SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-28446
MITCHELL BANCORP, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1966011
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
210 Oak Avenue, Spruce Pine, North Carolina 28777
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 765-7324
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per
share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. YES NO X
The Registrant's revenues for the fiscal year ended June 30, 1996 were
$2,277,000.
As of September 18, 1996, there were issued and outstanding 979,897
shares of the Registrant's Common Stock. The Registrant's voting stock is
traded over-the-counter and is listed on the Nasdaq Smallcap Market under the
symbol "MBSP." Based on the closing price for the Common Stock on September
18, 1996, the aggregate value of the Common Stock outstanding held by
nonaffiliates of the registrant was $11.9 million (937,512 shares at $12.75
per share). For purposes of this calculation, officers and directors of the
Registrant are considered nonaffiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business
General
Mitchell Bancorp, Inc. ("Mitchell Bancorp" or the "Corporation"), a North
Carolina corporation, was organized on February 28, 1996 for the purpose of
becoming the holding company for Mitchell Savings Bank, Inc., SSB ("Savings
Bank") upon the Savings Bank's conversion from a North Carolina-chartered
mutual to a North Carolina-chartered stock savings bank ("Conversion"). The
Conversion was completed on July 12, 1996. Mitchell Bancorp has not engaged
in any significant activity other than holding the stock of the Savings Bank.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Savings Bank and its
subsidiary.
The Savings Bank was established in 1924 as "Mitchell County Building and
Loan Association," a North Carolina-chartered mutual savings and loan
association, located in Spruce Pine, North Carolina, approximately 50 miles
Northeast of Asheville, North Carolina. In 1992, the Savings Bank converted
to a North Carolina-chartered savings bank and adopted its current title. The
Savings Bank is regulated by the Administrator, Savings Institutions Division,
North Carolina Department of Commerce ("Administrator"), its primary
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer
of its deposits. The Savings Bank's deposits are federally insured by the
FDIC under the Savings Association Insurance Fund ("SAIF"). The Savings Bank
is a member of the Federal Home Loan Bank ("FHLB") System.
The Savings Bank is a traditional, community oriented financial
institution that is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate fixed-rate one- to
four-family residential mortgage loans within the Savings Bank's market area,
and, to a significantly lesser extent, loans secured by multi-family
properties, land, churches, and selected commercial properties, and consumer
loans. The Savings Bank originates loans for its portfolio.
Market Area
Spruce Pine, North Carolina, is a community of approximately 2,000 people
located in Mitchell County, approximately 50 miles northeast of Asheville,
North Carolina. The Savings Bank focuses primarily on serving customers
located in Mitchell and Yancey counties, North Carolina and to a limited
extent, customers in Avery and McDowell counties, North Carolina. The
population within the zip code encompassing Spruce Pine, which covers much of
the Savings Bank's primary market area, is approximately 15,000. Because it
operates in a relatively small market area, the Savings Bank's loan and
deposit growth prospects are limited. The major employers in the Savings
Bank's market area include the Mitchell County Board of Education, Mitchell
County Government, Blue Ridge Hospital System, Inc., Henredon Furniture, and
Felspar Mining. The Savings Bank faces intense competition from many
financial institutions for deposits and loan originations. See "--
Competition."
Selected Financial Data
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Corporation
and its subsidiary at the dates and for the periods indicated. The selected
financial data at and for the fiscal year ended June 30, 1996 is presented as
if the Conversion had been consummated on June 30, 1996.
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At June 30,
1992 1993 1994 1995 1996
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $23,843 $26,399 $28,109 $27,596 $36,776
Loans receivable, net 21,765 20,785 21,843 22,463 23,568
Cash, interest-earning
deposits and investment
securities 1,651 4,945 5,710 4,254 12,414
FHLB stock 264 280 291 291 291
Deposits 19,039 21,050 22,195 20,940 20,346
Total stockholders'
equity 4,597 5,182 5,694 6,078 14,634
For the Years Ended June 30,
1992 1993 1994 1995 1996
(In thousands)
OPERATING DATA:
Interest income $2,374 $2,331 $2,193 $2,259 $2,271
Interest expense 1,226 962 903 962 1,161
Net interest income 1,148 1,369 1,290 1,297 1,110
Provision for loan losses 6 12 24 24 60
Net interest income
after provision
for loan losses 1,142 1,357 1,266 1,273 1,050
Non-interest income 4 20 5 45 6
Non-interest expenses 386 417 452 953 930
Income before income
taxes and cumulative
effect adjustments 760 960 819 365 126
Income tax expense 302 375 317 112 35
Income before cumulative
effect adjustment 458 585 502 253 91
Cumulative effect on
prior years for
accounting change -- -- 11 -- --
Net income $ 458 $ 585 $ 513 $ 253 $ 91
At June 30,
1992 1993 1994 1995 1996
OTHER DATA:
Number of:
Real estate loans
outstanding(1) 746 675 639 656 660
Deposit accounts 1,603 1,601 1,603 1,584 1,603
Full service offices 1 1 1 1 1
(footnotes on following page)
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At or for the Year Ended June 30,
1992 1993 1994 1995 1996
KEY FINANCIAL RATIOS:
Return on assets (net
income divided by
average assets) 1.86% 2.26% 1.89% .92% .32%
Return on average equity
(net income divided by
average equity) 10.46 11.89 9.39 4.24 1.53
Average equity to average
assets 17.80 19.00 20.17 21.71 20.73
Interest rate spread
(difference between
average yield on
interest-earning assets
and average cost of
interest-bearing
liabilities) 3.59 4.50 3.97 3.79 2.81
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 4.70 5.37 4.82 4.77 3.96
Non-interest expense to
average assets 1.57 1.61 1.67 3.45 3.23
Average interest-earning
assets to interest-
bearing liabilities 122.23 123.10 125.02 127.87 127.83
Allowance for loan losses
to total loans at end
of period .15 .21 .31 .40 .63
Net charge offs to
average out-standing
loans during the period -- -- -- -- --
Ratio of nonperforming
assets to total assets
at period end 1.87 1.19 1.12 1.43 2.54
(1) All real estate loans have fixed-rates of interest.
Lending Activities
General. The principal lending activity of the Savings Bank is the
origination of mortgage loans to enable borrowers to purchase existing one- to
four-family homes. To a significantly lesser extent, the Savings Bank also
originates loans secured by multi-family properties, land, churches, and
selected commercial properties, and consumer loans. The Savings Bank's net
loans receivable totalled approximately $23.6 million at June 30, 1996,
representing approximately 64.1% of consolidated total assets.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio at the dates indicated.
At June 30,
1995 1996
Amount Percent Amount Percent
(Dollars in thousands)
Residential one- to four-family $18,600 81.86% $19,751 82.47%
Commercial real estate 2,666 11.73 2,810 11.73
Multi-family 166 .73 157 .66
Land 1,143 5.03 1,078 4.50
Total mortgage loans 22,575 99.35 23,796 99.36
Consumer loans 148 .65 154 .64
Total loans 22,723 100.00% 23,950 100.00%
Less:
Undisbursed portion
of loans in process 44 62
Unamortized loan origination
fees, net or direct costs 116 124
Allowance for loan losses 92 152
Allowance for uncollected
interest 8 44
Total loans receivable,
net $22,463 $23,568
Residential One- to Four-Family Lending. The primary lending activity of
the Savings Bank is the origination of mortgage loans to enable borrowers to
purchase existing one- to four-family homes. Management believes that this
policy of focusing on one- to four-family residential mortgage loans located
in its market area has been successful in contributing to interest income
while keeping delinquencies and losses to a minimum. At June 30, 1996, $19.8
million, or 82.5%, of the Savings Bank's total gross loan portfolio, consisted
of loans secured by one- to four-family residential real estate. As of such
date, the average balance of the Savings Bank's permanent residential one- to
four-family mortgage loans was approximately $34,000. The Savings Bank
presently originates for retention in its portfolio fixed-rate mortgage loans
with terms of 16 years. The Savings Bank charges a 1% origination fee on its
residential one- to four-family mortgage loans.
Virtually all of the Savings Bank's residential mortgage loans are not
readily saleable in the secondary market because they are not originated in
accordance with the purchase requirements of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA").
Although such loans satisfy the Savings Bank's underwriting requirements, they
are "non-conforming" because they do not satisfy minimum loan amount
requirements, acreage limits, or various other requirements imposed by the
FHLMC and FNMA. Accordingly, the Savings Bank's non-conforming loans could be
sold only after incurring certain costs and/or discounting the purchase price.
The Savings Bank currently does not intend to sell its loans. The Savings
Bank has historically found that its origination of non-conforming loans has
not resulted in a materially higher amount of nonperforming loans. In
addition, the Savings Bank believes that these loans satisfy a need in the
Savings Bank's local community. As a result, the Savings Bank intends to
continue to originate such non-conforming loans.
While fixed-rate, single-family residential real estate loans are
normally originated with 16 year terms, such loans typically remain
outstanding for substantially shorter periods because borrowers often prepay
their loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all mortgage loans
in the Savings Bank's loan portfolio contain due-on-sale clauses providing
that the Savings Bank may declare the unpaid amount due and payable upon the
sale of the property securing the loan. Typically, the Savings
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Bank enforces these due-on-sale clauses to the extent permitted by law and as
business judgment dictates. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the real
estate market, prevailing interest rates and the interest rates payable on
outstanding loans.
