
As of September 30, 1999, the Bank had 96 full-time employees and 25 part-
time employees. The employees are not represented by a collective bargaining
unit. The Bank believes its relationship with its employees is good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, SouthBanc Shares is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the Office of Thrift Supervision. The Bank is regulated,
examined and supervised extensively by the Office of Thrift Supervision, as its
primary federal regulator, and the Federal Deposit Insurance Corporation, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund managed by the Federal Deposit Insurance Corporation.
The Bank must file reports with the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation concerning its activities and financial condition
in addition to obtaining certain approvals before entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The Office of Thrift Supervision and the Federal Deposit
Insurance Corporation examine the Bank periodically to test the Bank's safety
and soundness and compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework for the Bank's
activities and is intended primarily to protect the insurance fund and the
Bank's depositors.
The regulatory structure also gives regulatory authorities extensive
discretion in their supervisory and enforcement activities and examination
policies, including policies regarding asset classification and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in regulatory requirements and policies, whether by the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation or the Congress, could
have a material adverse impact on SouthBanc Shares, the Bank and their
operations. The description of statutory provisions and regulations that apply
to SouthBanc Shares and the Bank discussed below and elsewhere in this
prospectus is not a complete description of them and their effects on the Bank
and SouthBanc Shares.
Holding Company Regulation
SouthBanc Shares is a nondiversified unitary savings and loan holding
company under federal law. Formerly, a unitary savings and loan holding company
was not restricted as to the types of business activities in which it could
engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. See "--Federal Savings Institution Regulation --
Qualified Thrift Lender Test." Recent legislation, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for a financial holding
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company as defined under the legislation, including insurance and securities
activities, and those permitted for a multiple savings and loan holding company
as described below. SouthBanc Shares qualifies for the grandfather.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company and from acquiring or retaining
control of a depository institution that is not insured by the Federal Deposit
Insurance Corporation, unless it first receives the approval of the Office of
Thrift Supervision. In evaluating applications by holding companies to acquire
savings institutions, the Office of Thrift Supervision considers the financial
and managerial resources and future prospects of the holding company and the
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision may not approve any acquisition that
results in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, there are two exceptions to this
general rule. First, the approval of interstate supervisory acquisitions by
savings and loan holding companies. Second, the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit the acquisition. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies do not have specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations place these restrictions on
subsidiary savings institutions as described below. The Bank must notify the
Office of Thrift Supervision 30 days before declaring any dividend to SouthBanc
Shares. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision, which has authority to order the stoppage of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association
are limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 3% leverage ratio and an 8% risk-based capital ratio.
Effective April 1, 1999, however, the minimum leverage ratio increased to 4% for
all institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system) and, together with the risk-
based capital standard itself, a 4% Tier 1 risk-based capital standard. The
Office of Thrift Supervision regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard requires an institution to maintain Tier 1
or core capital to risk-weighted assets of at least 4% and total capital to
risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary capital. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of asset.
Core or Tier 1 capital is defined as common stockholders' equity and retained
earnings, certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock, and the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets. Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.
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The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. Presently, the Office of Thrift Supervision has deferred
implementation of the interest rate risk component. At September 30, 1999, the
Bank met each of its capital requirements. See Note 12 to Notes to Consolidated
Financial Statements for further information.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 or core
capital to risk-weighted assets of less than 4%, or a ratio of core capital to
total assets of less than 4%, or 3% or less for institutions with the highest
examination rating, is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Although there is a narrow exception, the Office
of Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized" if the institution is
critically undercapitalized on average during the calendar quarter 270 days
after becoming critically undercapitalized. The regulation also provides that
an institution must file a capital restoration plan with the Office of Thrift
Supervision within 45 days of the date that the Office of Thrift Supervision
notifies it that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
immediately apply to an undercapitalized institution, including, but not limited
to, increased monitoring by regulators and restrictions on growth, capital
distributions and expansion. The Office of Thrift Supervision could also take
any one of a number of discretionary supervisory actions, including issuing a
capital directive and replacing senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the Savings Association Insurance Fund. The Federal Deposit Insurance
Corporation maintains a risk-based assessment system by which institutions are
assigned to one of three categories based on their capitalization and one of
three subcategories based on examination ratings and other supervisory
information. An institution's assessment rate depends upon the categories to
which it is assigned. Assessment rates for Savings Association Insurance Fund
member institutions are determined semiannually by the Federal Deposit Insurance
Corporation and currently range from zero basis points for the healthiest
institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1998, Financing Corporation payments for Savings Association Insurance
Fund members approximated 6.10 basis points, while Bank Insurance Fund members
paid 1.22 basis points. By law, there will be equal sharing of Financing
Corporation payments between the members of both insurance funds on the earlier
of January 1, 2000 or the date the two insurance funds are merged.
