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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
Commission file number: 0-18460
COMMUNITY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
South Carolina 57-0866395
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
109 Montague Avenue
Greenwood, South Carolina 29646
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (864) 941-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class On Which Reported
- ------------------- -----------------
Common Stock, par value $1.00 per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 15, 1999 was approximately $27.5 million based upon the last
sale price reported for such date on the American Stock Exchange. On that date,
the number of shares outstanding of the Registrant's common stock, $1.00 par
value, was $3,102,529 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 1999 Annual
Meeting of Stockholders (Part III).
PART I
ITEM 1. BUSINESS.
GENERAL
Community Capital Corporation (the "Company") is a multi-bank holding company
headquartered in Greenwood, South Carolina. The Company was incorporated under
the laws of the State of South Carolina on April 8, 1988 as a holding company
for Greenwood Bank & Trust (the "Greenwood Bank") which opened in 1989.
The Company was formed principally in response to perceived opportunities
resulting from takeovers of several South Carolina-based banks by large
southeastern regional bank holding companies. In many cases, when these
consolidations occur, local boards of directors are dissolved and local
management is relocated or terminated. The Company believes this situation
creates favorable opportunities for new community banks with local management
and local directors. Management believes that such banks can be successful in
attracting individuals and small to medium-sized businesses as customers who
wish to conduct business with a locally owned and managed institution that
demonstrates an active interest in their business and personal financial
affairs.
In 1994, the Company made the strategic decision to expand beyond the Greenwood
County area by creating an organization of independently managed community banks
that serve their respective local markets but which share a common vision and
benefit from the strength, resources and economies of a larger institution. In
1995, the Company opened Clemson Bank & Trust (the "Clemson Bank") in Clemson,
South Carolina. In 1997, the Company opened the Bank of Barnwell County (the
"Barnwell Bank"), TheBank (formerly the Bank of Belton, the "Belton Bank") and
the Bank of Newberry County (the "Newberry Bank," and collectively with the
Barnwell Bank and the Belton Bank, the "New Banks"). Each of these five
community banks (collectively, the "Banks") operates as a wholly-owned
subsidiary of the Company and engages in a general commercial banking business,
emphasizing the banking needs of individuals and small to medium-sized
businesses in each Bank's primary service area. The Belton Bank, the Barnwell
Bank, the Greenwood Bank and the Newberry Bank are state chartered Federal
Reserve member banks, while the Clemson Bank is a state chartered nonmember
bank.
The Company formed Community Trust Services Company in the fourth quarter of
1997 as a wholly-owned subsidiary to perform trust services for the Banks. The
name of this subsidiary was changed to Community Trust Company in 1998.
RECENT BRANCH ACQUISITIONS
On June 15, 1998, the Belton Bank acquired certain assets and deposits
associated with two branches from Carolina First Bank ("Carolina First") in
Anderson County, South Carolina, and the Clemson Bank acquired certain assets
and deposits associated with a Carolina First branch located in Abbeville
County, South Carolina.
MARKET AREAS
The Greenwood Bank has two banking locations in Greenwood, South Carolina; the
Clemson Bank has two banking locations in Clemson and Abbeville, South Carolina;
the Barnwell Bank has five banking locations in Aiken, Barnwell and Orangeburg
Counties, South Carolina; the Belton Bank has three banking locations in Belton
and Honea Path, South Carolina; and the Newberry Bank has one banking location
in Newberry, South Carolina.
The following table sets forth certain information concerning the Banks at
December 31, 1998:
NUMBER OF TOTAL TOTAL TOTAL
BANK LOCATIONS ASSETS LOANS DEPOSITS
- ---- --------- ------ ----- --------
(DOLLARS IN THOUSANDS)
Barnwell Bank................................... 5 $ 76,763 $ 35,663 $ 68,169
Belton Bank..................................... 3 65,556 21,090 55,834
Clemson Bank.................................... 2 38,051 22,229 28,829
Greenwood Bank.................................. 2 115,088 85,888 89,126
Newberry Bank................................... 1 26,082 10,198 19,854
Each Bank offers a full range of commercial banking services, including checking
and savings accounts, NOW accounts, IRA accounts, and other savings and time
deposits of various types ranging from money markets to long-term certificates
of deposit. The Banks also offer a full range of consumer credit and short-term
and intermediate-term commercial and personal loans. Each Bank conducts
residential mortgage loan origination activities pursuant to which mortgage
loans are sold to investors in the secondary markets. Servicing of such loans is
not retained by the Banks.
The Banks also offer trust and related fiduciary services which are administered
by the Company's wholly-owned subsidiary, Community Trust Company. Discount
securities brokerage services are available through a third-party brokerage
service which has contracted with Community Financial Services, Inc., a
wholly-owned subsidiary of the Greenwood Bank.
The Company performs data processing functions for the Banks upon terms that the
managements of the Banks believe is competitive with those offered by
unaffiliated third-party service bureaus. The Company also administers certain
operating functions for the Banks where cost savings can be achieved. Included
in such operations are regulatory compliance, personnel, and internal audit
functions. The Company's costs associated with the performance of such services
are allocated between the Banks based on each Bank's total accounts and/or total
assets.
LENDING ACTIVITIES
GENERAL. Through the Banks, the Company offers a range of lending services,
including real estate, consumer, and commercial loans, to individuals and small
business and other organizations that are located in or conduct a substantial
portion of their business in the Banks' market areas. The Company's total loans
at December 31, 1998, were $172.5 million, or 58.45% of total earning assets.
The interest rates charged on loans vary with the degree of risk, maturity, and
amount of the loan, and are further subject to competitive pressures,
availability of funds, and government regulations. The Company has no foreign
loans or loans for highly leveraged transactions.
The Company's primary focus has been on commercial and installment lending to
individuals and small to medium-sized businesses in its market areas, as well as
residential mortgage loans. These loans totaled approximately $113.6 million,
and constituted approximately 65.83% of the Company's loan portfolio, at
December 31, 1998.
The following table sets forth the composition of the Company's loan portfolio
for each of the five years in the period ended December 31, 1998.
LOAN COMPOSITION
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Commercial, financial and agricultural 24.19% 21.12% 19.05% 24.19% 16.80%
Real estate:
Construction 11.68 13.42 12.37 8.61 18.71
Mortgage:
Residential 29.62 35.62 39.13 27.48 30.93
Commercial(1) 26.57 22.45 21.87 21.81 15.46
Consumer and other 7.94 7.39 7.58 17.91 18.10
----------- ----------- ----------- ----------- -----------
Total loans 100.00% 100.00% 100.00% 100.00% 100.00%
=========== =========== =========== =========== ===========
Total loans (dollars) $ 50,565 $ 63,204 $ 80,546 $ 149,127 $ 172,545
=========== =========== =========== =========== ===========
- ----------
(1) The majority of these loans are made to operating businesses where real
property has been taken as additional collateral.
LOAN APPROVAL. Certain credit risks are inherent in the loan making process.
These include prepayment risks, risks resulting from uncertainties in the future
value of collateral, risks resulting from changes in economic and industry
conditions, and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility. The Company attempts to minimize
loan losses through various means and uses standardized underwriting criteria.
These means include the use of policies and procedures including officer and
customer lending limits, and loans in excess of certain limits must be approved
by the Board of Directors of the relevant Banks.
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LOAN REVIEW. The Company has a continuous loan review process designed to
promote early identification of credit quality problems. All loan officers are
charged with the responsibility of reviewing all past due loans in their
respective portfolios. Each of the Banks establishes watch lists of potential
problem loans.
DEPOSITS
The principal sources of funds for the Banks are core deposits, consisting of
demand deposits, interest-bearing transaction accounts, money market accounts,
saving deposits, and certificates of deposit. Transaction accounts include
checking and negotiable order of withdrawal (NOW) accounts which customers use
for cash management and which provide the Banks with a source of fee income and
cross-marketing opportunities, as well as a low-cost source of funds. Time and
savings accounts also provide a relatively stable source of funding. The largest
source of funds for the Banks is certificates of deposit. Certificates of
deposit in excess of $100,000 are held primarily by customers in the Banks'
market areas. Deposit rates are set weekly by senior management of each of the
Banks, subject to approval by management of the Company. Management believes
that the rates the Banks offer are competitive with other institutions in the
Banks' market areas.
COMPETITION
Banks generally compete with other financial institutions through the selection
of banking products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and the personal manner in which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. South Carolina law
also permits regional interstate banking whereby bank holding companies in
certain southeastern states are allowed to acquire depository institutions
within South Carolina. Many large banking organizations currently operate in the
respective market areas of the Banks, several of which are controlled by
out-of-state ownership. In addition, competition between commercial banks and
thrift institutions (savings institutions and credit unions) has been
intensified significantly by the elimination of many previous distinctions
between the various types of financial institutions and the expanded powers and
increased activity of thrift institutions in areas of banking which previously
had been the sole domain of commercial banks. Recent legislation, together with
other regulatory changes by the primary regulators of the various financial
institutions, has resulted in the almost total elimination of practical
distinctions between a commercial bank and a thrift institution. Consequently,
competition among financial institutions of all types is largely unlimited with
respect to legal ability and authority to provide most financial services.
Furthermore, as a consequence of legislation recently enacted by the United
States Congress, out-of-state banks not previously allowed to operate in South
Carolina will be allowed to commence operations and compete in the Banks'
primary service areas if the South Carolina legislature does not elect to limit
the reach of such federal legislation within South Carolina. See "Government
Supervision and Regulation -- Interstate Banking."
Each of the Banks faces increased competition from both federally-chartered and
state-chartered financial and thrift institutions, as well as credit unions,
consumer finance companies, insurance companies and other institutions in the
Banks' respective market areas. Some of these competitors are not subject to the
same degree of regulation and restriction imposed upon the Banks. Many of these
competitors also have broader geographic markets and substantially greater
resources and lending limits than the Banks and offer certain services that the
Banks do not currently provide. In addition, many of these competitors have
numerous branch offices located throughout the extended market areas of the
Banks that the Company believes may provide these competitors with an advantage
in geographic convenience that the Banks do not have at present. Such
competitors may also be in a position to make more effective use of media
advertising, support services, and electronic technology than can the Banks.
Currently there are two other commercial banks and one credit union operating in
the Barnwell Bank's primary service areas; four other commercial banks, and no
credit unions operating in the Belton Bank's primary service area; three other
commercial banks, one savings institution, and one credit union operating in the
Clemson Bank's primary service area; seven other commercial banks, one savings
institution, and four credit unions operating in the Greenwood Bank's primary
service area; and six other commercial banks, one savings institution, and one
credit union operating in the Newberry Bank's primary service area.
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EMPLOYEES
The Company currently has 24 full-time employees and one part-time employee, the
Barnwell Bank has 38 full-time employees and four part-time employees, the
Belton Bank has 16 full-time employees and five part-time employees, the Clemson
Bank has 14 full-time employees and two part-time employees, the Greenwood Bank
has 40 full-time employees and one part-time employee, and the Newberry Bank has
nine full-time employees and one part-time employee. Community Trust Company has
three full-time employees.