The Savings Bank requires fire and extended coverage casualty insurance
be maintained on all of its real estate secured loans.
The Savings Bank's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
66-2/3% of the lesser of the appraised value or the purchase price. Loans
originated by the Savings Bank on new one- to four-family properties which are
less than five years old may have an increased loan-to-value ratio of 80% of
the lesser of the purchase price. The maximum loan-to-value ratio on mortgage
loans secured by non-owner-occupied properties is generally 66-2/3%.
Commercial Real Estate Lending. Historically, the Savings Bank has
engaged in limited amounts of commercial real estate lending in its primary
market area and expects to continue that practice. Commercial real estate
loans are made for terms up to 15 years, amortized monthly, and at fixed
interest rates. Loan-to-value ratios generally do not exceed 50% of appraised
property value. At June 30, 1996, such loans totalled $2.8 million, or 11.7%,
of total gross loans.
At June 30, 1996, a commercial real estate loan relationship aggregating
$632,000 represented the Savings Bank's largest loan-to-one borrower
relationship at that date. The relationship consisted of four separate loans
made to the corporate owner and operator of a local commercial property. At
June 30, 1996, this aggregate loan relationship was performing according to
its terms.
At June 30, 1996, the second and third largest commercial real estate
loans had outstanding balances of $551,000 and $427,000, respectively, and
were secured by first mortgages on commercial properties located in the
Savings Bank's market area. Each loan was performing according to its terms
at June 30, 1996.
Loans secured by commercial real estate generally involve larger
principal balances and greater risks than one- to four-family residential
mortgage loans. Payments on such loans often depend on the successful
operation or management of the underlying properties and may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Savings Bank seeks to minimize these risks in a variety of ways, including
limiting the size of such loans and the maximum loan-to-value ratio to 50%,
and strictly scrutinizing the financial condition of the borrower, the quality
of the collateral, and the management of the property securing the loan. The
Savings Bank also obtains loan guarantees from financially capable parties
based on a review of personal financial statements. All of the properties
securing the Savings Bank's commercial real estate loans are inspected by the
Savings Bank's lending personnel before origination. The Savings Bank also
obtains appraisals on each property in accordance with applicable regulations
and, if applicable, an environmental audit.
At June 30, 1996, the Savings Bank had two commercial real estate loans
outstanding secured by local properties used in petroleum-related activities.
Although the Savings Bank is unaware of any underground petroleum
contamination at such properties, no assurances can be given that such
contamination does not, in fact, exist or that it will not arise in the
future. Under current law, the Savings Bank could be liable for the cleanup
costs associated with such contamination should it have to foreclose on the
properties or take other actions in the event of borrower default. Such
costs, if any, often exceed the value of the collateral property. See
"REGULATION -- The Savings Bank -- Environmental Issues Associated With Real
Estate Lending." Such loans were performing according to their terms at June
30, 1996.
Multi-family Real Estate Lending. The Savings Bank has historically
engaged in a limited amount of multi-family real estate lending. The Savings
Bank does not actively solicit multi-family real estate loans as there are a
limited number multi-family properties in its market area. At June 30, 1996,
the Savings Bank had three multi-
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family loans in the aggregate amount of $157,000. The risks associated with
multi-family lending are substantially the same as those associated with
commercial lending discussed above.
Land Lending. The Savings Bank originates loans secured by farm
residences and combinations of farm residences and farm real estate. The
Savings Bank also originates loans for the acquisition of land upon which the
purchaser can then build or upon which the purchaser makes improvements
necessary to build upon or to sell as improved lots. At June 30, 1996, the
Savings Bank's land loan portfolio totalled $1.1 million, or 4.5%, of total
gross loans.
Loans secured by farm real estate generally involve greater risks than
one- to four-family residential mortgage loans. Payments on loans secured by
such properties, in some instances, may depend on farm income from the
properties. To address this risk, the Savings Bank does not consider farm
income when qualifying borrowers. In addition, such loans are more difficult
to evaluate. If the estimate of value proves to be inaccurate, in the event
of default and foreclosure, the Savings Bank may be confronted with a property
the value of which is insufficient to assure full repayment.
Consumer Lending. Consumer lending has traditionally been a small part
of the Savings Bank's business. Consumer loans generally have shorter terms
to maturity and higher interest rates than mortgage loans. At June 30, 1996,
the Savings Bank's consumer loan portfolio consisted entirely of loans secured
by deposit accounts, which totalled $154,000, or .6%, of total gross loans.
The interest rate charged on such loans is generally 2% above the interest
rate earned on the underlying deposit account. Deposit account loans are
payable in monthly payments of principal and interest or in a single payment.
Maturity of Loan Portfolio. The following table sets forth certain
information at June 30, 1996 regarding the dollar amount of loans maturing in
the Savings Bank's portfolio based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan
balances do not include undisbursed loan proceeds, unearned discounts,
unearned income and allowance for loan losses.
After
3 Years
Due at June 30, Through
1997 1998 1999 5 Years
(In thousands)
Residential one- to
four-family $ 5 $10 $86 $201
Commercial real estate -- -- -- 15
Multi-family -- -- -- --
Land loans -- -- -- 3
Consumer loans 154 -- -- --
Total loans $159 $10 $86 $219
After After
5 Years 10 Years
Through Through
10 Years 15 Years Total
(In thousands)
Residential one- to
four-family $2,589 $16,860 $19,751
Commercial real estate 628 2,167 2,810
Multi-family 21 136 157
Land loans 89 986 1,078
Consumer loans -- -- 154
Total loans $3,327 $20,149 $23,950
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The following table sets forth the dollar amount of all loans due after
June 30, 1997, all of which have fixed interest rates. The Savings Bank does
not originate adjustable rate loans.
Fixed
Rates
(In thousands)
Residential one- to
four-family $19,746
Commercial real estate 2,810
Multi-family 157
Land loans 1,078
Consumer loans --
Total $23,791
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-
sale clauses on loans generally give the Savings Bank the right to declare
loans immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates.
Loan Solicitation and Processing. Loan originations are obtained from a
variety of sources, including walk-in customers, and referrals from attorneys,
builders and realtors. Upon receipt of a loan application from a prospective
borrower, a credit report and other data are obtained to verify specific
information relating to the loan applicant's employment, income and credit
standing. An appraisal of the real estate offered as collateral generally is
undertaken by an appraiser retained by the Savings Bank and certified by the
State of North Carolina.
All loans are approved by the President, Calvin F. Hall, Mr. Ballew and
Mrs. Wilson, and subsequently reviewed and ratified by the Board of Directors.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment. Management of the Savings Bank believes its local
decision-making capabilities and the accessibility of its senior officers are
attractive qualities to customers within its market area. The Savings Bank's
loan approval process allows consumer loans to be approved in one or two days
and mortgage loans to be approved in approximately 14 days and closed in 30
days.
Loan Originations. Consistent with its asset/liability management
strategy, the Savings Bank's policy has been to retain in its portfolio all of
the loans that it originates.
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The following table sets forth total loans originated and repaid during
the periods indicated. No loans were purchased or sold during the periods
indicated.
Year Ended June 30,
1995 1996
(In thousands)
Total mortgage loans at beginning of period $21,954 $22,575
Loans originated:
Residential one- to four-family 3,033 5,526
Commercial real estate 223 323
Land loans 394 68
Total loans originated 3,650 5,917
Mortgage loan principal repayments (3,029) (4,696)
Net loan activity 621 1,221
Total gross mortgage loans
at end of period $22,575 $23,796
Loan Origination and Other Fees. The Savings Bank, in some instances,
receives loan origination fees. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for funding the
loan. The amount of fees charged by the Savings Bank is generally 1%, except
on loans made to churches for which the Savings Bank does not charge any loan
origination fees. Current accounting standards require fees received (net of
certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid are recognized
as income at the time of prepayment. The Savings Bank had $124,000 of net
deferred mortgage loan fees at June 30, 1996.
Nonperforming Assets and Delinquencies. The Savings Bank does not assess
late fees or penalty charges on delinquent loans. All loan payments are due
on the first day of the month; however, the borrower is given the entire month
to make the loan payment. When a mortgage loan borrower fails to make a
required payment when due, the Savings Bank institutes collection procedures.
The first notice is mailed to the borrower 30 days after the date the payment
is due and, if necessary, a second written notice follows within 30 days
thereafter giving the borrower 15 days to respond and correct the delinquency.
Attempts to contact the borrower by telephone generally begin soon after the
first notice is mailed to the borrower. If a satisfactory response is not
obtained, continuous follow-up contacts are attempted until the loan has been
brought current. Before the 90th day of delinquency, attempts to interview
the borrower, preferably in person, are made to establish (i) the cause of the
delinquency, (ii) whether the cause is temporary, (iii) the attitude of the
borrower toward the debt, and (iv) a mutually satisfactory arrangement for
curing the default.