The Federal Deposit Insurance Corporation may terminate an institution's
deposit insurance if it finds that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed
by the Federal Deposit Insurance Corporation or the Office of Thrift
Supervision. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of its deposit insurance.
Financial Institution Modernization Legislation. Recently enacted federal
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that
acquire control of a single savings association after May 4, 1999 (or that filed
an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the
activities permitted "a financial holding company" under the new legislation,
including insurance and securities-related activities, and the
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activities currently permitted for multiple savings and loan holding companies,
but generally not in commercial activities. The authority for unrestricted
activities is grandfathered for unitary savings and loan holding companies, such
as SouthBanc Shares, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired SouthBanc
Shares.
Loans to One Borrower. Federal law provides that savings institutions must
generally follow the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral.
Qualified Thrift Lender Test. Federal law requires savings institutions to
meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets" in
certain "qualified thrift investments" in at least 9 months out of each 12 month
period. "Portfolio assets" equals total assets less specified liquid assets up
to 20% of total assets, intangibles, including goodwill, and the value of
property used to conduct business. "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.
A savings institution that fails the qualified thrift lender test faces
certain operating restrictions and may be required to convert to a commercial
bank charter. As of September 30, 1999, the Bank complied with the qualified
thrift lender test. Recent legislation has expanded the extent to which
education loans, credit card loans and small business loans may be considered
"qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out merger. The rule
effective through the first quarter of 1999 established three tiers of
institutions based primarily on an institution's capital level. A Tier I
institution exceeded all capital requirements before and after a proposed
capital distribution and has not been advised by the Office of Thrift
Supervision that it needs more than normal supervision. A Tier I institution
could, after first giving notice to but without obtaining approval of the Office
of Thrift Supervision, make capital distributions during the calendar year equal
to the greater of 100% of its net earnings to date during the calendar year plus
the amount that would have reduced by one-half the excess capital over its
capital requirements at the beginning of the calendar year, or 75% of its net
income for the previous four quarters. Any additional capital distributions
required prior regulatory approval.
Effective April 1, 1999, the Office of Thrift Supervision's capital
distribution regulation changed. Under the new regulation, an application to
and the prior approval of the Office of Thrift Supervision is required before
any capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under Office of Thrift Supervision
regulations (generally, compliance with all capital requirements and examination
ratings in one of two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with Office of Thrift Supervision. If an
application is not required, the institution must still give advance notice to
Office of Thrift Supervision of the capital distribution. If the Bank's capital
fell below its regulatory requirements or if the Office of Thrift Supervision
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the
Office of Thrift Supervision could prohibit a proposed capital distribution,
which would otherwise be permitted by the regulation if the Office of Thrift
Supervision determines that the distribution would be an unsafe or unsound
practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the Office of Thrift Supervision to any amount within the range of 4% to 10%.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank met these requirements at September 30, 1999.
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Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Bank's latest quarterly thrift financial report. The Bank's assessments for
the fiscal year ended September 30, 1999 totaled $76,000.
Branching. Office of Thrift Supervision regulations permit federally
chartered savings associations to branch nationwide under certain conditions.
Generally, federal savings associations may establish interstate networks and
geographically diversify their loan portfolios and lines of business. The
Office of Thrift Supervision authority preempts any state law purporting to
regulate branching by federal savings associations.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" is limited by federal law. Generally, an
affiliate is any company that controls or is under common control with an
institution, including SouthBanc Shares. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% Stockholders, as well as entities within the control of these persons, is
also governed by federal law. These persons are often referred to as "insiders"
of a company. Loans to insiders are required to be made on terms substantially
the same as those offered to unaffiliated individuals and may not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. The law limits both the individual and aggregate
amount of loans the Bank may make to insiders based, in part, on the Bank's
capital position and requires certain board approval procedures to be followed.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order, to removal of officers and/or
directors, to institution of a receivership or conservatorship, or to
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in
especially serious cases. The Federal Deposit Insurance Corporation has the
authority to recommend to the Director of the Office of Thrift Supervision that
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the Federal Deposit Insurance
Corporation has authority to take action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
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Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank of Atlanta
provides a central credit facility primarily for member institutions. The Bank,
as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank of Atlanta in an
amount at least equal to 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank of
Atlanta, whichever is greater. The Bank was in compliance with this requirement
with an investment in Federal Home Loan Bank of Atlanta stock at September 30,
1999, of $3.7 million. Federal Home Loan Bank of Atlanta advances must be
secured by specified types of collateral.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts,
primarily NOW and regular checking accounts. The regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less, subject to adjustment by the
Federal Reserve Board the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10%, subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances, as adjusted
by the Federal Reserve Board, are exempted from the reserve requirements. The
Bank complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Office of Thrift
Supervision regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift
Supervision, in connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of applications by such institution.