GOVERNMENT SUPERVISION AND REGULATION
GENERAL
The Company and the Banks are subject to an extensive collection of state and
federal banking laws and regulations which impose specific requirements and
restrictions on, and provide for general regulatory oversight with respect to,
virtually all aspects of the Company's and the Banks' operations. The Company
and the Banks are also affected by government monetary policy and by regulatory
measures affecting the banking industry in general. The actions of the Federal
Reserve System affect the money supply and, in general, the Banks' lending
abilities in increasing or decreasing the cost and availability of funds to the
Banks. Additionally, the Federal Reserve System regulates the availability of
bank credit in order to combat recession and curb inflationary pressures in the
economy by open market operations in United States government securities,
changes in the discount rate on member bank borrowings, changes in the reserve
requirements against bank deposits and limitations on interest rates which banks
may pay on time and savings deposits.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") have significantly changed the commercial banking industry through,
among other things, revising and limiting the types and amounts of investment
authority, significantly increasing minimum regulatory capital requirements, and
broadening the scope and power of federal bank and thrift regulators over
financial institutions and affiliated persons in order to protect the deposit
insurance funds and depositors. These laws, and the resulting implementing
regulations, have subjected the Banks and the Company to extensive regulation,
supervision and examination by the Federal Reserve System and the FDIC. This
change has resulted in increased administrative, professional and compensation
expenses in complying with a substantially increased number of new regulations
and policies. The regulatory structure created by these laws gives the
regulatory authorities extensive authority in connection with their supervisory
and enforcement activities and examination policies.
The following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Banks. This summary is qualified in its entirety
by reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations applicable to the business of the Company and the Banks. Any change
in applicable laws or regulations may have a material adverse effect on the
business and prospects of the Company and the Banks.
THE COMPANY
The Company is a bank holding company within the meaning of the Federal Bank
Holding Company Act of 1956, as amended (the "BHCA"), and the South Carolina
Banking and Branching Efficiency Act of 1996, as amended (the "South Carolina
Act"). The Company is registered with both the Federal Reserve System and the
South Carolina State Board of Financial Institutions (the "State Board"). The
Company is required to file with both of these agencies annual reports and other
information regarding its business operations and those of its subsidiaries. It
is also subject to the supervision of, and to regular examinations by, these
agencies. The BHCA requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before (i) it or any of its subsidiaries
(other than a bank) acquires substantially all of the assets of any bank, (ii)
it acquires ownership or control of any voting shares of any bank if after such
acquisition it would own or control, directly or indirectly, more than 5% of the
voting shares of such bank, or (iii) it merges or consolidates with any other
bank holding company. Under the South Carolina Act, it is unlawful without the
prior approval of the State Board for any South Carolina bank holding company
(i) to acquire direct or indirect ownership or control of more than 5% of the
voting shares of any bank or any other bank holding company, (ii) to acquire all
or substantially all of the assets of a bank or any other bank holding company,
or (iii) to merge or consolidate with any other bank holding company.
The BHCA and the Federal Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either the Federal Reserve Board's approval must be
4
obtained or notice must be furnished to the Federal Reserve Board and not
disapproved prior to any person or company acquiring control of a bank holding
company, such as the Company, subject to certain exemptions for certain
transactions.
Under the BHCA, a bank holding company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, nonbanking activities, unless the Federal Reserve Board,
by order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve Board has determined by
regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and certain types of leases, engaging in
certain insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial adviser, owning savings associations and making
investments in certain corporations or projects designed primarily to promote
community welfare. The Company is also restricted in its activities by the
provisions of the Glass-Steagall Act of 1933, which prohibits the Company from
owning subsidiaries that are engaged principally in the issue, flotation,
underwriting, public sale or distribution of securities. The regulatory
requirements to which the Company is subject also set forth various conditions
regarding the eligibility and qualifications of its directors and officers.
THE BANKS
The operations of the Barnwell Bank, the Belton Bank, the Greenwood Bank and the
Newberry Bank are subject to various statutory requirements and rules and
regulations promulgated and enforced primarily by the State Board, the Federal
Reserve System, and the FDIC. As a South Carolina-chartered banking corporation
with FDIC deposit insurance, the Clemson Bank is also subject to various
statutory requirements and rules and regulations promulgated and enforced
primarily by the State Board and the FDIC. The State Board and the FDIC regulate
or monitor all areas of the Bank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuances of securities, payment of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices.
The Federal Reserve System and the FDIC also require the Banks to maintain
certain capital ratios (see "Federal Capital Regulations"), and the provisions
of the Federal Reserve Act require the Barnwell Bank, the Belton Bank, the
Greenwood Bank and the Newberry Bank to observe certain restrictions on any
extensions of credit to the Company, or with certain exceptions, other
affiliates, on investments in the stock or other securities of other banks, and
on the taking of such stock or securities as collateral on loans to any
borrower. In addition, the Banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, or the providing of any
property or service. The regulatory requirements to which the Banks are subject
also set forth various conditions regarding the eligibility and qualification of
their directors and officers.
DIVIDENDS
Although the Company is not presently subject to any direct legal or regulatory
restrictions on dividends (other than the South Carolina state business
corporation law requirements that dividends may be paid only if such payment
would not render the Company insolvent or unable to meet its obligations as they
come due), the Company's ability to pay cash dividends will depend primarily
upon the amount of dividends paid by each of the Banks and any other
subsequently acquired entities. The Banks are subject to regulatory restrictions
on the payment of dividends, including the prohibition of payment of dividends
from each Bank's capital. All dividends of the Banks must be paid out of the
respective undivided profits then on hand, after deducting expenses, including
losses and bad debts. In addition, as a member of the Federal Reserve System,
each of the Barnwell Bank, the Belton Bank, the Greenwood Bank and the Newberry
Bank is prohibited from declaring a dividend on its shares of common stock until
its surplus equals its stated capital, unless there has been transferred to
surplus no less than one-tenth of such bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend) and the
approval of the Federal Reserve Board is required if the total of all dividends
declared by any of the Barnwell Bank, the Belton Bank, the Greenwood Bank or the
Newberry Bank in any calendar year exceeds the total of its net profits for that
year combined with that Bank's retained net profits for the preceding two years,
less any required transfers to surplus. The Banks are subject to various other
federal and state regulatory restrictions on the payment of dividends, including
receipt of the approval of the South Carolina Commissioner of Banking prior to
paying dividends to the Company.
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FIRREA
FIRREA has had a significant impact on the operations of all financial
institutions, including the Banks. FIRREA, among other things, abolished the
Federal Savings and Loan Insurance Corporation and established two new insurance
funds under the jurisdiction of the FDIC: the Savings Association Fund and the
Bank Insurance Fund (see "FDIC Regulations"). FIRREA also imposed, with certain
exceptions, a "cross guaranty" on the part of commonly controlled depository
institutions such as the Banks. Under this provision, if one depository
institution subsidiary of a multi-bank holding company fails or requires FDIC
assistance, the FDIC may assess a commonly controlled depository institution for
the estimated losses suffered by the FDIC. Consequently, each of the Banks is
subject to assessment by the FDIC related to any loss suffered by the FDIC
arising out of the operations of the other Banks. The FDIC's claim is junior to
the claims of nonaffiliated depositors, holders of secured liabilities, general
creditors and subordinated creditors but is superior to the claims of
shareholders.
FDIC REGULATIONS
The FDIC establishes rates for the payment of premiums by federally insured
banks and thrifts for deposit insurance. Deposits in the Banks are insured by
the FDIC up to a maximum amount (generally $100,000 per depositor, subject to
aggregation rules), and the FDIC maintains an insurance fund for commercial
banks with insurance premiums from the industry used to offset losses from
insurance payouts when banks fail. The Banks pay premiums to the FDIC on their
deposits. In 1993, the FDIC adopted a rule which establishes a risk-based
deposit insurance premium system for all insured depository institutions,
including the Banks. Under the 1993 rule, a depository institution pays to the
FDIC a premium of from $0.00 to $0.31 per $100 of insured deposits depending on
its capital levels and risk profile, as determined by its primary federal
regulator on a semi-annual basis. During 1998, each Bank's assessment rate was
$500 per quarter for insured deposits.
FEDERAL CAPITAL REGULATIONS
In an effort to achieve a measure of capital adequacy that is more sensitive to
the individual risk profiles of financial institutions, pursuant to the
provisions of the FDICIA, the Federal Reserve Board, the FDIC, and other federal
banking agencies have adopted risk-based capital adequacy guidelines for banking
organizations insured by the FDIC, including each of the Banks. These guidelines
redefine traditional capital ratios to take into account assessments of risks
related to each balance sheet category, as well as off-balance sheet financing
activities. The guidelines define a two-tier capital framework. Tier 1 capital
consists of common and qualifying preferred shareholders' equity, excluding the
unrealized gain (loss) on available-for-sale securities, less goodwill and other
adjustments. Tier 2 capital consists of mandatory convertible, subordinated and
other qualifying term debt, preferred stock not qualifying for Tier 1, and the
allowance for credit losses up to 1.25% of risk-weighted assets. Under the
guidelines, institutions must maintain a specified minimum ratio of "qualifying"
capital to risk-weighted assets. At least 50% of an institution's qualifying
capital must be "core" or "Tier 1" capital, and the balance may be
"supplementary" or "Tier 2" capital. The guidelines imposed on the Company and
the Banks include a minimum leverage ratio standard of capital adequacy. The
leverage standard requires top-rated institutions to maintain a minimum Tier 1
capital to assets ratio of 3%, with institutions receiving less than the highest
rating required to maintain a minimum ratio of 4% or greater, based upon their
particular circumstances and risk profiles. As of December 31, 1998, the
guidelines required achievement of a minimum ratio of total capital to
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4%.
Each of the Company's and the Banks' leverage and risk-based capital ratios at
December 31, 1998, exceeded their respective fully phased-in minimum
requirements.
OTHER REGULATIONS
Interest and certain other charges collected or contracted for by the Banks are
subject to state usury laws and certain federal laws concerning interest rates.
The Banks' loan operations are also subject to certain federal laws applicable
to credit transactions, such as the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers, the Community Reinvestment
Act of 1977 requiring financial institutions to meet their obligations to
provide for the total credit needs of the communities they serve, including
investing their assets in loans to low- and moderate-income borrowers, the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable public officials to determine whether a financial
institution is fulfilling its obligations to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit, the
Fair Credit Reporting Act governing the manner in which consumer
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debts may be collected by collection agencies, and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of the Banks also are subject to the
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that Act,
which govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
INTERSTATE BANKING
On September 29, 1994, the federal government enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "1994 Act"). The provisions of
the 1994 Act became effective on September 29, 1995, at which time eligible bank
holding companies in any state were permitted, with Federal Reserve Board
approval, to acquire banking organizations in any other state. As such, all
existing regional compacts and substantially all existing regional limitations
on interstate acquisitions of banking organizations have been eliminated.
The 1994 Act also removed substantially all of the existing prohibitions on
interstate branching by banks. Since June 1, 1997, a bank operating in any state
has been entitled to establish one or more branches within any other state
without, as formerly required, the establishment of a separate banking structure
within the other state. Interstate branching was allowed earlier than the
automatic phase-in date of June 1, 1997, as long as the legislatures of both
states involved had adopted statutes expressly permitting such branching to take
place at an earlier date.
On May 7, 1996, South Carolina adopted the South Carolina Act which became
effective on July 1, 1996. The South Carolina Act permits the acquisition of
South Carolina banks and bank holding companies by, and mergers with,
out-of-state banks and bank holding companies with the prior approval of the
State Board. The South Carolina Act also permits South Carolina state banks,
with prior approval of the State Board, to operate branches outside the State of
South Carolina. Although the 1994 Act has the potential to increase the number
of competitors in the marketplace of each of the Banks, the Company cannot
predict the actual impact of such legislation on the competitive position of the
Banks.
ADVISORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this PART I, Item 1 (Business) and in
PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) that are not historical facts are forward-looking
statements subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. The Company cautions readers of this Annual
Report on Form 10-K that such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Although the
Company's management believes that their expectations of future performance are
based on reasonable assumptions within the bounds of their knowledge of their
business and operations, there can be no assurance that actual results will not
differ materially from their expectations.