If by the 91st day of delinquency, or sooner if the borrower is
chronically delinquent and all reasonable means of obtaining payment on time
have been exhausted, foreclosure is initiated according to the terms of the
security instrument and applicable law. Interest income on loans is reduced
by the full amount of accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Savings Bank institutes the same
collection procedures as for its mortgage loan borrowers.
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The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent more than 30
days, the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
The following table sets forth information with respect to the Savings
Bank's non-performing assets at the dates indicated.
At June 30,
1995 1996
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
Residential one- to four-family $258 $690
Commercial 10 9
Multi-family -- --
Land 11 135
Consumer -- --
Total 279 834
Accruing loans which are contractually
past due 90 days or more -- --
Total of nonaccrual and 90 days
past due loans 279 834
Real estate owned 116 99
Total nonperforming assets $395 $933
Total loans delinquent 90 days or
more to net loans 1.24% 3.54%
Total loans delinquent 90 days or
more to total assets 1.01 2.27
Total nonperforming assets to
total assets 1.43 2.54
Interest income, which would have been recorded for the year ended June
30, 1996 had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $36,000. The amount of interest included in
the results of operations on such loans for the year ended June 30, 1996
amounted to approximately $25,000.
Real Estate Owned. Real estate acquired by foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
When property is acquired it is recorded at the lower of its cost, which is
the unpaid principal balance of the related loan plus foreclosure costs, or
fair market value. Subsequent to foreclosure, the property is carried at the
lower of the foreclosed amount or fair value, less estimated selling costs.
At June 30, 1996, the Savings Bank had $99,000 of real estate owned, net
of allowance for losses of $15,000, which consisted of two one- to four-family
properties and a commercial property. The one- to four-family properties
consist of approximately five undeveloped acres located in Bakersville, North
Carolina, and a one- to four-family residence. This undeveloped property was
acquired in 1991 and at June 30, 1996 had a net book value of $20,000. This
property has been listed for sale since 1991. The one- to four-family
residence was acquired in 1996 and at June 30, 1996 had a net book value of
$17,000. The commercial property is a vacant retail store,
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approximately 8,520 square feet in size, located in Spruce Pine, North
Carolina. This property was acquired in 1993 and at June 30, 1996 had a net
book value of $47,000. This property has been listed for sale since 1993.
Asset Classification. Applicable regulations require that each insured
institution review and classify its assets on a regular basis. In addition,
in connection with examinations of insured institutions, regulatory examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified as loss is
considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted. When an insured institution classifies
problem assets as either substandard or doubtful, it is required to establish
general allowances for loan losses in an amount deemed prudent by management.
These allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities and the risks
associated with particular problem assets. When an insured institution
classifies problem assets as loss, it charges off the balances of the asset.
The Savings Bank's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the FDIC and
the Administrator which can order the establishment of additional loss
allowances.
The aggregate amounts of the Savings Bank's classified assets (as
determined by the Savings Bank), and of the Savings Bank's general and
specific loss allowances and charge-offs for the dates indicated, were as
follows:
At June 30,
1995 1996
(In thousands)
Loss $ 13 $ 55
Doubtful -- --
Substandard assets 454 878
Special mention -- --
General loss allowances 92 152
Specific loss allowances(1) 5 15
Charge-offs -- --
(1) Real estate owned.
Allowance for Loan Losses. The Savings Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
assigned to individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Savings Bank increases its
allowance for loan losses by charging provisions for loan losses against
income.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans and is generally based on mortgage loans
which consist primarily of single-family residences. Management reviews the
adequacy of the allowance at least quarterly based on management's assessment
of current economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. Specific valuation allowances are
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established to absorb losses on loans for which full collectibility may not be
reasonably assured. The amount of the allowance is based on the estimated
value of the collateral securing the loan and other analyses pertinent to each
situation. No allowance is maintained for consumer loans since the only
non-mortgage loans held by the Savings Bank are on savings accounts.
Generally, a provision for losses is charged against income quarterly to
maintain the allowances.
At June 30, 1996, the Savings Bank had an allowance for loan losses of
$152,000. Management believes that the amount maintained in the allowances
will be adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Savings Bank believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Savings Bank's loan portfolio, will not request
the Savings Bank to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not
be necessary should the quality of any loans deteriorate as a result of the
factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Savings Bank's financial condition and results
of operations.
The following table sets forth an analysis of the gross allowance for
possible loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and
the amount of loss realized has been charged or credited to current income.
Year Ended June 30,
1995 1996
(Dollars in thousands)
Allowance at beginning of period $68 $ 92
Provision for loan losses 24 60
Recoveries -- --
Charge-offs -- --
Balance at end of period $92 $152
Ratio of allowance to total
loans outstanding at the end
of the period .40% .63%
Ratio of net charge-offs to
average loans outstanding
during the period -- --
Ratio of allowance to
non-performing loans 32.97 18.23
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The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any other category.
At June 30,
1995 1996
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
(Dollars in thousands)
Real estate -- mortgage:
Residential one- to
four-family $52 0.28% 81.86% $ 95 .48 82.47%
Commercial 40 1.50 11.73 57 2.03 11.73
Multi-family -- -- 0.73 -- -- .66
Land -- -- 5.03 -- -- 4.50
Consumer -- -- 0.65 -- -- .64
Total allowance for
loan losses $92 100.00% 152 100.00%
Investment Activities
The Savings Bank is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB-Atlanta, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, the Savings Bank may also invest a portion of its assets
in commercial paper and corporate debt securities. Savings institutions like
the Savings Bank are also required to maintain an investment in FHLB-Atlanta
stock.
The Savings Bank is required under North Carolina regulations to maintain
a minimum amount of liquid assets. At June 30, 1996, the Savings Bank's
regulatory liquidity was 37.8%, which is significantly in excess of the 10%
required by North Carolina regulations. See "REGULATION -- The Savings Bank
- -- Liquidity" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
As of June 30, 1996, the Savings Bank's investment securities portfolio
consisted entirely of interest-earning deposits at other banks, FHLB-Atlanta
stock and FHLMC stock. At June 30, 1996, the Savings Bank's investment in
FHLMC stock and FHLB-Atlanta stock totalled $13,000 and $291,000,
respectively. The market value of the Savings Bank's investment portfolio
amounted to $520,000 and $576,000 at June 30, 1995 and 1996, respectively.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Savings Bank's funds for lending and other investment purposes. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are influenced significantly by general
interest rates and money market conditions. Borrowings through the
FHLB-Atlanta may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources; however, the Savings Bank has
never borrowed any funds from the FHLB-Atlanta.
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Deposit Accounts. Substantially all of the Savings Bank's depositors are
residents of North Carolina. Deposits are attracted from within the Savings
Bank's market area through the offering of a broad selection of deposit
instruments, including money market deposit accounts, regular savings accounts
and certificates of deposit. Deposit account terms vary, according to the
minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, the Savings Bank considers current market interest rates,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns.
The Savings Bank has recently adopted a strategy to extend the term of
its liabilities in the form of longer term certificate accounts and maintain
adequate liquidity levels to address its interest rate risk exposure. The
implementation of such strategy, however, is not reflected in the Savings
Bank's recent financial data as most of its liabilities are still in the form
of short term certificate accounts.
At June 30, 1996 the Savings Bank had $16.6 million of certificates of
deposit. The Savings Bank does not solicit brokered deposits and believes
that its jumbo certificates of deposit, which represented 23.8% of total
deposits at June 30, 1996, present similar interest rate risk to its other
deposit products.
In the unlikely event the Savings Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation, as the sole stockholder of the Savings Bank.
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 1996.
Weighted
Average
Interest Checking and Savings Minimum
Rate Term Deposits Amount Balance Deposits
(In thou-
sands)
3.02 -- Money Market accounts $1,000 $ 1,581 7.77%
2.50 -- Savings accounts 25 2,184 10.73
Certificates of Deposit
6.50 -- Fixed-term, fixed-rate (1) -- 11 .05
7.50 -- Fixed-term, fixed-rate (1) -- 86 .42
8.00 -- Fixed-term, fixed-rate (1) -- 19 .09
5.10 6 months Fixed-term, fixed-rate 2,500 2,845 13.98
5.37 12 months Fixed-term, fixed-rate 2,500 3,550 17.45
6.01 18 months Fixed-term, fixed-rate 500 1,110 5.47
6.24 30 months Fixed-term, fixed-rate 500 986 4.85
6.58 48 months Fixed-term, fixed-rate 2,500 3,140 15.43
Negotiable Fixed-term, fixed-rate 100,000 4,834 23.76
$20,346 100.00%
(1) No longer offered.
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The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity as of June 30, 1996. Jumbo certificates of
deposit require minimum deposits of $100,000, and have negotiable interest
rates.
Maturity Period Amount
(In thousands)
Less than three months $1,178
Three through six months 1,214
More than six through twelve
months 913
Over twelve months 1,529
Total $4,834
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Savings Bank at the dates
indicated.
At June 30,
1995 1996
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
(Dollars in thousands)
Regular savings accounts $ 2,066 9.87% $2,184 10.73% $ 118
Money market deposit 1,659 7.92 1,581 7.77 (78)
Fixed-rate certificates
which mature in the
year ended in(1):
Within 1 year 10,575 50.50 12,257 60.24 1,682
After 1 year, but
within 2 years 3,211 15.33 2,456 12.07 (755)
After 2 years, but
within 5 years 3,429 16.38 1,868 9.18 (1,561)
Total $20,940 100.00% $20,346 100.00% $(594)
_____________
(1) At June 30, 1995 and 1996, jumbo certificates amounted to $5.3 million
and $4.8 million, respectively.