The Community Reinvestment Act requires public disclosure of an institution's
Community Reinvestment Act rating. The Bank's latest Community Reinvestment Act
rating, received from the Office of Thrift Supervision was "satisfactory."
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax
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matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company. For
additional information regarding income taxes, see Note 11 of Notes to
Consolidated Financial Statements.
Bad Debt Reserve. Historically, savings institutions such as the Bank,
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift"), were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). For taxable years beginning after December
31, 1995, the Bank's bad debt deduction must be determined under the experience
method using a formula based on actual bad debt experience over a period of
years or, if the Bank is a "large" Bank (assets in excess of $500 million) on
the basis of net charge-offs during the taxable year. The new rules allowed an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only
home purchase or home improvement loans are included and the institution can
elect to have the tax years with the highest and lowest lending activity removed
from the average calculation. If an institution is permitted to postpone the
reserve recapture, it must begin its six-year recapture no later than the 1998
tax year. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be subject
to provisions of present law referred to below that require recapture of the
pre-1988 bad debt reserve in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "Regulation and Supervision" for
limits on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income at a rate of 20%. The excess of the tax bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the experience method is treated as a preference
item for purposes of computing the alternative minimum taxable income. In
addition, only 90% of alternative minimum taxable income can be offset by net
operating loss carryovers. Alternative minimum taxable income is increased by
an amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its alternative minimum taxable income (determined without
regard to this preference and prior to reduction for net operating losses). For
taxable years
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beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of alternative minimum taxable income (with certain
modification) over $2.0 million is imposed on corporations, including the Bank,
whether or not an alternative minimum tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Company and the Bank will not file a consolidated tax return, except that if the
Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
State Taxation
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax, but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
Audits
There have not been any Internal Revenue Service audits of the Bank's
Federal income tax returns or audits of the Bank's state income tax returns
during the past five years.
-28-
Item 2. Properties
- -------------------
The following table sets forth certain information relating to the Bank's
offices as of September 30, 1999. All offices are owned by the Bank except as
noted in the table.
Lease
Year Owned Square Expiration
Location Opened or Leased Footage Date
- -------- ---------- ------------- ----------- -------------------------
Main Office:
907 N. Main Street 1979 Owned 50,000 --
Anderson, South Carolina
Branch Offices:
104 Whitehall Road 1975 Building owned 2,000 December 31, 2004, with
Anderson, South Carolina Land leased two renewal options for
ten years each
2821 South Main Street 1976 Building owned 2,500 April 30, 2000, with five
Anderson South Carolina Land leased renewal options for five
years each
Perpetual Square 1997 Owned 2,700 --
SC Highway 81
Anderson, South Carolina
Northtowne 1994 Owned 2,800 --
3898 Liberty Highway
Anderson, South Carolina
1007 By-Pass 123 1996 Owned 2,900 --
Seneca, South Carolina
The Bank has an in-house computer system to process customer records and
monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations. See the
information under the caption entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Issues" in the 1999
Annual Report to Stockholders for information regarding the Company's Year 2000
program.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1999.
-29-
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ---------------------------------------------------------------------------
Matters
- -------
The information contained under the section captioned "Market for Common
Stock and Dividend Information" in the 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained under the section captioned "Selected Financial
Information" in the 1999 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Market Risk and
Asset and Liability Management" in the 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
(a) Financial Statements
Independent Auditors' Report*
Consolidated Statements of Financial Condition as of September
30, 1999 and 1998
Consolidated Statements of Income for the Years Ended September
30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
Item 10. Directors, Executive Officers of the Registrant
- ---------------------------------------------------------
The following table sets forth certain information regarding the
executive officers of the Company. The officers of SouthBanc Shares are elected
annually by the board of directors. Each officer holds office until his
successor is duly elected and qualified or until his death or until he resigns
or is removed.