Factors which could cause actual results to differ from expectations include,
among other things, the challenges, costs and complications associated with the
continued development of the New Banks as start-up operations with no history of
operating profits; the ability of the Company to effectively integrate and staff
the operations of the New Banks as well as the operations allocated to the base
of deposits acquired in connection with branch acquisitions; the ability of the
Company to retain and deploy in a timely manner the cash associated with branch
acquisitions into assets with satisfactory yields and credit risk profiles; the
potential that loan charge-offs may exceed the allowance for loan losses or that
such allowance will be increased as a result of factors beyond the control of
the Company; the Company's dependence on senior management; competition from
existing financial institutions operating in the Company's market areas as well
as the entry into such areas of new competitors with greater resources, broader
branch networks and more comprehensive services; the potential adverse impact on
net income of rapidly declining interest rates; adverse changes in the general
economic conditions in the geographic markets served by the Company; the
challenges and uncertainties in the implementation of the Company's expansion
and development strategies; the potential negative effects of future legislation
affecting financial institutions; and other factors described in this report and
in other reports filed by the Company with the Securities and Exchange
Commission.
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ITEM 2. PROPERTIES.
The Company operates out of an approximately 12,500 square foot building located
on approximately one acre of land owned by the Company in Greenwood, South
Carolina.
The Greenwood Bank operates out of an approximately 8,100 square foot building
located on approximately one acre of land owned by the Greenwood Bank in
Greenwood, South Carolina. The Greenwood Bank also operates a branch location in
Greenwood on land the Greenwood Bank leases from a director of the Company and
the Greenwood Bank.
The Barnwell Bank operates out of an approximately 2,900 square foot building
located on a quarter acre parcel owned by the Barnwell Bank in Barnwell, South
Carolina. The Barnwell Bank also operates five branches located in Aiken,
Barnwell and Orangeburg Counties in South Carolina. Of the five branch banking
locations of the Barnwell Bank, one is leased from a third party and four are
owned by the Barnwell Bank.
The Belton Bank operates out of an approximately 1600 square foot building
located on approximately five areas of land in Belton, South Carolina. The land
is owned by the Belton Bank and the building is leased by the Belton Bank from
the Company. The Belton Bank also operates two branches located on land owned by
the Company and leased to the Belton Bank in Anderson County, South Carolina.
The Clemson Bank operates out of an approximately 9,100 square foot building
located on approximately one and one-half acres of land owned by the Clemson
Bank in Clemson, South Carolina. The Clemson Bank also operates a branch located
on land owned by the Company and leased to the Clemson Bank in Abbeville County,
South Carolina.
The Newberry Bank operates out of an approximately 2,000 square foot building
located on approximately two acres of land in Newberry, South Carolina. The land
is owned by the Newberry Bank and the building is leased from an unrelated third
party.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The common stock of the Company (the "Common Stock") commenced trading on the
American Stock Exchange on February 11, 1997 under the symbol "CYL". Although
prior to such listing the Common Stock was quoted on the OTC Bulletin Board,
trading and quotations of the Common Stock were limited and sporadic. Management
is not aware of the prices at which all shares of Common Stock traded prior to
its listing on the American Stock Exchange. The range of prices known to
management prior to February 11, 1997 were $11.00 to $15.00 in 1997. The table
below reflects the high and low sales price per share for the Common Stock
reported on the American Stock Exchange for the periods indicated.
YEAR QUARTER HIGH LOW
1998 Fourth. . . . . . . . . . . . . . . . .$ 12.12 $ 9.50
. Third. . . . . . . . . . . . . . . . . . 16.37 10.12
Second . . . . . . . . . . . . . . . . . . . 18.75 15.75
First. . . . . . . . . . . . . . . . . . 18.87 14.50
8
1997 Fourth $ 15.00 $ 13.75
Third 14.75 12.00
Second 12.88 11.12
First (from February 11, 1997) 12.25 11.00
As of March 15, 1999, there were 3,102,529 shares of Common Stock outstanding
held by approximately 1,290 shareholders of record.
The Company has not declared or distributed any cash dividends to its
shareholders since its organization in 1988, and it is not likely that any cash
dividends will be declared in the near term. The Board of Directors of the
Company intends to follow a policy of retaining any earnings to provide funds to
operate and expand the business of the Company and the Banks for the foreseeable
future. The future dividend policy of the Company is subject to the discretion
of the Board of Directors and will depend upon a number of factors, including
future earnings, financial condition, cash requirements, and general business
conditions. The Company's ability to distribute cash dividends will depend
entirely upon the Banks' abilities to distribute dividends to the Company. As
state banks, the Banks are subject to legal limitations on the amount of
dividends each is permitted to pay. In particular, the Banks must receive the
approval of the State Board prior to paying dividends to the Company.
Furthermore, neither the Banks nor the Company may declare or pay a cash
dividend on any of their capital stock if they are insolvent or if the payment
of the dividend would render them insolvent or unable to pay their obligations
as they become due in the ordinary course of business. See "Government
Supervision and Regulation -- Dividends."
During the fiscal year ended December 31, 1998, the Company sold an aggregate of
18,425 shares of Common Stock to its employee stock ownership plan without
registration under the Securities Act of 1933, as amended (the "1933 Act"). The
following sets forth the dates and amounts of such sales:
DATE SHARES PROCEEDS
---- ------ --------
January 1, 1998 925 $ 13,875
February 1, 1998 1,867 29,909
March 1, 1998 971 17,478
April 1, 1998 948 17,419
May 1, 1998 1,091 18,808
June 1, 1998 3,265 55,505
July 1, 1998 1,102 16,794
August 1, 1998 1,596 22,144
September 1, 1998 2,128 21,875
November 1, 1998 3,056 31,048
December 1, 1998 1,476 16,236
In each case, all of the shares were sold at the quoted market price at the time
of sale and were issued pursuant to the exemption from registration contained in
Section 4(2) of the 1933 Act as a transaction, not involving a general
solicitation, in which the purchaser was purchasing for investment. The Company
believes that the purchaser was given and had access to detailed financial and
other information with respect to the Company and possessed requisite financial
sophistication . The Company did not sell any other equity securities during the
fiscal year ended December 31, 1998 which were not registered under the 1933
Act.
9
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five years ended
December 31, 1998 are derived from the consolidated financial statements and
other data of the Company. The consolidated financial statements for the years
ended December 31, 1994 through 1998, were audited by Tourville, Simpson &
Henderson, L.L.P. independent auditors. The selected consolidated financial data
should be read in conjunction with the consolidated financial statements of the
Company, including the accompanying notes, included elsewhere herein.
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
------------ ----------- ------------ ----------- ------------
INCOME STATEMENT DATA:
Interest income $ 21,043 $ 14,443 $ 8,201 $ 6,217 $ 4,403
Interest expense 11,198 7,172 4,006 2,948 1,693
------------ ----------- ------------ ----------- ------------
Net interest income 9,845 7,271 4,195 3,269 2,710
Provision for loan losses 1,836 608 187 112 14
------------ ----------- ------------ ----------- ------------
Net interest income after provision for
loan losses 8,009 6,663 4,008 3,157 2,696
Net securities gains (losses) 220 (1) 17 (22) (79)
Noninterest income 2,797 1,572 1,122 729 530
Noninterest expense 10,228 7,248 4,141 3,069 2,261
------------ ----------- ------------ ----------- ------------
Income before income taxes 798 986 1,006 795 886
Applicable income taxes 34 220 300 261 301
------------ ----------- ------------ ----------- ------------
Net income $ 764 $ 766 $ 706 $ 534 $ 585
============ =========== ============ =========== ============
BALANCE SHEET DATA:
Assets $ 321,031 $ 248,861 $ 115,959 $ 96,100 $ 65,071
Earning assets 295,213 227,372 106,770 89,233 59,269
Securities (1) 120,695 77,480 25,479 23,699 8,704
Loans (2) 172,545 149,127 80,546 63,204 50,565
Allowance for loan losses 2,399 1,531 837 671 581
Deposits 260,120 186,861 89,862 73,138 49,146
Federal Home Loan Bank advances 9,434 16,350 4,889 6,244 5,925
Shareholders' equity 33,430 31,928 13,556 12,932 6,079
PER SHARE DATA (3):
Basic earnings per share $ .25 $ 0.27 $ 0.55 $ 0.55 $ 0.90
Diluted earnings per share .24 0.26 0.52 0.50 0.86
Book value (period end) (4) 10.81 10.47 10.59 10.17 9.16
Tangible book value (period end) (4) 9.01 9.45 10.55 10.13 9.12
SELECTED RATIOS:
Return on average assets .27% 0.40% 0.67% 0.68% 0.97%
Return on average equity 2.33 2.68 5.41 5.69 10.17
Net interest margin (5) 3.76 4.16 4.29 4.49 4.78
Efficiency (6) 80.90 81.96 77.28 76.78 69.81
Allowance for loan losses to loans 1.39 1.03 1.04 1.06 1.15
Net charge-offs to average loans .62 0.15 0.03 0.03 -
Nonperforming assets to period end loans and
foreclosed property (2) (7) .85 0.63 0.23 0.02 0.04
Average equity to average assets 11.48 14.92 12.37 11.99 9.46
Leverage (4.00% required minimum) 8.89 12.08 11.62 13.21 9.42
Tier 1 risk-based capital ratio 13.78 17.65 15.58 18.46 11.04
Total risk-based capital ratio 15.00 18.61 16.54 19.41 12.09
Average loans to average deposits 69.65 76.78 88.06 93.03 98.21
- --------------
1) Securities held to maturity are stated at amortized cost, and securities
available for sale are stated at fair value.
2) Loans are stated net of unearned income, before allowance for loan losses.
3) All share and per share data have been adjusted to reflect the 5% Common
Stock dividends in April 1994, August 1995, May 1996 and September 1998.
4) Excludes the effect of any outstanding stock options.
5) Net interest income dividend by average earning assets.
6) Noninterest expense divided by the sum of net interest income and
noninterest income, net of gains and losses on sales of assets.
7) Nonperforming loans and nonperforming assets do not include loans past due
90 days or more that are still accruing interest.
10
QUARTERLY OPERATING RESULTS
1998 Quarter ended 1997 Quarter ended
--------------------------------------- --------------------------------------
(Dollars in thousands
except per share) Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
--------- --------- --------- --------- -------- --------- --------- ---------
Net interest income $ 2,731 $ 2,502 $ 2,373 $ 2,239 $ 2,127 $ 2,005 $ 1,875 $ 1,264
Provision for loan losses 904 339 286 307 276 108 136 88
Noninterest income 606 934 850 627 487 417 404 263
Noninterest expense 3,018 2,650 2,450 2,110 2,184 2,093 1,773 1,198
Net income (283) 339 396 312 138 200 269 159
Basic earnings per share (.09) .11 .13 .10 0.05 0.07 0.08 0.07
Diluted earnings per share (.09) .11 .12 .10 0.05 0.06 0.08 0.07
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE PRECEDING
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES
THERETO AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.
THE FINANCIAL INFORMATION PROVIDED BELOW HAS BEEN ROUNDED IN ORDER TO SIMPLIFY
ITS PRESENTATION. HOWEVER, THE RATIOS AND PERCENTAGES PROVIDED BELOW ARE
CALCULATED USING THE DETAILED FINANCIAL INFORMATION CONTAINED IN THE FINANCIAL
STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE IN
THIS ANNUAL REPORT.
GENERAL
Community Capital Corporation is a bank holding company headquartered in
Greenwood, South Carolina which operated through two community banks through
1996 and in 1997 acquired three de novo community banks (collectively, the
"Banks") in non-metropolitan markets in the State of South Carolina and formed a
subsidiary to perform trust services for its banking subsidiaries. The Company
pursues a community banking business which is characterized by personalized
service and local decision-making and emphasizes the banking needs of
individuals and small to medium-sized businesses.