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Time Deposits by Rates and Maturities
The following table sets forth the certificates of deposit in the Savings
Bank classified by rates at the dates indicated.
At June 30,
1995 1996
(In thousands)
2.00 - 3.99% $ 315 $ 37
4.00 - 5.99% 9,380 11,859
6.00 - 7.99% 7,233 4,372
8.00% and over 287 313
Total $17,215 $16,581
The following table sets forth the amount and maturities of
certificates of deposit at June 30, 1996.
Amount Due
More More More
than One than Two than Three
Less Than Year to Years to Years to
One Year Two Years Three Years Four Years
(In thousands)
2.00 - 3.99% $ 31 $ 6 $ -- $--
4.00 - 5.99% 10,831 648 356 24
6.00 - 7.99% 1,409 1,789 1,145 29
8.00% and over -- -- 313 --
Total $12,271 $2,443 $1,814 $53
Amount Due
Percent
of Total
After Certificate
4 Years Total Accounts
(In thousands)
2.00 - 3.99% $-- $ 37 .22%
4.00 - 5.99% -- 11,859 71.52
6.00 - 7.99% -- 4,372 26.37
8.00% and over -- 313 1.89
Total $-- $16,581 100.00%
Deposit Activities
The following table sets forth the deposit activities of the Savings Bank
for the periods indicated.
Year Ended June 30,
1995 1996
(In thousands)
Beginning balance $22,195 $20,940
Net increase (decrease)
before interest credited (2,211) (1,768)
Interest credited 956 1,174
Net increase (decrease)
in savings deposits (1,255) (594)
Ending balance $20,940 $20,346
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Borrowings
Savings deposits are the primary source of funds for the Savings Bank's
lending and investment activities and for general business purposes. The
Savings Bank has the ability to use advances from the FHLB-Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Atlanta functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member of the FHLB-Atlanta, the Savings Bank is required
to own capital stock in the FHLB-Atlanta and is authorized to apply for
advances on the security of such stock and certain of its mortgage loans and
other assets (principally securities which are obligations of, or guaranteed
by, the U.S. Government) provided certain creditworthiness standards have
been met. Advances are made pursuant to several different credit programs.
Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on
the financial condition of the member institution and the adequacy of
collateral pledged to secure the credit. At June 30, 1996, and during the two
years ended June 30, 1996, the Savings Bank had no borrowings from the
FHLB-Atlanta.
Competition
The Savings Bank operates in an intensely competitive market for the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Historically, its most direct competition for
savings deposits has come from three large commercial banks in its market
area. Particularly in times of high interest rates, the Savings Bank has
faced additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities. The
Savings Bank's competition for loans comes principally from mortgage bankers
and commercial banks. Such competition for deposits and the origination of
loans may limit the Savings Bank's future growth and earnings prospects.
Subsidiary Activities
The Savings Bank has one wholly-owned subsidiary, Mitchell Mortgage and
Investment Co., Inc., which was formed to hold stock in the Savings Bank's
data processing servicer. This subsidiary has been inactive for the past five
years. At June 30, 1996, the Savings Bank's investment in the subsidiary was
$15,000.
REGULATION
The Savings Bank
General. As a state-chartered, federally insured savings bank, the
Savings Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Savings Bank is regularly
examined by the FDIC and the Administrator and files periodic reports
concerning the Savings Bank's activities and financial condition with its
regulators. The Savings Bank's relationship with depositors and borrowers
also is regulated to a great extent by both federal law and the laws of North
Carolina, especially in such matters as the ownership of savings accounts and
the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Savings Bank, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Corporation and the Savings Bank
have authority to impose penalties, initiate civil and administrative actions
and take other steps intended to prevent banks from engaging in unsafe or
unsound practices.
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State Regulation and Supervision. As a North Carolina-chartered savings
bank, the Savings Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North
Carolina-chartered savings banks under his jurisdiction and for the protection
of the public investing in such institutions. The regulatory authority of the
Administrator includes, but is not limited to: the establishment of reserve
requirements; the regulation of the payment of dividends; the regulation of
stock repurchases, the regulation of incorporators, stockholders, directors,
officers and employees; the establishment of permitted types of withdrawable
accounts and types of contracts for savings programs, loans and investments;
and the regulation of the conduct and management of savings banks, chartering
and branching of institutions, mergers, conversions and conflicts of interest.
North Carolina law requires that the Savings Bank maintain federal deposit
insurance as a condition of doing business. Under state law, savings banks in
North Carolina with deposits insured by the SAIF are generally subject to
restrictions with respect to activities and investments, transactions with
affiliates and loans to one borrower similar to those applicable to
SAIF-insured savings associations.
The Administrator conducts regular examinations of North
Carolina-chartered savings banks. The purpose of such examinations is to
assure that institutions are being operated in compliance with applicable
North Carolina law and regulations and in a safe and sound manner. These
examinations are usually conducted on a joint basis with the FDIC. In
addition, the Administrator is required to conduct an examination of any
institution when he has good reason to believe that the standing and
responsibility of the institution is of doubtful character or when he
otherwise deems it prudent. The Administrator is empowered to order the
revocation of the license of an institution if he finds that it has violated
or is in violation of any North Carolina law or regulation and that revocation
is necessary in order to preserve the assets of the institution and protect
the interests of its depositors. The Administrator has the power to issue
cease and desist orders if any person or institution is engaging in, or has
engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets,
and liquidity of 10% of total assets. See "-- Capital Requirements" and "--
Liquidity." Additionally, a North Carolina-chartered savings bank is required
to maintain general valuation allowances and specific loss reserves in the
same amounts as required by the FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which
is permitted to federally chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total
assets in business, commercial, corporate and agricultural loans. In addition
to such lending authority, North Carolina-chartered savings banks are
authorized to invest funds, in excess of loan demand, in certain statutorily
permitted investments, including but not limited to (i) obligations of the
United States, or those guaranteed by it; (ii) obligations of the State of
North Carolina; (iii) bank demand or time deposits; (iv) stock or obligations
of the federal deposit insurance fund or a FHLB; (v) savings accounts of any
savings institution as approved by the board of directors; and (vi) stock or
obligations of any agency of the State of North Carolina or of the United
States or of any corporation doing business in North Carolina whose principal
business is to make education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things,
such merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides
for simultaneous mergers and conversions and for supervisory mergers conducted
by the Administrator.
Proposed Federal Legislation Regarding SAIF Recapitalization and Other
Matters. Legislation currently pending before the U.S. Congress contains a
provision calling for a one-time assessment on all SAIF-insured deposits for
the purpose of recapitalizing the SAIF. As currently proposed, the one-time
assessment would be approximately 0.68% of SAIF-insured deposits as of March
31, 1995. Based on the Savings Bank's assessable
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deposits of $21.0 million at March 31, 1995, such assessment would amount to
approximately $143,000. The assessment would be tax deductible and would have
the effect of immediately reducing the capital of the Savings Bank by the
amount of the assessment, net of applicable taxes. Management cannot predict
whether the legislation providing for such assessment will be enacted, or, if
enacted, the final amount of such assessment or whether ongoing SAIF premiums
will be reduced to a level equal to that of BIF premiums.
In addition, separate legislation proposing a comprehensive reform of the
banking and thrift industries is under consideration by the U.S. Congress to
(i) merge the BIF and the SAIF on January 1, 1998, at which time banks and
thrifts would pay the same deposit insurance premiums and (ii) require federal
savings associations to convert to a national bank or a state-chartered thrift
by January 1, 1998. Management cannot predict whether such legislation will
be enacted, or, if enacted, the final form of such legislation and its
ultimate impact on the Savings Bank.
Deposit Insurance. The FDIC insures deposits at the Savings Bank to the
maximum extent permitted by law. The Savings Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which
are based solely on the level of an institution's capital --"well
capitalized," "adequately capitalized," and "undercapitalized" -- which are
defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the Federal Deposit Insurance Act
("FDIA"), as discussed below. These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates currently ranging from .23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to .31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. The
FDIC is authorized to raise assessment rates in certain circumstances. The
Savings Bank's assessments expensed for the year ended June 30, 1996, equaled
$48,000.
On August 8, 1995, the FDIC revised the premium schedule for BIF-insured
banks to provide a range of .04% to .31% of deposits (as compared to the
current range of .23% to .31% of deposits for SAIF-insured institutions). On
November 14, 1995, the FDIC again revised the premium schedule for BIF-insured
banks to eliminate premiums for all well-capitalized banks (except for the
statutory minimum annual assessment of $2,000) and to provide a range of .03%
to .27% of deposits for all other banks. Approximately 92% of all BIF-insured
banks are categorized as "well-capitalized." It is anticipated that SAIF will
not be adequately recapitalized until 2002, absent a substantial increase in
premium rates or the imposition of special assessments or other significant
developments, such as a merger of SAIF and BIF. Implementation of the
proposed one-time SAIF-recapitalization assessment discussed above may reduce
SAIF premiums to a level at or near BIF premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Savings Bank.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be: (i) "well capitalized" if it has a total risk-based capital
ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more,
has a Tier I leverage capital ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure; (ii)
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"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized;" (iii) "undercapitalized" if it has
a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide that
a federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At June 30, 1996, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness
standards required by the FDIA. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The agencies also proposed asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. Under the final
regulations, if the FDIC determines that the Savings Bank fails to meet any
standard prescribed by the Guidelines, the agency may require the Savings Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard, as required by the FDIA. The final regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.