-30-
Name Age(1) Position
- ---- ------ --------
Harold A. Pickens, Jr. 66 Chairman of the Board
Robert W. "Lujack" Orr 51 President, Chief Executive Officer and a Director
Thomas C. Hall 52 Treasurer and Chief Financial Officer
Barry C. Visioli 51 Senior Vice President
Sylvia B. Reed 59 Corporate Secretary
The following table sets forth certain information regarding the
executive officers of the Company.
Name Age(1) Position
- ---- ------ --------
Thomas C. Hall 52 Senior Vice President and Treasurer
Barry C. Visioli 51 Senior Vice President
Sylvia B. Reed 59 Corporate Secretary
___________________
(1) As of September 30, 1999.
Harold A. "Drew" Pickens, Jr. is the retired owner of Harold A. Pickens and
Sons, Inc., with which he has been affiliated since 1956.
Robert W. "Lujack" Orr has been employed by the Bank since 1974 and has
held a variety of positions, such as Senior Vice President/Funds Acquisition and
Executive Vice President, prior to assuming his current position as President
and Managing Officer on January 1, 1991. Mr. Orr is a director of First Trust,
the mortgage banking company in which a service corporation subsidiary of the
Bank has an equity investment.
Thomas C. Hall has been employed by the Bank since 1975 and currently
serves as Senior Vice President, Treasurer and Chief Financial Officer
responsible for areas of accounting, investments, data processing and deposits.
Barry C. Visioli has been affiliated with the Bank since 1973. Mr. Visioli
serves as Senior Vice President and is responsible for Lending Operations. Mr.
Visioli is a director of First Trust, the mortgage banking company in which a
service corporation subsidiary of the Bank has an equity investment.
Sylvia B. Reed joined the Bank in 1986 and currently serves as Corporate
Secretary.
Item 11. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" in the Proxy
Statement.
(b) Security Ownership of Management
-31-
The information required by this item is incorporated herein by
reference to the sections captioned "Stock Ownership" in the
Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the Company.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Transactions with
Management" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of SouthBanc Shares, Inc.
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No.
333-42517) filed on December 17, 1997)
3.2 Bylaws of SouthBanc Shares, Inc. (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-42517) filed on
December 17, 1997)
4.0 Specimen stock certificate (incorporated by reference
to Exhibit 4.0 to the Company's Registration Statement
on Form S-1 (File No. 333-42517) filed on December 17,
1997)
10.1 Employment Agreement between SouthBanc Shares, Inc. and
Robert W. Orr
10.2 Employment Agreement between SouthBanc Shares, Inc. and
Thomas C. Hall
10.3 Employment Agreement between SouthBanc Shares, Inc. and
Barry C. Visioli
10.4 Employment Agreement between Perpetual Bank, A Federal
Savings Bank and Robert W. Orr
10.5 Employment Agreement between Perpetual Bank, A Federal
Savings Bank and Thomas C. Hall
10.6 Employment Agreement between Perpetual Bank, A Federal
Savings Bank and Barry C. Visioli
10.7 1998 Stock Option Plan (incorporated by reference to
the Company's Annual Meeting Proxy Statement dated
December 18, 1998)
10.8 1998 Management Development and Recognition Plan
(incorporated by reference to the Company's Annual
Meeting Proxy Statement dated December 18, 1998)
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
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott, Davis & Company, LLP
27 Financial Data Schedule
-32-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHBANC SHARES, INC.
Date: December 28, 1999 By: /s/ Robert W. Orr
----------------------------------------
Robert W. Orr
President and Managing Officer
(Duly Authorized Representative)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Robert W. Orr By: /s/ Thomas C. Hall
-------------------------------- ------------------------------------
Robert W. Orr Thomas C. Hall
President and Managing Officer Senior Vice President and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: December 28, 1999 Date: December 28, 1999
By: /s/ Harold A. Pickens, Jr. By: /s/ Cordes G. Seabrook, Jr.
-------------------------------- ------------------------------------
Harold A. Pickens, Jr. Cordes G. Seabrook, Jr.
Chairman of the Board Director
Date: December 28, 1999 Date: December 28, 1999
By: /s/ Martha S. Clamp By: /s/ Jim Gray Watson
-------------------------------- ------------------------------------
Martha S. Clamp Jim Gray Watson
Director Director
Date: December 28, 1999 Date: December 28, 1999
By: /s/ Jack F. McIntosh By: /s/ Richard C. Ballenger
-------------------------------- ------------------------------------
Jack F. McIntosh Richard C. Ballenger
Director Director
Date: December 28, 1999 Date: December 28, 1999
By: /s/ F. Stevon Kay
--------------------------------
F. Stevon Kay
Director
Date: December 28, 1999