The Company was formed in 1988 to serve as a holding company for the Greenwood
National Bank, now Greenwood Bank & Trust (the "Greenwood Bank"), principally in
response to perceived opportunities resulting from takeovers of several South
Carolina-based banks by large southeastern regional bank holding companies. In
many cases, when these consolidations occur, local boards of directors are
dissolved and local management is relocated or terminated. The Company believes
this situation creates favorable opportunities for new community banks with
local management and local directors. Management believes that such banks can be
successful in attracting individuals and small to medium-sized businesses as
customers who wish to conduct business with a locally owned and managed
institution that demonstrates an active interest in their business and personal
financial affairs.
In 1994, the Company made the strategic decision to expand beyond the Greenwood
County area by creating an organization of independently managed community banks
that serve their respective local markets but which share a common vision and
benefit from the strength, resources, and economies of a larger institution. In
June 1995, the Company opened Clemson Bank & Trust (the "Clemson Bank") in
Clemson, South Carolina. During 1996, the Company made the decision to acquire
and capitalize three de novo banks which were being organized in Barnwell,
Belton, and Newberry, South Carolina. In February 1997, Bank of Barnwell County
(the "Barnwell Bank") opened as a subsidiary of the Company. Similarly, in March
1997, TheBank (formerly the Bank of Belton, the "Belton Bank") opened, and, in
July 1997, The Bank of Newberry County (the "Newberry Bank") opened. The Company
also formed a separate trust organization in 1997 known as Community Trust
Services, Inc. In 1998, the Company changed the name from Community Trust
Services, Inc. to Community Trust Company. On April 7, 1997, the Barnwell Bank
acquired net loans (including accrued interest receivable) of approximately
$14.9 million and premises and equipment of approximately $2.0 million and
assumed deposits (including accrued interest payable) of approximately $55.1
million of five branches located in Aiken, Barnwell and Orangeburg Counties,
South Carolina from Carolina First Bank (the "Carolina First Branches in 1997").
In connection with the purchase of the Carolina First Branches, the Barnwell
Bank paid a premium of $2.5 million which is being amortized over a fifteen-year
period on a straight-line basis. The Barnwell Bank, the Belton Bank, and the
Newberry Bank are hereafter referred to collectively as the "New Banks".
11
To capitalize the New Banks, the Company sold 1,665,000 shares of its common
stock (the "Offering") resulting in net proceeds of $16.9 million. Of the net
proceeds, the Company used $7.2 million to capitalize the Barnwell Bank, $3.5
million to capitalize the Belton Bank, and $3.3 million to capitalize the
Newberry Bank. In accordance with the agreements with the organizers of the New
Banks and subject to the New Banks being opened, the Company agreed to include
organizational and preopening costs in the initial capitalization of the New
Banks. The goodwill associated with the acquisitions totaled $826,000 and is
being amortized over a five-year period on a straight-line basis.
On February 25, 1998, the Clemson Bank and the Belton Bank entered into Purchase
and Assumption Agreements with Carolina First Bank to acquire certain assets and
deposits associated with three branch offices of Carolina First Bank. On June
15, 1998, the Clemson Bank acquired net loans (including accrued interest
receivable) of approximately $580,000 and assumed deposits (including accrued
interest payable) of approximately $4.7 million of a Carolina First Branch in
Abbeville County, South Carolina. Also on June 15, 1998 the Belton Bank acquired
net loans (including accrued interest receivable) of approximately $1.6 million
and assumed deposits (including accrued interest payable) of approximately $38.7
million of two branches in Anderson County, South Carolina. The parent company
also purchased premises and equipment of approximately $637,000 during the
branch acquisitions. In connection with these Carolina First Branches, the
Clemson Bank paid a premium of $324,000 and the Belton Bank paid a premium of
$2.4 million, both of which are being amortized over a fifteen-year period on a
straight-line basis. The branch acquisitions for the Clemson Bank and Belton
Bank are hereafter referred to collectively as the "Carolina First Branches in
1998".
To maintain the minimum capital requirements for the Carolina First Branch
acquisitions in 1998 at the Belton Bank, the Company injected $4.8 million
additional capital. To fund this capitalization, the Company used a combination
of dividends and loans from its subsidiaries, a loan from a third party, and
utilization of liquid assets of the parent company. The Clemson Bank's current
capital structure was able to support the acquisition with no capital infusion
by the Company.
As a one-bank holding company for the Greenwood Bank, the Company grew from
approximately $21.5 million in assets, $11.7 million in loans, $16.6 million in
deposits, and $4.6 million in shareholders' equity at December 31, 1989, to
approximately $65.1 million in assets, $50.6 million in loans, $49.1 million in
deposits, and $6.1 million in shareholders' equity at December 31, 1994. The
opening of the Clemson Bank in June 1995 resulted in a year-over-year decrease
of the Company's earnings per share for the year ended December 31, 1995. The
Clemson Bank became profitable in September 1996, and at December 31, 1996, the
Company had approximately $116.0 million in assets, $80.5 million in loans,
$89.9 million in deposits, and $13.6 million in shareholders' equity. Due to the
acquisitions of the New Banks, the net proceeds from the Offering and the 1997
and 1998 Carolina First Branch acquisitions, the Company has grown to $321.0
million in assets, $172.5 million in loans, $260.1 million in deposits, and
$33.4 million in shareholders' equity at December 31, 1998.
During 1998, the Company experienced dilution of its return on equity and
earnings per share due to the continuing expenses incurred in connection with
the acquisition and opening of the New Banks, and losses incurred by the
Barnwell Bank, the Newberry Bank, and Community Trust Company. Tangible book
value per share was also negatively affected by the intangibles associated with
the acquisition of the Carolina First Branches in 1997 and 1998, and the New
Banks. The Company believes that the dilution of earnings per share, return on
equity, and tangible book value per share will be outweighed by the long-term
benefits and shareholder value the Company expects to derive from the purchase
of the New Banks and the acquisition of the Carolina First Branches in 1997 and
1998. However, there can be no assurance that the Company will be able to
achieve these goals.
12
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net interest income increased $2.6 million, or 35.4%, to $9.8 million in 1998
from $7.3 million in 1997. The increase in net interest income was due primarily
to an increase in average earning assets. Average earning assets increased $87.3
million, or 49.9%, due to the growth of the New Banks and the acquisition of the
Carolina First Branches in 1998.
The Company's net interest spread and net interest margin were 3.14% and 3.76%,
respectively, in 1998 compared to 3.35% and 4.16% in 1997. The decreases in the
net interest spread and net interest margin were primarily the result of the
growth in the volume of investment securities, traditionally lower yielding
assets than loans, as a percentage of average earning assets. The net cash
received from the acquisition of the Carolina First Branches in 1998 was
invested in debt securities until the Company is able to shift the funds to
loans to achieve the Company's targeted loan-to-deposit ratio and maximize
earnings.
The provision for loan losses was $1,836,000 in 1998 compared to $608,000 in
1997. The increase in the provision was primarily the result of significant loan
problems at the Barnwell Bank which caused it to record a provision for loan
losses of $1,278,000 in 1998. Management feels that it has taken the appropriate
actions to correct the problem loan situation at the Barnwell Bank. The
Company's allowance for loan losses was 1.39% of total loans outstanding at
December 31, 1998. In addition, the provision was funded to match the growth in
the loan portfolio from the growth of the New Banks and the Banks' efforts to
maintain their respective allowances for loan losses at levels sufficient to
cover known and inherent losses in their loan portfolios.
Noninterest income increased $1.4 million, or 92.0%, to $3.0 million in 1998
from $1.6 million in 1997, which was primarily attributable to increased service
charges on deposit accounts and increased fees from mortgage loan originations.
The increase in service charges on deposit accounts was attributable to the
increase in the number of deposit accounts from the growth of the New Banks.
Income from the origination of mortgage loans was $613,000 in 1998 compared to
$271,000 in 1997. The Company also recognized gains on sales of securities of
$220,000 in 1998 compared to losses on sales of securities of $1,000 in 1997.
Other income for the year ended December 31, 1998 also included $130,000 from
the sale of the Greenwood Bank's Ninety Six branch.
Noninterest expense increased $3.0 million, or 41.1%, to $10.2 million in 1998
from $7.2 million in 1997. The primary component of noninterest expense is
salaries and benefits, which increased $1.4 million, or 40.8%, to $4.7 million
in 1998 from $3.3 million in 1997. The increase is attributable to an increase
in the number of employees due to the growth of the New Banks and to staff the
Carolina First Branches acquired in 1998 and 1997. Other categories of expenses
increased due to the growth of the New Banks and the acquisition of the Carolina
First Branches in 1998. Net occupancy expense was $703,000 in 1998 compared to
$479,000 in 1997, and furniture and equipment expense was $1,129,000 in 1998
compared to $771,000 in 1997. The Company recorded amortization of intangible
assets related to the Carolina First Branch acquisitions of $443,000 in 1998
compared to $246,000 in 1997. The Company's efficiency ratio was 80.90% in 1998
compared to 81.96% in 1997.
Net income decreased $2,000, or .3%, to $764,000 in 1998 from $766,000 in 1997.
The decrease in net income was due primarily to the significant increase in the
provision for loan losses and increase in other expenses. Return on average
assets during 1998 was 0.27% compared to 0.40% during 1997, and return on
average equity was 2.33% during 1998 compared to 2.68% during 1997.
13
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net interest income increased $3.1 million, or 73.3%, to $7.3 million in 1997
from $4.2 million in 1996. The increase in net interest income was due primarily
to an increase in average earning assets. Average earning assets increased $77.1
million, or 78.9%, due to investable proceeds from the Offering, the acquisition
and opening of the New Banks, and the acquisition of the Carolina First Branches
in 1997.
The Company's net interest spread and net interest margin were 3.35% and 4.16%,
respectively, in 1997 compared to 3.44% and 4.29% in 1996. The decreases in the
net interest spread and net interest margin were primarily the result of the
growth in the volume of investment securities, traditionally lower yielding
assets than loans, as a percentage of average earning assets. Proceeds from the
Offering and net cash received from the acquisition of the Carolina First
Branches in 1997 were invested in debt securities until the Company is able to
shift the funds to loans to achieve the Company's targeted loan-to-deposit ratio
and maximize earnings.
The provision for loan losses was $608,000 in 1997 compared to $187,000 in 1996.
The increase in the provision was primarily the result of the growth in the loan
portfolio from the acquisition and opening of the New Banks and the Banks'
efforts to maintain their respective allowances for loan losses at levels
sufficient to cover known and inherent losses in their loan portfolios.
Noninterest income increased $432,000, or 37.9%, to $1.6 million in 1997 from
$1.1 million in 1996, primarily attributable to increased service charges on
deposit accounts and increased fees from mortgage loan originations. The
increase in service charges on deposit accounts was attributable to the increase
in the number of deposit accounts from acquisitions during the year and the
growth of the New Banks. Due to the continued low mortgage lending rates, the
Company was able to originate mortgage loans for qualified borrowers and sell
them to investors under pre-existing commitments or originate loans which the
Company did not fund. Income from the origination of mortgage loans was $271,000
in 1997 compared to $207,000 in 1996.
Noninterest expense increased $3.1 million, or 75.0%, to $7.2 million in 1997
from $4.1 million in 1996. The primary component of noninterest expense is
salaries and benefits, which increased $1.4 million, or 69.8%, to $3.3 million
in 1997 from $2.0 million in 1996. The increase is attributable to an increase
in the number of employees due to the acquisitions of the New Banks and the
creation of Community Trust Company, which provides trust services for the
Banks, during 1997. Other categories of expenses increased due to the
acquisitions of the New Banks and the Carolina First Branches in 1997. Net
occupancy expense was $479,000 in 1997 compared to $287,000 in 1996, and
furniture and equipment expense was $771,000 in 1997 compared to $305,000 in
1996. The Company recorded amortization of intangible assets related to the
acquisitions of $246,000 in 1997 compared to only $14,000 in 1996. The Company's
efficiency ratio was 81.96% in 1997 compared to 77.28% in 1996.