Capital Requirements. The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of
purchased mortgage servicing rights and certain other accounting adjustments.
All other banks must have a Tier 1 leverage ratio of at least 100-200 basis
points above the 3% minimum. The FDIC capital regulations establish a minimum
leverage ratio of not less than 4% for banks that are not the most highly
rated or are anticipating or experiencing significant growth.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital
be maintained. Any insured bank with a Tier 1 capital to total assets ratio
of less than 2% is deemed to be operating in an unsafe and unsound condition
pursuant to Section 8(a) of the FDIA unless the insured bank enters into a
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written agreement, to which the FDIC is a party, to correct its capital
deficiency. Insured banks operating with Tier 1 capital levels below 2% (and
which have not entered into a written agreement) are subject to an insurance
removal action. Insured banks operating with lower than the prescribed minimum
capital levels generally will not receive approval of applications submitted
to the FDIC. Also, inadequately capitalized state nonmember banks will be
subject to such administrative action as the FDIC deems necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary
capital) to risk weighted assets of 8% and Tier 1 capital to risk-weighted
assets of 4%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet items, are multiplied by a risk-weight of 0% to
100%, based on the risks the FDIC believes are inherent in the type of asset
or item. The components of Tier 1 capital are equivalent to those discussed
above under the 3% leverage requirement. The components of supplementary
capital currently include cumulative perpetual preferred stock,
adjustable-rate perpetual preferred stock, mandatory convertible securities,
term subordinated debt, intermediate-term preferred stock and allowance for
possible loan and lease losses. Allowance for possible loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of Tier 1 capital. Beginning in
September 1995, the FDIC will include in its evaluation of a bank's capital
adequacy an assessment of the exposure to declines in the economic value of
the bank's capital due to changes in interest rates. However, no measurement
framework for assessing the level of a bank's interest rate risk exposure has
been codified. In the future, the FDIC will issue a proposed rule that would
establish an explicit minimum capital charge for interest rate risk, based on
the level of a bank's measured interest rate risk exposure.
An undercapitalized, significantly undercapitalized, or critically
undercapitalized institution is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency. The plan must
specify (i) the steps the institution will take to become adequately
capitalized, (ii) the capital levels to be attained each year, (iii) how the
institution will comply with any regulatory sanctions then in effect against
the institution and (iv) the types and levels of activities in which the
institution will engage. The banking agency may not accept a capital
restoration plan unless the agency determines, among other things, that the
plan "is based on realistic assumptions, and is likely to succeed in restoring
the institution's capital" and "would not appreciably increase the risk...to
which the institution is exposed." Under the FDIA, a bank holding company
must guarantee that a subsidiary depository institution meet its capital
restoration plan, subject to certain limitations. The obligation of a
controlling bank holding company under the FDIA to fund a capital restoration
plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's
assets and the amount required to meet regulatory capital requirements.
The FDIA provides that the appropriate federal regulatory agency must
require an insured depository institution that is significantly
undercapitalized or its undercapitalized and either fails to submit an
acceptable capital restoration plan within the time period allowed or fails in
any material respect to implement a capital restoration plan accepted by the
appropriate federal banking agency to take one or more of the following
actions: (i) sell enough shares, including voting shares, to become
adequately capitalized; (ii) merge with (or be sold to) another institution
(or holding company), but only if grounds exist for appointing a conservator
or receiver; (iii) restrict certain transactions with banking affiliates as if
the "sister bank" requirements of Section 23A of the Federal Reserve Act
("FRA") did not exist; (iv) otherwise restrict transactions with bank or
non-bank affiliates; (v) restrict interest rates that the institution pays on
deposits to "prevailing rates" in the institution's region; (vi) restrict
asset growth or reduce total assets; (vii) alter, reduce or terminate
activities; (viii) hold a new election of directors; (ix) dismiss any director
or senior executive officer who held office for more than 180 days immediately
before the institution became undercapitalized; (x) employ "qualified" senior
executive officers; (xi) cease accepting deposits from correspondent
depository institutions; (xii) divest certain non-depository affiliates which
pose a danger to the institution; (xiii) be divested by a parent holding
company; and (xiv) take any other action which the agency determines would
better carry out the purposes of the Prompt Corrective Action provisions. See
"-- Prompt Corrective Action."
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The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement. At June 30, 1996, the Savings
Bank had a Tier 1 leverage capital ratio of 29.9% and net worth of 30.4% of
total assets.
The FDIC has adopted the Federal Financial Institutions Examination
Council's recommendation regarding the adoption of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Specifically, the
agencies determined that net unrealized holding gains or losses on available
for sale debt and equity securities should not be included when calculating
core and risk-based capital ratios.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC may
determine that the minimum adequate amount of capital for that bank is greater
than the minimum standards established in the regulation.
The Savings Bank's management believes that, under the current
regulations, the Savings Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Savings Bank, such as a downturn in the economy in areas where the Savings
Bank has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Savings Bank to meet its capital
requirements.
Activities and Investments of Insured State-Chartered Banks. The FDIA,
as amended by the FDICIA, generally limits the activities and equity
investments of FDIC-insured, state-chartered banks to those that are
permissible for national banks. Under regulations dealing with equity
investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is
not permissible for a national bank. An insured state bank is not prohibited
from, among other things, (i) acquiring or retaining a majority interest in a
subsidiary, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's
total assets, (iii) acquiring up to 10% of the voting stock of a company that
solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for
insured depository institutions, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.
In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990 through November 26, 1991 ("measurement
period") made or maintained investments in listed stocks and registered
shares, may retain whatever shares that were lawfully acquired or held prior
to December 19, 1991 and continue to acquire listed stock and registered
shares, provided that the bank does not convert its charter to another form or
undergo a change in control. In order to acquire or retain any listed stock
or registered shares, however, the bank must file a one-time notice with the
FDIC which meets specified requirements and which sets forth the bank's
intention to acquire and retain stocks or shares, and the FDIC must determine
that acquiring or retaining the listed stocks or registered shares will not
pose a significant risk to the deposit insurance fund of which the bank is a
member.
FDIC regulations implementing the FDIA provide that an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
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directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Loans-to-One-Borrower. The Savings Bank is subject to the
Administrator's loan-to-one-borrower limits. Under these limits, no loans and
extensions of credit to any borrower outstanding at one time and not fully
secured by readily marketable collateral shall exceed 15% of the net worth of
the savings bank. Loans and extensions of credit fully secured by readily
marketable collateral may comprise an additional 10% of net worth. These
limits also authorize savings banks to make loans-to-one-borrower, for any
purpose, in an amount not to exceed $500,000. A savings institution also is
authorized to make loans to one borrower to develop domestic residential
housing units, not to exceed the lesser of $30 million, or 30% of the savings
institution's net worth, provided that (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
savings institution is in compliance with its fully phased-in capital
requirements; (iii) the loans comply with applicable loan-to-value
requirements; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of net worth; and (v) the institution's regulator issued
an order permitting the savings institution to use this higher limit. These
limits also authorize a savings bank to make loans-to-one-borrower to finance
the sale of real property acquired in satisfaction of debts in an amount up to
50% of net worth.
At June 30, 1996 the Savings Bank's loans-to-one-borrower limit was
approximately $1.5 million. At June 30, 1996, the largest aggregate amount of
loans by the Savings Bank to any one borrower was approximately $632,000,
which was composed of four separate loans made to the corporate owner and
operator of a local commercial property. See "-- Lending Activities --
Commercial Real Estate Lending."
Environmental Issues Associated With Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), a federal statute, generally imposes strict liability on, among
other things, all prior and present "owners and operators" of hazardous waste
sites. However, the U.S. Congress created a safe harbor provision for secured
creditors by providing that the term "owner and operator" excludes a person
who, without participating in the management of the site, holds indicia of
ownership primarily to protect its security interest in the site. Since the
enactment of the CERCLA, this "secured creditor exemption" has been the
subject of judicial interpretations which have left open the possibility that
lenders could be liable for cleanup costs on contaminated property that the
hold as collateral for a loan.
In response to the uncertainty created by judicial interpretations, in
April 1992, the United States Environmental Protection Agency ("EPA"), an
agency within the Executive Branch of the government, promulgated a regulation
clarifying when and how secured creditors could be liable for cleanup costs
under the CERCLA. Generally, the regulation protected a secured creditor that
acquired full title to collateral property through foreclosure as long as the
creditor did not participate in the property's management before foreclosure
and undertook certain due diligence efforts to divest itself of the property.
However, in February 1994, the U.S. Court of Appeals for the District of
Columbia Circuit held that the EPA lacked authority to promulgate such
regulation on the grounds that Congress meant for decisions on liability under
the CERCLA to be made by the courts and not the Executive Branch. In January
1995, the U.S. Supreme Court denied to review the U.S. Court of Appeal's
decision. In light of this adverse court ruling, in October 1995 the EPA
issued a statement entitled "Policy on CERCLA Enforcement Against Lenders and
Government Entities that Acquire Property Involuntarily" explaining that as an
enforcement policy, the EPA intended to apply as guidance the provisions of
the EPA lender liability rule promulgated in 1992.
To the extent that legal uncertainty exists in this area, all creditors,
including the Savings Bank, that have made loans secured by properties with
potential hazardous waste contamination (such as petroleum contamination)
could be subject to liability for cleanup costs, which costs often
substantially exceed the value of the collateral property.
Federal Reserve System. All depository institutions that maintain
transaction accounts or nonpersonal time deposits must maintain reserve
requirements (under "Regulation D") imposed by the Federal Reserve. These
reserves may be in the form of cash or non-interest-bearing deposits with the
regional Federal Reserve Bank. NOW accounts
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and other types of accounts that permit payments or transfers to third parties
fall within the definition of transaction accounts and are subject to
Regulation D reserve requirements, as are any nonpersonal time deposits at a
bank. Under Regulation D, a bank must establish reserves equal to 3% of the
first $54.0 million of transaction accounts, of which the first $4.2 million
is exempt, and 10% on the remainder. The reserve requirement on nonpersonal
time deposits with original maturities of less than 1-1/2 years is 0%. As of
June 30, 1996, the Savings Bank met its reserve requirements.
Liquidity. The Savings Bank is subject to the Administrator's
requirement that the ratio of liquid assets to total assets equal at least
10%. The computation of liquidity under North Carolina regulation allows the
inclusion of mortgage-backed securities and investments which, in the judgment
of the Administrator, have a readily marketable value, including investment
with maturities in excess of five years. At June 30, 1996, the Savings Bank's
liquidity ratio calculated in accordance with North Carolina regulations, was
approximately 24.1%.
Affiliate Transactions. The Corporation and the Savings Bank are legal
entities separate and distinct. Various legal limitations restrict the
Savings Bank from lending or otherwise supplying funds to the Corporation (an
"affiliate"), generally limiting such transactions with the affiliate to 10%
of the bank's capital and surplus and limiting all such transactions to 20% of
the bank's capital and surplus. Such transactions, including extensions of
credit, sales of securities or assets and provision of services, also must be
on terms and conditions consistent with safe and sound banking practices,
including credit standards, that are substantially the same or at least as
favorable to the bank as those prevailing at the time for transactions with
unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such 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.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of
a bank, to assess the bank's record in meeting the credit needs of the
community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is
made available to the public. Further, such assessment is required of any
bank which has applied, among other things, to establish a new branch office
that will accept deposits, relocate an existing office or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution. The Savings Bank received a "satisfactory"
rating during its most recent CRA examination.
Dividends. Dividends from the Savings Bank constitute the major source
of funds for dividends which may be paid by the Corporation. The amount of
dividends payable by the Savings Bank to the Corporation will depend upon the
Savings Bank's earnings and capital position, and is limited by federal and
state laws, regulations and policies. According to North Carolina law, the
Savings Bank may not declare or pay a cash dividend on its capital stock if it
would cause its net worth to be reduced below (i) the amount required for the
liquidation account established in connection with the Conversion and (ii) the
minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
The amount of dividends actually paid during any one period are strongly
affected by the Savings Bank's management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the
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federal bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice.
The Corporation
General. The Corporation, as the sole shareholder of the Savings Bank,
is a bank holding company and is registered as such with the Board of
Governors of the Federal Reserve System ("Federal Reserve"). Bank holding
companies are subject to comprehensive regulation by the Federal Reserve under
the Bank Holding Company Act of 1956, as amended ("BHCA") and the regulations
of the Federal Reserve. As a bank holding company, the Corporation will be
required to file with the Federal Reserve annual reports and such additional
information as the Federal Reserve may require and will be subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound
practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control
of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations
of the bank holding company's banking subsidiaries are principally conducted,
may not be approved by the Federal Reserve unless the laws of the state in
which the bank to be acquired is located specifically authorize such an
acquisition. Most states have authorized interstate bank acquisitions by
out-of-state bank holding companies on either a regional or a national basis,
and most such statutes require the home state of the acquiring bank holding
company to have enacted a reciprocal statute. North Carolina law permits
out-of-state bank holding companies to acquire banks or bank holding companies
located in North Carolina so long as the laws of the state in which the
acquiring bank holding company is located permit bank holding companies
located in North Carolina to acquire banks or bank holding companies in the
acquiror's state and the North Carolina bank sought to be acquired has been in
existence for at least three years. Beginning September 30, 1995, federal law
permits well capitalized and well managed bank holding companies to acquire
control of an existing bank in any state.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely
related to the business of banking or managing or controlling banks as to be a
proper incident thereto. The list of activities determined by regulation to
be closely related to banking within the meaning of the BHCA includes, among
other things: operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing
securities brokerage services for customers.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Interstate Banking Act") permits adequately
capitalized bank and savings bank holding companies to acquire control of
banks
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and savings banks in any state beginning on September 29, 1995, one year after
the effectiveness of the Interstate Banking Act. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or savings bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state,
unless the state specifically legislated a higher deposit cap. States are
free to legislate stricter deposit caps and, at present, 18 states have
deposit caps lower than 30%.
The Interstate Banking Act also provides for interstate branching. The
McFadden Act of 1927 established state lines as the ultimate barrier to
geographic expansion of a banking network by branching. The Interstate
Banking Act withdraws these barriers, effective June 1, 1997, allowing
interstate branching in all states, provided that a particular state has not
specifically prohibited interstate branching by legislation prior to such
time. Unlike interstate acquisitions, a state may prohibit interstate
branching if it specifically elects to do so by June 1, 1997. States may
choose to allow interstate branching prior to June 1, 1997 by opting-in to a
group of states that permits these transactions. These states generally allow
interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation
permitting interstate branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the market in which the Corporation and the Savings Bank
operate, although the extent to which such competition will increase in such
market or the timing of such increase cannot be predicted. In addition, there
can be no assurance as to whether, or in what form, legislation may be enacted
in North Carolina in reaction to the Interstate Banking Act or what impact
such legislation or the Interstate Banking Act might have upon the Corporation
and the Savings Bank.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to promulgate regulations governing
such topics as internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and fees and other matters
those agencies determine to be appropriate. The legislation exempts bank
holding companies from these provisions and requires the agencies to prepare
guidelines, as opposed to regulations, dealing with these areas. It also
gives more discretion to the banking regulatory agencies in prescribing
standards for banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also expanded exemptions from the requirement
that banks be examined on a 12-month cycle. Exempted banks are inspected
every 18 months. Other provisions address paperwork reduction and regulatory
improvements, small business and commercial real estate loan securitization,
truth-in-lending amendments regarding high cost mortgages, strengthening of
the independence of certain financial regulatory agencies, money laundering,
flood insurance reform and extension of certain statutes of limitations.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the
Federal Reserve's view that a bank holding company should pay cash dividends
only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention
that is consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve pursuant to FDICIA, the Federal
Reserve may prohibit a bank holding company from paying any dividends if the
holding company's bank subsidiary is classified as "undercapitalized" under
the prompt corrective action regulations.
Bank holding companies, except for certain "well-capitalized" bank
holding companies, are required to give the Federal Reserve prior written
notice of any purchase or redemption of its outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases
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or redemptions during the preceding 12 months, is equal to 10% or more of
their consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption of it determines that the proposal would constitute an
unsafe or unsound practice or would violate any law, regulation, Federal
Reserve order, or any condition imposed by, or written agreement with, the
Federal Reserve.
Capital Requirements. The Federal Reserve has established capital
adequacy guidelines for bank holding companies that generally parallel the
capital requirements of the FDIC for the Savings Bank. The Federal Reserve
regulations provide that capital standards will be applied on a consolidated
basis in the case of a bank holding company with $150 million or more in total
consolidated assets. For bank holding companies with less than $150 million
in consolidated assets, such as the Savings Bank, the guidelines are applied
on a bank-only basis unless the parent bank holding company (i) is engaged in
nonbank activity involving significant leverage or (ii) has a significant
amount of outstanding debt that is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based
capital regulations. Under these regulations, the minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be Tier 1 capital, principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder, Tier II capital, may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt
securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance. In addition to the risk-based capital guidelines, the
Federal Reserve has adopted a minimum Tier I (leverage) capital ratio, under
which a bank holding company must maintain a minimum level of Tier 1 capital
to average total consolidated assets of at least 3% in the case of a bank
holding company which has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other bank holding
companies are expected to maintain a Tier 1 (leverage) capital ratio of at
least 1% to 2% above the state minimum.