Net income increased $60,000, or 8.5%, to $766,000 in 1997 from $706,000 in
1996. The increase in net income was due primarily to increases in net interest
income due to asset growth from acquisitions. Return on average assets during
1997 was 0.40% compared to 0.67% during 1996, and return on average equity was
2.68% during 1997 compared to 5.41% during 1996.
14
NET INTEREST INCOME
GENERAL. The largest component of the Company's net income is its net interest
income, which is the difference between the income earned on assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the yields earned on the Company's interest-earning assets and
the rates paid on its interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch and the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities. Net interest income divided by average
interest-earning assets represents the Company's net interest margin.
AVERAGE BALANCES, INCOME, EXPENSES AND RATES. The following tables set forth,
for the periods indicated, certain information related to the sCompany's average
balance sheet and its average yields on assets and average costs of liabilities.
Such yields are derived by dividing income or expense by the average balance of
the corresponding assets or liabilities. Average balances have been derived from
the daily balances throughout the periods indicated.
Average Balances, Income and Expenses and Rates
Year ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- ---------- ------- --------- ------- ------ --------- -------- --------
Assets:
Earning Assets
Loans (1) $ 161,695 $ 14,942 9.24% $ 113,080 $ 10,604 9.38% $ 71,298 $ 6,622 9.29%
Securities, taxable (2) 76,287 4,798 6.29 45,871 3,026 6.60 17,195 1,112 6.47
Securities, nontaxable 15,171 751 4.95 9,056 441 4.87 5,993 290 4.84
Nonmarketable equity 4,085 216 5.29 2,751 133 4.83 1,724 87 5.05
securities
Funds sold and other 4,864 336 6.91 4,074 239 5.87 1,538 90 5.85
----------- ------- --------- ------- -------- -------
Total 262,102 21,043 8.03 174,832 14,443 8.26 97,748 8,201 8.39
earning assets ----------- ------- --------- ------- -------- -------
Cash and due from banks 7,168 5,231 3,080
Premises and equipment 8,288 6,883 3,408
Other assets 9,746 5,818 2,052
Allowance for loan losses (1,912) (1,134) (746)
----------- ---------- ----------
Total assets $ 285,392 $ 191,630 $ 105,542
=========== ========== ==========
Liabilities:
Interest-Bearing Liabilities
Interest-bearing transaction
accounts $ 64,836 $ 2,241 3.46% $ 22,482 $ 547 2.43% $ 7,719 $ 151 1.96%
Savings deposits 21,118 847 4.01 30,659 1,335 4.35 21,175 928 4.38
Time deposits 124,871 7,040 5.64 78,572 4,443 5.65 41,476 2,346 5.66
Other short-term 3,534 227 6.42 5,326 318 5.97 5,070 283 5.58
borrowings
Federal Home Loan Bank
advances 13,132 760 5.79 8,968 529 5.90 5,436 298 5.48
Long-term debt 1,530 83 5.42 - - - - - -
----------- ------- --------- ------- -------- -------
Total interest-bear-
ing liabilities 229,021 11,198 4.89 146,007 7,172 4.91 80,876 4,006 4.95
----------- ------- --------- ------- -------- -------
Demand deposits 21,338 15,567 10,591
Accrued interest and other
liabilities 2,204 1,471 1,015
Shareholders' equity 32,829 28,585 13,060
----------- ---------- ----------
Total liabilities and
shareholders'
equity $ 285,392 $ 191,630 $ 105,542
=========== ========== ==========
Net interest spread 3.14% 3.35% 3.44%
Net interest income $ 9,845 $ 7,271 $ 4,195
========== ========== =========
Net interest margin 3.76% 4.16% 4.29%
(1) The effect of loans in nonaccrual status and fees collected is not
significant to the computations. All loans and deposits are domestic.
(2) Average investment securities exclude the valuation allowance on securities
available for sale.
15
ANALYSIS OF CHANGES IN NET INTEREST INCOME. The following tables set forth the
effect which the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 1998 to 1997 and 1997 to 1996.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
YEAR ENDED DECEMBER 31,
1998 Compared With 1997 1997 Compared With 1996
-----------------------------------------------------------------------
Variance Due to Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total Volume (1) Rate (1) Total
----------- ----------- ---------- ----------- ----------- ---------
Earning Assets
Loans $ 4,494 $ (156) $ 4,338 $ 3,917 $ 65 $ 3,982
Securities, taxable 1,919 (147) 1,772 1,892 22 1,914
Securities, nontaxable 303 7 310 149 2 151
Nonmarketable equity 70 13 83 50 (4) 46
securities
Funds sold and other 51 46 97 149 - 149
-------- ------- -------- ---------- ------ --------
Total interest income 6,837 (237) 6,600 6,157 85 6,242
-------- ------- -------- ---------- ------ --------
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction 1,385 309 1,694 351 45 396
accounts
Savings and market rate (389) (99) (488) 413 (6) 407
investments
Certificates and other time deposits 2,610 (13) 2,597 2,098 (1) 2,097
-------- ------- -------- ---------- ------ --------
Total interest-bearing 3,606 197 3,803 2,862 38 2,900
deposits
Other short-term borrowings (114) 23 (91) 14 21 35
Federal Home Loan Bank 241 (10) 231 207 24 231
advances
Long-term debt 83 - 83 - - -
-------- ------- -------- ---------- ------ --------
Total interest expense 3,816 210 4,026 3,083 83 3,166
-------- ------- ------- ----------- ------ --------
Net interest income $ 3,021 $ (447) $ 2,574 $ 3,074 $ 2 $ 3,076
======== ======= ======== ========== ====== ========
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
INTEREST SENSITIVITY. The Company monitors and manages the pricing and maturity
of its assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on its net interest income. The
principal monitoring technique employed by the Company is the measurement of the
Company's interest sensitivity "gap", which is the positive or negative dollar
difference between assets and liabilities that are subject to interest rate
repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities available for
sale, replacing an asset or liability at maturity, or adjusting the interest
rate during the life of an asset or liability. Managing the amount of assets and
liabilities repricing in this same time interval helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.
16
The following table sets forth the Company's interest rate sensitivity at
December 31, 1998.
INTEREST SENSITIVITY ANALYSIS
After One After Three Greater Than
Within Through Through One Year
One Three Twelve Within or Non-
DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) Month Months Months One Year sensitive Total
------------ ---------- ---------- ---------- ---------- ----------
ASSETS
Earning Assets
Loans (1) $ 69,765 13,162 28,058 110,985 60,212 171,197
Securities - 100 20,425 20,525 100,170 120,695
Funds sold and other 1,973 - - 1,973 - 1,973
------------ ---------- ---------- ---------- ---------- ----------
Total earning assets 71,738 13,262 48,483 133,483 160,382 293,865
------------ ---------- ---------- ---------- ---------- ----------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Demand deposits 76,015 - - 76,015 - 76,015
Savings deposits 25,202 - - 25,202 25,202
Time deposits 14,337 21,564 87,063 122,964 12,448 135,412
------------ ---------- ---------- ---------- ---------- ----------
Total interest- 115,554 21,564 87,063 224,181 12,488 236,629
bearing deposits
Other short-term borrowings 11,802 - - 11,802 - 11,802
Federal Home Loan Bank advances - 1,400 - 1,400 8,034 9,434
Long-term debt - - - - 2,925 2,925
------------ ---------- ---------- ---------- ---------- ----------
Total interest-bearing 127,356 22,964 87,063 237,383 23,407 260,790
liabilities ------------ ---------- ---------- ---------- ---------- ----------
Period gap $ (55,618) $ (9,702) $ (38,580) $(103,900) $ 136,975
============ ========== ========== ========== ==========
Cumulative gap $ (55,618) $ (65,320) $(103,900) $(103,900) $ 33,075
============ ========== ========== ========== ==========
Ratio of cumulative gap to total
earning assets (18.93)% (22.23)% (35.36)% (35.36)% 11.26%
(1) Excludes nonaccrual loans.
The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at
each scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. Interest-bearing liabilities
with no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements which give the Company the opportunity to vary the
rates paid on those deposits within a thirty-day or shorter period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity date.
The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap position and generally would benefit from
decreasing market rates of interest when it is liability-sensitive. The Company
is liability sensitive over the one month, three month, and one year time
frames. However, the Company's gap analysis is not a precise indicator of its
interest sensitivity position. The analysis presents only a static view of the
timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those rates are viewed by management as significantly less interest-sensitive
than market-based rates such as those paid on non-core deposits. Accordingly,
management believes a liability-sensitive gap position is not as indicative of
the Company's true interest sensitivity as it would be for an organization which
depends to a greater extent on purchased funds to support earning assets. Net
interest income may be impacted by other significant factors in a given interest
rate environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
17
PROVISION AND ALLOWANCE FOR LOAN LOSSES
GENERAL. The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. On a quarterly basis, each Bank's Board of Directors
reviews and approves the appropriate level for that Bank's allowance for loan
losses based upon management's recommendations, the results of the internal
monitoring and reporting system, analysis of economic conditions in its markets,
and a review of historical statistical data for both the Company and other
financial institutions.
Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on the Company's income statement, are made periodically to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. Loan losses and recoveries are charged
or credited directly to the allowance. The amount of the provision is a function
of the level of loans outstanding, the level of nonperforming loans, historical
loan loss experience, the amount of loan losses actually charged against the
reserve during a given period, and current and anticipated economic conditions.
The Company's allowance for loan losses is based upon judgments and assumptions
of risk elements in the portfolio, future economic conditions and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process
and specific reviews and evaluations of significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquency, charge-offs, and general and economic conditions in the
service area. The adequacy of the allowance for loan losses and the
effectiveness of the Company's monitoring and analysis system are also reviewed
periodically by the banking regulators and the Company's independent auditors.
Based on present information and an ongoing evaluation, management considers the
allowance for loan losses to be adequate to meet presently known and inherent
risks in the loan portfolio. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable but which may or may not be valid. Thus, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the allowance for loan losses
will not be required. The Company does not allocate the allowance for loan
losses to specific categories of loans but evaluates the adequacy on an overall
portfolio basis utilizing a risk grading system.
The following table sets forth certain information with respect to the Company's
allowance for loan losses and the composition of charge-offs and recoveries for
each of the last five years.
ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- -----------
Total loans outstanding at end of period, net of
unearned income $ 172,545 $ 149,127 $ 80,546 $ 63,204 $ 50,565
========== ========== ========== ======================
Average loans outstanding, net of unearned income $ 161,695 $ 113,080 $ 71,298 $ 55,018 $ 46,305
========== ========== ========== ======================
Balance of allowance for loan losses at beginning of $ 1,531 $ 837 $ 671 $ 581 $ 567
period
Allowance for loan losses from acquisitions 38 255 - - -
Loan losses:
Commercial, financial and agricultural 135 92 - 18 -
Real estate - mortgage 43 9 - - -
Consumer 885 68 21 4 4
---------- ---------- ---------- ----------------------
Total loan losses 1,063 169 21 22 4
---------- ---------- ---------- ----------------------
Recoveries of previous loan losses:
Commercial, financial and agricultural - - - - -
Real estate - mortgage - - - - -
Consumer 57 - - - 4
---------- ---------- ---------- ----------------------
Total recoveries 57 - - - 4
---------- ---------- ---------- ----------------------
Net loan losses 1,006 169 21 22 -
Provision for loan losses 1,836 608 187 112 14
Balance of allowance for loan losses at end of ---------- ---------- ---------- ----------------------
period $ 2,399 $ 1,531 $ 837 $ 671 $ 581
========== ========== ========== ======================
Allowance for loan losses to period end loans 1.39% 1.03% 1.04% 1.06% 1.15%
Net charge-offs to average loans .62 0.15 0.04 0.03 -
18
NONPERFORMING ASSETS. The following table sets forth the Company's nonperforming
assets for the dates indicated.
NONPERFORMING ASSETS
DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
Nonaccrual loans $1,348 $ 678 $ 186 $ 13 $ 3
Restructured or impaired loans - - - - -
------- ------ ------- ------ ------
Total nonperforming loans 1,348 678 186 13 3
Other real estate owned - 262 - - 19
------- ------ ------- ------ ------
Total nonperforming assets $1,348 $ 940 $ 186 $ 13 $ 22
======= ====== ======= ====== ======
Loans 90 days or more past due and still accruing $ 112 $ 84 $ 54 $ 60 $ 39
interest
Nonperforming assets to period end loans and
foreclosed property .78% 0.63% 0.23% 0.02% 0.04%
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. When a loan is placed in nonaccrual status,
all interest which has been accrued on the loan but remains unpaid is reversed
and deducted from current earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain. When a problem loan is
finally resolved, there may ultimately be an actual writedown or charge-off of
the principal balance of the loan which would necessitate additional charges to
earnings. For all periods presented, the additional interest income, which would
have been recognized into earnings if the Company's nonaccrual loans had been
current in accordance with their original terms, is immaterial.
Total nonperforming assets increased $408,000 to $1.3 million at December 31,
1998, from $940,000 at December 31, 1997. This increase was primarily due to
nonaccrual loans at the Greenwood Bank totaling $1.2 million at December 31,
1998. Two loans in nonaccrual status totaling approximately $450,000 were to one
customer of the Greenwood Bank. Nonperforming assets were 0.78% of total loans
and foreclosed property at December 31, 1998. The allowance for loan losses to
period end nonperforming assets was 177.97% at December 31, 1998.
POTENTIAL PROBLEM LOANS. At December 31, 1998, through their internal review
mechanisms, the Banks had identified $7.8 million of criticized loans and $4.8
million of classified loans. The results of this internal review process are the
primary determining factor in management's assessment of the adequacy of the
allowance for loan losses.
The Company's Barnwell Bank incurred significant loan losses in 1998 that were
primarily attributable to a large number of small-dollar consumer loans that
originated during the fourth quarter of 1997 and the beginning of 1998. When the
loan problem first surfaced, certain loan personnel and administrative changes
were made to correct the situation. However, the magnitude of the problem was
not fully realized until the fourth quarter when an extensive examination was
made of the Barnwell Bank's complete loan portfolio. As a result of this
examination the loan loss provision for the Barnwell Bank was increased to
$806,542 for the fourth quarter and to $1,278,000 for the year which increased
its allowance for loan losses to 2.14% of total loans outstanding at December
31, 1998. Near the end of the year a new senior lender was hired by the Barnwell
Bank.
While management feels that it has taken the necessary actions to correct the
problem loan situation at the Barnwell Bank, the internal review process has
identified a number of criticized and classified loans that still exist at
December 31, 1998. Of the Company's $7.8 million criticized loans and $4.8
million classified loans, $4.1 million and $1.3 million were identified at the
Barnwell Bank, respectively.
19
NONINTEREST INCOME AND EXPENSE
NONINTEREST INCOME. The largest component of noninterest income is service
charges on deposit accounts, which totaled $1.3 million in 1998, a 49.6%
increase over the 1997 level of $842,000. The increase in service charges and
other noninterest income was primarily attributable to an increase in the
customer base due to the growth of the New Banks and the acquisition of the
Carolina First Branches in 1997 and 1998.
The following table sets forth, for the periods indicated, the principal
components of noninterest income:
NONINTEREST INCOME
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
--------------------------------
Service charges on deposit accounts $ 1,260 $ 842 $ 515
Residential mortgage origination fees 613 271 207
Securities gains (losses) 220 (1) 17
Fees from sales of mutual funds 104 54 132
Income from fiduciary activities 133 37 34
Other 687 368 234
--------------------------------
Total noninterest income $ 3,017 $ 1,571 $ 1,139
================================
NONINTEREST EXPENSE. Salaries and employee benefits increased $1.4 million, or
40.8%, to $4.7 million in 1998 from $3.3 million in 1997, primarily as a result
of an increase in the number of employees in order to staff the growth of the
New Banks and to staff the Carolina First Branches acquired in 1998. The growth
of the New Banks, and the acquisition of the Carolina First Branches in 1997 and
1998 also resulted in increases in all other categories of noninterest expense.
The Company is amortizing the intangible assets associated with the acquisitions
over periods ranging from five to fifteen years. During 1998, the Company
recorded amortization expense of $443,000 compared to $246,000 in 1997. The
factors above resulted in increases in net occupancy expense, furniture and
equipment expense, and other operating expenses. The Company's efficiency ratio,
which is noninterest expense as a percentage of the total of net interest income
plus noninterest income, net of gains and losses on the sale of assets, was
80.90% in 1998 compared to 81.96% in 1997 and 77.28% in 1996.
The following table sets forth, for the periods indicated, the primary
components of noninterest expense:
NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
---------- ---------- ----------
Salaries and employee benefits $ 4,688 $ 3,329 $ 1,960
Net occupancy expense 703 479 287
Furniture and equipment expense 1,129 771 305
Director and committee fees 182 124 114
Amortization of intangibles 443 246 14
Data processing and supplies 135 151 176
Mortgage loan department expense 191 94 80
Banking assessments 58 44 3
Professional fees 360 205 132
Postage and freight 278 200 117
Supplies 367 451 228
Credit card expenses 139 120 94
Telephone expenses 364 214 74
Other 1,191 820 557
---------- ---------- ----------
Total noninterest expense $ 10,228 $ 7,248 $ 4,141
========== ========== ==========
Efficiency ratio 80.90% 81.96% 77.28%
INCOME TAXES. The Company's income tax expense was $34,000, a decrease of
$186,000 from the 1997 amount of $220,000. The decrease is partially
attributable to a decrease in income before taxes of $188,000 when compared to
1997 and the positive effect of the $310,000 increase in nontaxable income. In
addition, the amount of nontaxable income from securities offset the majority of
income before taxes. Nontaxable securities income was $751,000 for the year
ended December 31, 1998, as compared to $441,000 for the year ended December 31,
1997.
20
EARNING ASSETS
LOANS. Loans are the largest category of earning assets and typically provide
higher yields than the other types of earning assets. Associated with the higher
loan yields are the inherent credit and liquidity risks which management
attempts to control and counterbalance. Loans averaged $161.7 million in 1998
compared to $113.1 million in 1997, an increase of $48.6 million, or 43.0%. At
December 31, 1998, total loans were $172.5 million compared to $149.1 million at
December 31, 1997.
The increase in loans during 1998 was primarily due to the continued growth in
the new markets created by the acquisition of the New Banks and the purchase of
approximately $2.1 million in loans from the Carolina First Branches acquired in
1998 by the Belton Bank and the Clemson Bank. The Banks have also actively
sought opportunities to participate in loans originated by other financial
institutions. The following table sets forth the composition of the loan
portfolio by category at the dates indicated and highlights the Company's
general emphasis on mortgage lending.
COMPOSITION OF LOAN PORTFOLIO
DECEMBER 31, 1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
(Dollars in thousands) ------- -------- ------- --------- ------ -------- -------- -------- ------- --------
Commercial, financial
and agricultural $28,991 16.80% $ 36,079 24.19% $15,348 19.05% $ 13,349 21.12 % $12,231 24.19%
Real estate
Construction 32,284 18.71 12,838 8.61 9,962 12.37 8,483 13.42 5,906 11.68
Mortgage-residential 53,375 30.93 40,977 27.48 31,519 39.13 22,515 35.62 14,978 29.62
Mortgage-
nonresidential 26,658 15.46 32,518 21.81 17,616 21.87 14,190 22.45 13,436 26.57
Consumer 29,784 17.26 25,747 17.27 5,947 7.38 4,591 7.27 3,953 7.82
Other 1,453 .84 968 0.64 154 0.20 76 0.12 61 0.12
------- ------- -------- ------- ------- ------- --------- ------ -------- ------
Total loans 172,545 100.00% 149,127 100.00% 80,546 100.00 % 63,204 100.00% 50,565 100.0%
======= ======= ======= ====== ======
Allowance for loan (2,399) (1,531) (837) (671) (581)
losses -------- --------- -------- --------- --------
Net loans 170,146 $147,596 $79,709 $ 62,533 $49,984
======== ========= ======== ========= ========
The principal component of the Company's loan portfolio is real estate mortgage
loans. At December 31, 1998, this category totaled $80.0 million and represented
46.4% of the total loan portfolio, compared to $73.5 million, or 49.3%, at
December 31, 1997.
In the context of this discussion, a "real estate mortgage loan" is defined as
any loan, other than loans for construction purposes, secured by real estate,
regardless of the purpose of the loan. It is common practice for financial
institutions in the Company's market areas to obtain a security interest in real
estate, whenever possible, in addition to any other available collateral. This
collateral is taken to reinforce the likelihood of the ultimate repayment of the
loan and tends to increase the magnitude of the real estate loan portfolio
component.
Real estate construction loans increased $19.4 million, or 151.5%, to $32.3
million at December 31, 1998, from $12.8 million at December 31, 1997.
Residential mortgage loans, which is the largest category of the Company's
loans, increased $12.4 million, or 30.3%, to $53.4 million at December 31, 1998,
from $41.0 million at December 31, 1997. Residential real estate loans consist
of first and second mortgages on single or multi-family residential dwellings.
Nonresidential mortgage loans, which include commercial loans and other loans
secured by multi-family properties and farmland, decreased $5.9 million, or
18.0%, to $26.7 million at December 31, 1998, from $32.5 million at December 31,
1997. The overall increase in real estate lending was attributable to the new
markets in the local communities of the New Banks, the continued demand for
residential and commercial real estate loans in the Greenwood market, and loan
growth at the Clemson Bank. The Banks have been able to compete favorably for
residential mortgage loans with other financial institutions by offering fixed
rate products having three and five year call provisions.
Commercial, financial and agricultural loans decreased $7.1 million, or 19.6%,
to $29.0 million at December 31, 1998, from $36.1 million at December 31, 1997.
This decrease was primarily attributable to the Company's focus on mortgage and
construction lending opportunities.
Consumer loans increased $4.0 million, or 15.7%, to $29.8 million at December
31, 1998, from $25.7 million at December 31, 1997. The growth in consumer loans
is primarily attributable to overall growth in the Company's loan portfolio due
to new markets created by the New Banks.
21
LOANS. The Company's loan portfolio reflects the diversity of its markets.
The home office and the branch office of the Greenwood Bank are located in
Greenwood County, South Carolina. The economy of Greenwood contains elements of
medium and light manufacturing, higher education, regional healthcare, and
distribution facilities. The Clemson Bank moved into its permanent facility in
Clemson, South Carolina during 1997. Due to its proximity to a major interstate
highway and Clemson University, a state-supported university, management expects
the area to remain stable with continued growth. The Belton Bank and the
Barnwell Bank are in more rural areas and will have a higher concentration of
consumer loans with fewer opportunities for commercial lending. The Newberry
Bank is located in Newberry County, South Carolina and is in close proximity to
an interstate highway. The diversity of the economy creates opportunities for
all types of lending. The Company does not engage in foreign lending.