TAXATION
Federal Taxation
General. The Holding Company and the Savings Bank will report their
income on a calendar year basis using the accrual method of accounting and
will be subject to federal income taxation in the same manner as other
corporations with some exceptions. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Savings Bank or the Holding
Company.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Savings Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Savings Bank's actual loss
experience, or a percentage equal to 8% of the Savings Bank's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve. The Savings Bank's deduction with
respect to nonqualifying loans was computed under the experience method, which
essentially allows a deduction based on the Savings Bank's actual loss
experience over a period of several years. Each year the Savings Bank
selected the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve. The Savings Bank used the percentage
method bad debt deduction for the taxable years ended December 31, 1995, 1994
and 1993. However, the use of the percentage method for the taxable years
ended December 31, 1995, 1994 and 1993 resulted in no bad debt deduction
because of other limitations in the computation.
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Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation also
requires savings associations to recapture into income over a six-year period
their post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At June 30, 1996, the Savings Bank's post-1987
reserves totalled approximately $56,000. The recapture may be suspended for
up to two years if, during those years, the institution satisfies a
residential loan requirement. The Savings Bank anticipates that it will meet
the residential loan requirement for the taxable year ending December 31,
1996.
Under prior law, if the Savings Bank failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Savings Bank would be
required to deduct bad debts as they occur and would additionally be required
to recapture its bad debt reserve deductions ratably over a multi-year period.
At June 30, 1996, the Savings Bank's total bad debt reserve for tax purposes
was approximately $1.2 million. Among other things, the qualifying thrift
definitional tests required the Savings Bank to hold at least 60% of its
assets as "qualifying assets." Qualifying assets generally include cash,
obligations of the United States or any agency or instrumentality thereof,
certain obligations of a state or political subdivision thereof, loans secured
by interests in improved residential real property or by savings accounts,
student loans and property used by the Savings Bank in the conduct of its
banking business. Under current law, a savings association will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Savings Bank's taxable income. Nondividend
distributions include distributions in excess of the Savings Bank's current
and accumulated earnings and profits, distributions in redemption of stock,
and distributions in partial or complete liquidation. However, dividends paid
out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Savings Bank's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to the
Savings Bank's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Savings Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION -- The Savings Bank -- Dividends" for limits on the payments of
dividends by the Savings Bank. The Savings Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended ("Code") imposes a tax on alternative minimum taxable income ("AMTI")
at a rate of 20%. The excess of the tax bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. In addition, only 90% of AMTI can be offset
by net operating loss carryovers. AMTI is increased by an amount equal to 75%
of the amount by which the Savings Bank's adjusted current earnings exceeds
its AMTI (determined without regard to this preference and prior to reduction
for net operating losses). For taxable years beginning after December 31,
1986, and before January 1, 1996, an environmental tax of .12% of the excess
of AMTI (with certain modification) over $2.0 million is imposed on
corporation, including the Savings Bank, whether or not an Alternative Minimum
Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Savings Bank as a
member of the same affiliated group of corporations. The
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corporate dividends-received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Corporation
and the Savings Bank will not file a consolidated tax return, except that if
the Corporation or the Savings Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
State and Local Taxation
The North Carolina corporate income tax is 7.75% of federal taxable
income as computed under the Code, subject to certain prescribed adjustments.
In addition, for tax years beginning in 1991, 1992, 1993 and 1994, corporate
taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise payable by it. An annual
state franchise tax is imposed a rate of 0.15% applied to the greater of the
institution's (i) capital stock, surplus and undivided profits, (ii)
investment in tangible property in North Carolina or (iii) appraised valuation
of property in North Carolina.
Personnel
As of June 30, 1996, the Savings Bank had six full-time employees and
one part-time employee. The employees are not represented by a collective
bargaining unit and the Savings Bank believes its relationship with its
employees is good.
Item 2. Description of Property
The Savings Bank has no branch offices. The Savings Bank owns its main
office located at 210 Oak Avenue, Spruce Pine, North Carolina 28777. The
office was opened in 1957 and the square footage is approximately 5,400 feet.
At June 30, 1996, the net book value of the property (including land and
building) and the Savings Bank's fixtures, furniture and equipment was
$70,000.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Savings Bank's business. The Savings Bank is not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Savings Bank.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The common stock of Mitchell Bancorp is traded in the over-the counter
market as reported on the Nasdaq Smallcap Market under the symbol "MBSP." As
of September 6, 1996, there were approximately 335 stockholders of record.
The Board of Directors of the Corporation has not formulated a dividend
policy, but intends to consider a policy of paying cash dividends in the
future. Future declarations or payments of dividends will be subject to
determination by the Corporation's Board of Directors, which will take into
account the Corporation's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and
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other factors, including the regulatory restrictions which affect the payment
of dividends by the Savings Bank to the Corporation. Under current North
Carolina regulations, the Corporation could not declare or pay a cash dividend
if the effect thereof would be to reduce its net worth to an amount which is
less than the minimum required by the FDIC and the Administrator. In
addition, for a period of five years after the consummation of the Conversion,
the Corporation will be required, under existing regulations, to obtain the
prior written approval of the Administrator before it can declare and pay a
cash dividend on its capital stock in an amount in excess of one-half of the
greater of (i) its net income for the most recent fiscal year, or (ii) the
average of its net income after dividends for the most recent fiscal year and
not more than two of the immediately preceding fiscal years, if applicable. No
assurances can be given that any dividends will be declared or, if declared,
what the amount of dividends will be or whether such dividends, once declared,
will continue.
The Corporation's common stock was sold in its initial public offering at
$10.00 per share and commenced trading on July 15, 1996. The high and low
prices for the common stock from July 15, 1996 through September 18, 1996 were
$12.75 and $10.125, respectively.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition
and results of operations of the Savings Bank. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto.
Operating Strategy
The business of the Savings Bank consists principally of attracting
deposits from the general public and using such deposits to originate
fixed-rate mortgage loans secured primarily by one- to four-family residences.
The Savings Bank also invests in overnight deposits. The Savings Bank plans
to continue to fund its assets primarily with deposits.
The Savings Bank's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Savings
Bank's profitability is also affected by the level of other income and
expenses. Other income consists of service charges on loan charges and other
fees, insurance commissions and net real estate owned income (expense). Other
expenses include compensation and employee benefits, occupancy expenses,
deposit insurance premiums, equipment and data servicing expenses,
professional fees and other operating costs. The Savings Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies concerning monetary and fiscal affairs, housing and
financial institutions and the attendant actions of the regulatory
authorities.
The Savings Bank strives to operate a conservative, well capitalized,
profitable thrift dedicated to financing home ownership and other consumer
needs, and to provide quality service to its customers. The Savings Bank
believes that it has established a market niche by serving moderate-income
borrowers and making smaller loans and loans that do not satisfy the standards
of the secondary market, which are considered less desirable by competing
lenders. The Savings Bank believes that it has successfully implemented its
strategy by: (i) maintaining a strong capital level; (ii) maintaining what
management believes are conservative underwriting standards; (iii) emphasizing
local loan origination; and (iv) emphasizing high quality customer service
with a competitive fee structure.
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Financial Condition
Total assets increased from $27.6 million at June 30, 1995 to $36.8
million at June 30, 1996 primarily as a result of an increase in
interest-earning deposits of $7.9 million received mainly from stock
subscriptions for the initial public offering. Loans receivable increased by
$1.1 million and has been funded with cash flow provided by operations and
principal repayments on the existing loan portfolio. Deposits decreased from
$20.9 million at June 30, 1995 to $20.3 million at June 30, 1996. The
decrease was attributable to deposits used for the purchase of common stock in
the new holding company. Historically, the Savings Bank has not relied on
borrowings to fund loan demand and had no borrowings outstanding at any of the
periods presented. Total equity increased by $8.5 million as a primary result
of the financial data at June 30, 1996 being presented as if the Conversion
had been consummated on June 30, 1996. The net proceeds from the Conversion
were $8.4 million.
Results of Operations
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, primarily loans, and interest expense on interest-bearing liabilities,
primarily deposits. The Company's net income is also affected by the
establishment of provisions for loan losses and the level of its non-interest
expenses and income tax provisions.
Comparison of Operating Results for the Year Ended June 30, 1995 and 1996
General. Net income decreased $162,000, or 64% from $253,000 for the
year ended June 30, 1995 to $91,000 for the year ended June 30, 1996. This
decrease was mainly attributable to a $187,000 decrease in net interest income
which was primarily attributable to a 76 basis point increase in the cost of
funds in 1996 compared to 1995.
Interest Income. Total interest income increased by $12,000 in 1996 to
$2.3 million primarily as a result of an increase in average outstanding loans
of $894,000 offset by a decrease in the average yield on those loans of 23
basis points. Interest income on investments and interest-earning deposits
had minimal change in fiscal 1996 compared to fiscal 1995.
Interest Expense. Savings deposit interest expense increased $199,000
for the year ended June 30, 1996 as compared to the same period in 1995. The
increase was attributable to an increase in the cost of these liabilities as
the weighted average rate paid on deposits increased 76 basis points from
4.53% during the year ended June 30, 1995 to 5.29% during the year ended June
30, 1996. The increase in deposit rates was attributable primarily to an
increase in rates paid on certificates of deposits, which increased from 5.04%
in 1995 to 6.04% in 1996, along with a corresponding increase in average
balances of certificates of deposits of $627,000 from $16.7 million to $17.3
million between the periods. The Savings Bank did not have any FHLB-Atlanta
advances or other borrowings outstanding during these periods.