The repayment of loans in the loan portfolio as they mature is also a source of
liquidity for the Company. The following table sets forth the Company's loans
maturing within specified intervals at December 31, 1998.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
Over One Year
One Year Through Over Five
DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) or Less Five Years Total
---------- ------------ --------- --------
Commercial, financial and agricultural $ 14,373 $12,805 $ 1,813 $ 28,991
Real estate 28,857 49,786 33,674 112,317
Consumer and other 8,424 19,387 3,426 31,237
Loans maturing after one year with:
Fixed interest rates $ 85,559
Floating interest rates 35,332
-----------
$ 120,891
===========
The information presented in the above table is based on the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval as well as modification of terms upon their maturity.
Consequently, management believes this treatment presents fairly the maturity
and repricing structure of the loan portfolio shown in the above table.
INVESTMENT SECURITIES. The investment securities portfolio is a significant
component of the Company's total earning assets. Total securities averaged $95.5
million in 1998, compared to $57.7 million in 1997 and $24.9 million in 1996. At
December 31, 1998, the total securities portfolio was $120.7 million. Securities
designated as available for sale totaled $115.2 million and were recorded at
estimated fair market value, and securities designated as held to maturity
totaled $650,000 and were recorded at amortized cost. The securities portfolio
also includes nonmarketable equity securities totaling $4.8 million which are
carried at cost because they are not readily marketable or have no quoted market
value. These include investments in Federal Reserve Bank stock, Federal Home
Loan Bank stock and the stock of four unrelated financial institutions. The
increase in the portfolio during 1998 was primarily due to the investment of
proceeds from the Clemson and Belton Banks' Carolina First Branch acquisitions
in debt securities.
The following table sets forth the book value of the securities held by the
Company at the dates indicated.
BOOK VALUE OF SECURITIES
DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
--------------------------------
U.S. Treasury $ 597 $ 13,467 $ 6,420
U.S. government agencies 64,517 46,236 11,150
State, county and municipal securities 20,656 13,573 5,367
Mortgage-backed securities 28,993 273 343
Nonmarketable equity securities 4,823 3,224 2,199
--------------------------------
Total securities $ 119,586 $ 76,773 $ 25,479
================================
22
The following table sets forth the scheduled maturities and average yields of
securities held at December 31, 1998.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
After One But After Five But
(Dollars in thousands) Within One Within Five Within Ten
DECEMBER 31, 1998 Year Years Years After Ten Years
----------------- ----------------- ----------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------------- ----------------- ----------------- -------------------
U.S. Treasury $ - -% $ 614 6.49% $ - -% $ - - %
U.S. government agencies 5,514 5.61 48,103 5.83 9,291 6.28 1,997 7.01
State and political subdivisions (2) 172 7.34 3,741 6.64 3,464 7.58 13,898 7.65
---------- ---------- ---------- ----------
Total (1) $ 5,686 5.66% $ 52,458 5.97% $ 12,755 6.63% $ 15,895 7.57 %
========== ========== ========== ==========
(1) Excludes mortgage-backed securities totaling $29.0 million with a yield of
5.94% and nonmarketable equity securities.
(2) The yield on state and political subdivisions is presented on a tax
equivalent basis using a federal income tax rate of 34%.
Other attributes of the securities portfolio, including yields and maturities,
are discussed above in "---Net Interest Income--- Interest Sensitivity."
SHORT-TERM INVESTMENTS. Short-term investments, which consist primarily of
federal funds sold and interest-bearing deposits with other banks, averaged $4.9
million in 1998, compared to $4.1 million in 1997 and $1.5 million in 1996. At
December 31, 1998, short-term investments totaled $2.0 million. These funds are
a source of the Banks' liquidity. Federal funds are generally invested in an
earning capacity on an overnight basis.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing liabilities increased $83.0 million, or 56.9%, to
$229.0 million in 1998, from $146.0 million in 1997. Average interest-bearing
deposits increased $79.1 million, or 60.1%, to $210.8 million in 1998, from
$131.7 million in 1997. These increases resulted from increases in most
categories of interest-bearing liabilities, primarily as a result of the
approximately $43.7 million of deposits transferred upon the Carolina First
Branch acquisitions in 1998 to the Clemson and Belton Banks.
DEPOSITS. Average total deposits increased $84.9 million, or 57.6%, to $232.2
million during 1998, from $147.3 million during 1997. At December 31, 1998,
total deposits were $260.1 million compared to $186.9 million a year earlier, an
increase of 39.2%.
The following table sets forth the deposits of the Company by category at the
dates indicated.
DEPOSITS
DECEMBER 31 1998 1997 1996 1995 1994
------------------- ------------------ ---------------- ----------------- -----------------
(Dollars in Percent Percent Percent Percent Percent
thousands) of of of of of
Amount Deposits Amount Deposits Amount Deposits Amount Deposits Amount Deposits
---------- -------- -------- -------- -------- ------- --------- -------- ------- ---------
Demand deposit accounts $ 23,491 9.03% $19,460 10.41% $12,226 13.61% $ 9,447 12.92 % $ 6,968 14.18%
NOW accounts 45,854 17.63 30,562 16.36 8,296 9.23 8,028 10.98 7,158 14.56
Money market accounts 30,161 11.60 20,812 11.14 14,035 15.62 9,498 12.98 4,815 9.80
Savings accounts 25,202 9.69 15,127 8.09 8,681 9.66 7,922 10.83 6,818 13.87
Time deposits less
than $100,000 104,491 40.17 73,827 39.51 34,745 38.66 26,161 35.77 15,893 32.34
Time deposits of
$100,000 or over 30,921 11.88 27,073 14.49 11,879 13.22 12,082 16.52 7,494 15.25
---------- -------- ------- -------- ------- ------- -------- ------- ------- --------
Total deposits $ 260,120 100.00% $186,861 100.00% $89,862 100.00 % $ 73,138 100.00 % $49,146 100.00%
========== ======== ======= ======== ======= ======= ======== ======= ======= ========
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits increased $69.4 million in
1998 due to the branch acquisitions.
23
Deposits, and particularly core deposits, have historically been the Company's
primary source of funding and have enabled the Company to meet successfully both
its short-term and long-term liquidity needs. Management anticipates that such
deposits will continue to be the Company's primary source of funding in the
future. The Company's loan-to-deposit ratio was 66.3% at December 31, 1998,
79.8% at the end of 1997, and averaged 69.7% during 1998. The maturity
distribution of the Company's time deposits over $100,000 at December 31, 1998,
is set forth in the following table.
Maturities of Certificates of Deposit of $100,000 or More
After Three After Six
Within Through Through After
Three Six Twelve Twelve
Months Months Months Months Total
----------- ------------ ----------- ----------- -----------
Certificates of deposit of $100,000 or more $ 9,938 $ 7,945 $ 10,341 $ 2,697 $ 30,921
Approximately 32.1% of the Company's time deposits over $100,000 had scheduled
maturities within three months and 57.8% had maturities within six months. Large
certificate of deposit customers tend to be extremely sensitive to interest rate
levels, making these deposits less reliable sources of funding for liquidity
planning purposes than core deposits. Some financial institutions partially fund
their balance sheets using large certificates of deposit obtained through
brokers. These brokered deposits are generally expensive and are unreliable as
long-term funding sources. Accordingly, the Company does not solicit brokered
deposits.
BORROWED FUNDS. Borrowed funds consist primarily of short-term borrowings in the
form of federal funds purchased from correspondent banks, securities sold under
agreements to repurchase, and advances from the Federal Home Loan Bank.
Average short-term borrowings were $16.7 million in 1998, an increase of $2.4
million from 1997. Average Federal Home Loan Bank advances during 1998 were
$13.1 million compared to $9.0 million during 1997, an increase of $4.1 million.
Advances from the Federal Home Loan Bank are collateralized by $9.6 million of
debt securities of U.S. Government agencies, one-to-four family residential
mortgage loans, and the Company's investment in Federal Home Loan Bank stock. At
December 31, 1998, borrowings from the Federal Home Loan Bank were $9.4 million
compared to $16.4 million a year earlier. Although management expects to
continue using short-term borrowing and Federal Home Loan Bank advances as
secondary funding sources, core deposits will continue to be the Company's
primary funding source. Of the $9.4 million advances from the Federal Home Loan
Bank outstanding at December 31, 1998, $8.0 million will mature after one year.
LONG-TERM DEBT. Long-term debt consists of borrowings obtained to infuse capital
into the Belton Bank in order to maintain the minimum capital ratios as a result
of the Belton Bank's purchase of two Carolina First Branches in 1998. The
average balance of the long-term debt was $1.5 million in 1998. Long-term debt
totaled $2.9 million at December 31, 1998. The debt is collateralized by the
stock of the subsidiary banks and bears interest at a simple interest rate per
annum equal to the London Interbank Offered rate plus 200 basis points. Interest
is payable on a quarterly basis, commencing December 31, 1998. Principal
payments are due in ten equal installments, beginning on the third anniversary
of the note, with the final balance due on December 21, 2010.
CAPITAL
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital of the Company consists of common
shareholders' equity, excluding the unrealized gain(loss) on available-for-sale
securities, minus intangible assets. The Company's Tier 2 capital consists of
the allowance for loan losses subject to certain limitations. A bank holding
company's qualifying capital base for purposes of its risk-based capital ratio
consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.
The holding company and banking subsidiaries are also required to maintain
capital at a minimum level based on average total assets (as defined), which is
known as the leverage ratio. Only the strongest bank holding companies and banks
are allowed to maintain capital at the minimum requirement. All others are
subject to maintaining ratios 1% to 2% above the minimum.
24
The Company exceeded the Federal Reserve's fully phased-in regulatory capital
ratios at December 31, 1998, 1997 and 1996, as set forth in the following table.
ANALYSIS OF CAPITAL
DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
---------- ---------- ----------
Tier 1 capital $ 27,142 $ 28,341 $ 13,474
Tier 2 capital 2,399 1,531 837
---------- ---------- ----------
Total qualifying capital $ 29,541 $ 29,872 $ 14,311
========== ========== ==========
Risk-adjusted total assets (including off-balance sheet exposures) $ 196,968 $ 160,538 $ 86,512
========== ========== ==========
Tier 1 risk-based capital ratio 13.78% 17.65% 15.58%
Total risk-based capital ratio 15.00 18.61 16.54
Tier 1 leverage ratio 8.89 12.08 11.62
Each of the Banks is required to maintain risk-based and leverage ratios similar
to those required for the Company. Each of the Banks exceeded these regulatory
capital ratios at December 31, 1998, as set forth in the following table.
BANK CAPITAL RATIOS
Tier 1 Total
Risk- Risk- Tier 1
December 31, 1998 Based Based Leverage
---------- ---------- ----------
The Greenwood Bank 10.77% 11.84% 8.47%
The Clemson Bank 15.56 16.71 10.74
The Barnwell Bank 12.82 14.14 7.87
The Belton Bank 23.25 22.29 9.12
The Newberry Bank 23.03 24.08 11.25
The Banks are expected to maintain capital ratios that exceed their regulatory
minimum requirements. The Company has verbally committed to the state
Commissioner of Banking to maintain the percentage of Tier 1 capital (as defined
by the commissioner) to total assets at the New Banks at a minimum of 8.00%. The
Tier 1 leverage ratio for the Barnwell Bank was 7.87% at December 31, 1998,
below the minimum of 8.00%. Management has committed to the state Commissioner
of Banking to take the necessary steps to have this ratio at 8.00% by March 31,
1999.
The Clemson Bank and the Belton Bank acquired three Carolina First Branches in
1998. The purchase of the branches and the intangible assets resulting from the
purchase lowered the capital ratios of the two banks. The Company infused
additional capital of approximately $4.8 million into the Belton Bank after the
acquisitions. Although the capital ratios of the Clemson Bank decreased, they
remained well above the minimum ratios. See "Liquidity Management and Capital
Resources" for additional information.
LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES
Liquidity management involves monitoring the Company's sources and uses of funds
in order to meet its day-to-day cash flow requirements while maximizing profits.
Liquidity represents the ability of a company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Without proper liquidity management, the Company would
not be able to perform the primary function of a financial intermediary and
would, therefore, not be able to meet the needs of the communities it serves.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control at the time investment decisions are made.
However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control.
25
Net proceeds from the Offering and cash received upon the acquisition of the
Carolina First Branches in 1997 and 1998 improved the overall liquidity of the
Company. The funds were primarily invested in securities which the Company has
designated as available for sale. As a result, the Company's loans-to-assets
ratio and loans-to-funds ratio decreased. The loans-to-assets ratio at December
31, 1998 was 53.7% compared to 59.9% at December 31, 1997, and the
loans-to-funds ratio at December 31, 1998 was 60.7% compared to 69.3% at
December 31, 1997. The amount of advances from the Federal Home Loan Bank were
approximately $9.4 million at December 31, 1998 compared to $16.3 million at
December 31, 1997. Management expects to continue using these advances as a
source of funding. The Company obtained borrowings from an unrelated financial
institution in 1998 to purchase the three branches from Carolina First. At
December 31, 1998, total long-term debt was $2.9 million. Additionally, the
Company has approximately $19.5 million of unused lines of credit for federal
funds purchases. The Company also has approximately $115.2 million of securities
available for sale as a source of liquidity.
The Company depends on dividends from the Banks as its primary source of
liquidity. The ability of the Banks to pay dividends is subject to general
regulatory restrictions which may, but are not expected to, have a material
impact on the liquidity available to the Company. Generally, banks are not
allowed to pay dividends unless the retained earnings are in a positive
position. Accordingly, management does not expect the New Banks to be able to
pay cash in the form of dividends to its parent company in the near future. The
Company does not plan to pay cash dividends for the near term. The Company has
paid stock dividends in April 1994, August 1995, May 1996, and September 1998
and may do so in the future.
The net proceeds of the Offering were adequate for the initial capitalization of
each New Bank and for capital injections at the Barnwell Bank and the Greenwood
Bank to comply with capital requirements of the State Board resulting from the
growth of the banks. The State Board could require the Company to increase the
capitalization of any of the banks. In such event, the Company would likely fund
the increased capitalization through the dividends from the Banks (to the extent
available), through loans from the Company's banking subsidiaries (subject to
regulatory limits and regulatory approval) or through loans from third parties
(subject to obtaining regulatory approval).
ACCOUNTING RULE CHANGES
DERIVATIVES AND HEDGING ACTIVITIES. In June 1998, the Financial Accounting
Standards Board released Statement of Financial Account Standards (SFAS) 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair values. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. The
Company and its subsidiary banks generally do not purchase derivative
instruments or enter into hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and its subsidiaries are primarily monetary in
nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation.
INDUSTRY DEVELOPMENTS
In February 1998, the Supreme Court ruled that a federal credit union must limit
its membership to employees of the company that sponsors it. Banking leaders
throughout the country have argued that credit unions have an unfair competitive
advantage because they do not pay income taxes and are not subject to the same
level of regulatory oversight. The Supreme Court ruling applies only to federal
credit unions. State-chartered credit unions were not directly affected by the
ruling. The lower courts will determine whether current members who are not
employed by the credit union sponsor will be forced to close their accounts.
Management does not expect the ruling to have an immediate affect on the
financial position or results of operations of the Company. The effects on
future periods has not yet been determined.
26
THE YEAR 2000
ISSUES. Some computers, software, and other equipment include programming codes
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches and are commonly referred to as the "Year 2000 Problem".
ASSESSMENT. The Year 2000 Problem could affect computers, software, and other
equipment that the Company uses. Accordingly, the Company has completed a review
of its internal computer programs and systems to determine whether they will be
Year 2000 compliant in a timely manner. However, while the Company does not
expect the cost of these efforts to be material to its financial position or any
year's operating results, there can be no assurance to this effect.
INTERNAL INFRASTRUCTURE. The Company utilizes an in-house data processing system
for most of its accounting functions. The Company believes that it has
identified substantially all of the major computers, software applications, and
related equipment used in connection with its internal operations that must be
modified, upgraded, or replaced to minimize the possibility of a material
disruption of its business. Management has completed upgrading and is in the
process of testing the systems for year 2000 compliance. Management believes
that the testing of its systems should be completed by March 31, 1999. The
Company also has a number of personal computers, most of which are considered to
be Year 2000 compliant. Management has spent approximately $320,000 to get all
of its systems Year 2000 compliant. The Company does not believe that the cost
related to these efforts will be material to its business, financial condition,
or operating results.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and
related systems, the operation of the Company's office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems, and
other devices, may be affected by the Year 2000 Problem. The Company has
completed its assessment of the potential effect of, and the costs of
remediating, the Year 2000 Problem on this equipment. The Company estimates that
its total cost of completing any required modifications, upgrades, or
replacements of these internal systems will not have a material effect on its
business, financial condition, or operating results.
SUPPLIERS AND OTHER THIRD PARTIES. The Company has been gathering information
from and has initiated communications with its suppliers and other third parties
to identify and, to the extent possible, resolve issues involving the Year 2000
Problem. However, the Company has limited or no control over the actions of its
suppliers and others. Therefore, while the Company expects that it will be able
to resolve any significant Year 2000 Problems with its own system, it cannot
guarantee that its suppliers or others will resolve any or all Year 2000
Problems with their systems before the occurrence of a material disruption to
their businesses. Any failure of these suppliers or others to resolve Year 2000
Problems with their systems in a timely manner could have a material adverse
effect on the Company's business, financial condition, or operating results.
CUSTOMERS. The Company believes that the largest Year 2000 Problem exposure to
most banks is the preparedness of the customers of the banks. Management is
addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an increase in loan defaults. The amount of potential
loss from this issue is not quantifiable. Management is attempting to reduce
this exposure by educating its customers. The Company has implemented a
comprehensive Year 2000 credit review policy for all existing loans that exceed
$100,000 as well as an underwriting policy for all new loan requests. At
present, the Company's review indicates that the Company's exposure to credit
risks associated with Year 2000 is considered to be low. The Company's credit
review procedures will continue to include these policies throughout 1999.
27
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business, financial condition, or operating results. However, the Company
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting it have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, the Company cannot accurately predict how many
failures related to the Year 2000 Problem will occur with its suppliers,
customers, or other third parties or the severity, duration, or financial
consequences of such failures. As a result, the Company expects that it could
possibly suffer the following consequences:
A number of operational inconveniences and inefficiencies for the
Company, its service providers, or its customers that may divert
the Company's time and attention and financial and human
resources from its ordinary business activities; and
System malfunctions that may require significant efforts by the
Company or its service providers or customers to prevent or
alleviate material business disruptions.
CONTINGENCY PLANS. The Company is in the process of developing contingency plans
to be implemented as part of its efforts to identify and correct Year 2000
Problems affecting its internal systems. The Company's Business Resumption
Contingency Plan is expected to be completed by June 30, 1999. Depending on the
systems affected, these plans include (a) accelerated replacement of affected
equipment or software; (b) short term use of backup equipment and software; (c)
increased work hours for the Company's personnel or use of contract personnel to
correct on an accelerated schedule any Year 2000 Problems which arise; and (d)
other similar approaches. If the Company is required to implement any of these
contingency plans, these plans could have a material adverse effect on its
business, financial condition, or operating results.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable, as the Company qualifies as a "small business issuer" under
Regulation S-B promulgated by the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements identified in Item 14 of this Report on Form 10-K are
included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Information called for by PART III (Items 10, 11, 12 and 13) of this Report on
Form 10-K has been omitted as the Company intends to file with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year ended December 31, 1998 a definitive Proxy Statement pursuant to Regulation
14A promulgated under the Securities Exchange Act of 1934. Such information will
be set forth in such Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedules:
The consolidated financial statements and schedules of the Company identified
in the accompanying Index to Financial Statements at page F-1 herein are filed
as part of this Report on Form 10-K.
(3) Exhibits:
The accompanying Exhibit Index on page E-1 sets forth the exhibits that
are filed as part of this Report on Form 10-K.
(b) Reports on Form 8-K:
None.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, Community Capital Corporation, has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMUNITY CAPITAL CORPORATION
Dated: March 27, 1999 By: /s/ WILLIAM G. STEVENS
------------------------------------------
William G. Stevens
President and Chief Executive Officer
Pursuant to the requirements 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.
Signature Title Date
- --------- ----- ----
/s/ WILLIAM G. STEVENS President (Principal March 27, 1999
- --------------------------- Executive Officer) and
William G. Stevens Director
/s/ JAMES H. STARK Chief Financial March 27, 1999
- --------------------------- Officer (Principal
James H. Stark Financial and
Accounting Officer) and
Secretary
* Assistant March 27, 1999
- --------------------------- Secretary and
Patricia C. Edmonds Director
* Director March 27, 1999
- ---------------------------
David P. Allred, M.D.
* Director March 27, 1999
- ---------------------------
Earl H. Bergen
* Director March 27, 1999
- ---------------------------
Robert C. Coleman
Director March 27, 1999
- ---------------------------
John W. Drummond
* Director March 27, 1999
- ---------------------------
James M. Horton
* Director March 27, 1999
- ---------------------------
Hazel B. Hughes
30
* Director March 27, 1999
- ---------------------------
Wayne Q. Justesen, Jr.
* Director March 27, 1999
- ---------------------------
Clinton C. Lemon, Jr.
* Director March 27, 1999
- ---------------------------
James A. Lollis
* Director March 27, 1999
- ---------------------------
Thomas C. Lynch, Jr.
* Director March 27, 1999
- ---------------------------
H. Edward Munnerlyn
* Director March 27, 1999
- ---------------------------
George B. Park
* Director March 27, 1999
- ---------------------------
Joseph H. Patrick, Jr.
* Director March 27, 1999
- ---------------------------
Donna W. Robinson
* Director March 27, 1999
- ---------------------------
George D. Rodgers
* Director March 27, 1999
- ---------------------------
Charles J. Rogers
Director March 27, 1999
- ---------------------------
Thomas F. Skelton
Director March 27, 1999
- ---------------------------
William F. Steadman
Director March 27, 1999
- ---------------------------
Lex D. Walters
*By: /s/ WILLIAM G. STEVENS March 27, 1999
- ---------------------------
(William G. Stevens) (As
Attorney-in-Fact for each
of the persons indicated)
31
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 * Articles of Incorporation of Registrant.
3.2 * Articles of Amendment to Articles of Incorporation of Registrant (re: Change of
Name).
3.3 * Bylaws of Registrant.
4.1** Form of Common Stock Certificate. (The rights of security holders of
the Registrant are set forth in the Registrant's Articles of
Incorporation and Bylaws included as Exhibits 3.1 and 3.3,
respectively.)
10.3 * Registrant's Executive Supplemental Income Plan (Summary) and form of
Executive Supplemental Income Agreement.
10.4 * Registrant's Management Incentive Compensation Plans (Summary). 10.5 *
Lease Agreement dated July 8, 1994 between John W. Drummond and the Registrant.
10.6 ** Lease Agreement With Options dated June 11, 1996 between Robert C.
Coleman and the
Registrant.
10.18 1997 Stock Incentive Plan, as amended.(Incorporated by reference to
Registrant's Definitive Proxy Statement for Annual Meeting of
Shareholders held on May 26, 1999.)
21.1 Subsidiaries of the Registrant.
24.1 Directors' Powers of Attorney.
27.1 Financial Data Schedule.
- ------------------
* Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's Form 10-K for the fiscal year ended
December 31, 1995.
** Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's Registration Statement on Form S-2
initially filed on December 20, 1996 (File No. 333-18457).
E-1