Provision for Loan Losses. The provisions for loan losses were $24,000
and $60,000 during the years ended June 30, 1995 and 1996, respectively. At
June 30, 1996, the allowance for loan losses was equal to 16.3% of
non-performing assets compared to 23.3% at June 30, 1995. The ratio of the
allowance to total loans outstanding at June 30, 1996 was .63% compared to
.40% at June 30, 1995.
Non-Interest Income. Non-interest income decreased $39,000 from $45,000
for the year ended June 30, 1995 to $6,000 for the year ended June 30, 1996.
The decrease was mainly attributable to a $41,000 gain on the sale of real
estate owned recognized in 1995 with only a $2,000 gain recognized in 1996.
Non-Interest Expense. Non-interest expense decreased $23,000 for the
year ended June 30, 1996, from a total of $953,000 for the prior year to
$930,000 in 1996. This decrease was primarily attributable to a decrease of
$51,000 in other employee benefit expense in 1996. The adoption of the
Directors' Retirement Plan and two additional Supplemental Executive
Retirement Plans (SERP) at a pre-tax cost of $454,000 was recorded for the
year
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ending June 30, 1995. In 1996, continuing expense for the Directors
Retirement Plan was $12,000 compared to $278,000 in 1995. The expense for the
SERP plans was $273,000 in 1996 as a result of plan amendments made in
December 1996 compared to $176,000 recognized in 1995 when the additional SERP
plans were adopted. In 1996, the Savings Bank also executed postretirement
executive health care agreements with two executive officers. The expense
recognized upon adoption and for the remainder of the 1996 fiscal year was
$73,000. The ratio of non-interest expense to average total assets was 3.45%
and 3.23% for the years ended June 30, 1995 and 1996, respectively.
Provision for Income Tax. The provisions for income taxes decreased
$77,000 for the year ended June 30, 1996 compared with the prior year,
primarily as a result of a $239,000 reduction in income before income taxes.
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Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities and average
yields and costs. Such yields and costs for the periods indicated are derived
by dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily balances has caused any material
difference in the information presented.
At
Year Ended June 30, June 30,
1995 1996 1996
-------------------------- ------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning
assets:
Mortgage loans $21,965 $1,968 8.96% $22,863 $1,994 8.72% 8.55%
Consumer loans 204 13 6.37 170 12 7.06 6.60
Total net loans 22,169 1,981 8.94 23,033 2,006 8.71 8.54
FHLMC stock(1) 13 3 23.08 13 4 30.77 30.75
Daily interest-
bearing
deposits 4,693 255 5.43 4,705 240 5.10 5.12
FHLB stock 292 20 6.85 292 21 7.19 7.22
Total interest-
earning
assets 27,167 $2,259 8.32 28,043 $2,271 8.10 7.40
Non-interest-
earning assets:
Office properties
and equipment,
net 80 71
Real estate, net 118 89
Non-interest-
earning assets 110 557
Total assets $27,473 $28,760
Interest-bearing
liabilities:
Passbook
accounts $ 2,332 $ 59 2.53 $ 2,935 66 2.25 2.50
Money market
accounts 2,251 63 2.80 1,712 0 2.92 3.02
Certificates of
deposit 16,663 840 5.04 17,290 1,045 6.04 5.93
Total interest-
bearing
liabilities 21,246 962 4.53 21,937 1,161 5.29 5.33
Non-interest-
bearing
liabilities 262 861
Total
liabilities 21,508 22,798
Retained earnings 5,965 5,962
Total
liabilities and
retained
earnings $27,473 $28,760
Net interest
income $1,297 $1,110
Interest rate
spread (2) 3.79% 2.81% 2.07
Net interest
margin (3) 4.77% 3.96%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 127.87% 127.83%
(1) Stated at amortized cost.
(2) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(3) Net yield in interest-earning assets represents net interest income
divided by average interest-earning assets.
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Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Savings Bank. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
Year Ended June 30, 1995
Compared to June 30, 1994
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
(In thousands)
Interest-earning assets:
Mortgage loans $ 87 $ (107) $ (6) $ (26)
Consumer loans 1 (1) -- --
Total loans 88 (108) (6) (26)
Investment securities -- -- -- --
Daily interest-earning
deposits (18) 117 (12) 87
FHLB stock -- 5 -- 5
Total interest-earning
assets 70 14 (18) 66
Interest expense:
Interest-bearing deposits 2 56 1 59
Total interest-bearing
liabilities 2 56 1 59
Net change in net
interest income $ 68 $ (42) $(19) $ 7
Year Ended June 30, 1996
Compared to June 30, 1995
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
(In thousands)
Interest-earning assets:
Mortgage loans $ (53) $ 81 $ (2) $ 26
Consumer loans 1 (2) -- (1)
Total loans (52) 79 (2) 25
Investment securities 1 -- -- 1
Daily interest-earning
deposits (16) 1 -- (15)
FHLB stock 1 -- -- 1
Total interest-earning
assets (66) 80 (2) 12
Interest expense:
Interest-bearing deposits 161 32 6 199
Total interest-bearing
liabilities 161 32 6 199
Net change in net
interest income $(227) $ 48 $ (8) $(187)
Asset and Liability Management and Interest Rate Risk
General. The ability to maximize net interest income depends largely
upon achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities, and is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would result in a decrease in
net interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
The Savings Bank has perceived its market niche to be that of a
traditional thrift lender that originates fixed rate residential loans for its
portfolio and uses its capital position to absorb the adverse consequences of
the increased interest rate risk associated with this strategy. As an
integral part of this strategy, the Savings Bank has historically
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concentrated its lending activity on the origination of long-term, fixed-rate,
residential one- to four-family mortgage loans and commercial real estate and
multi-family loans. As of June 30, 1996, all of the Savings Bank's total
loans, net of loans in process and non-performing loans, were fixed rate
loans.
The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk. The Savings Bank has a
high level of interest rate risk, compared to many similar sized thrift
institutions, as a result of its policies to make fixed-rate, residential one-
to four-family real estate loans, which are longer term in nature than the
short-term characteristics of its liabilities for customer deposit accounts.
The extent of interest rate risk to which the Savings Bank is subject is
monitored by management through an analysis of the institution's interest
sensitivity gap (the difference between the amounts of interest-earning assets
and interest-bearing liabilities repricing during a given time), as well as by
other means. At June 30, 1996, the Savings Bank's interest-bearing
liabilities that were estimated to mature or reprice within one year exceeded
its interest-earning assets with the same characteristics by $3.0 million for
cumulative one-year negative gap to total rate sensitive assets of 28%. An
institution with a significant negative gap, like the Savings Bank, could
expect adverse effects on liquidity, net interest margin and net interest
income during a period of rising interest rates. The Savings Bank has
recently adopted a strategy to extend the term of its liabilities in the form
of longer term certificate accounts and maintain adequate liquidity levels to
address its interest rate risk exposure, however, most of its liabilities are
still short term certificate accounts and as a result does not reflect the
implementation of this new strategy. The Savings Bank's one year interest
sensitivity gap as a percentage of total rate sensitive assets on June 30,
1996 was negative 28%. At June 30, 1996, the Savings Bank's three year
cumulative interest rate sensitivity gap as a percentage of total
interest-earning assets was negative 15% and its five year cumulative interest
rate sensitivity gap as a percentage of total interest-earning assets was
positive 5%.
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<TABLE>
The following table presents the Savings Bank's interest sensitivity gap between interest-earning
assets and interest-bearing liabilities at June 30, 1996.
Within 6 Over Over
Six Months to 1-3 3-5 5-10
Months One Year Years Years Years Total
(Dollars in thousands)
Interest-earning assets:
Residential one- to four-
<S> <C> <C> <C> <C> <C> <C>
family loans $1,655 $ 1,514 $ 4,905 $3,541 $8,136 $19,751
Commercial real estate 75 79 352 418 1,886 2,810
Multi-family -- -- -- -- 157 157
Land -- -- -- -- 1,078 1,078
Consumer loans 154 -- -- -- -- 154
Investment securities
and interest-
bearing deposits 7,430 -- -- -- -- 7,430
Total rate sensitive
assets $9,314 $ 1,593 $ 5,257 $3,959 $11,257 $31,380
Interest-bearing liabilities:
Deposits:
Regular savings $ 235 $ 214 $ 681 $ 444 $ 610 $ 2,184
Money market deposit
accounts 656 449 251 106 119 1,581
Certificates of deposit 5,519 6,846 3,707 -- 509 16,581
Total rate sensitive
liabilities $6,410 $ 7,509 $ 4,639 $ 550 $ 1,238 $20,346
Excess (deficiency) of
interest sensitivity
assets over interest
sensitivity liabilities $2,904 $(5,916) $ 618 $3,409 $10,019 $11,034
Cumulative excess
(deficiency) of
interest sensitivity
assets $2,904 $(3,012) $(2,394) $1,015 $11,034 $11,034
Cumulative ratio of
interest-earning
assets to interest-
bearing liabilities 145% 78% 87% 105% 154% 154%
Interest sensitivity gap
to total assets 9% (9)% (7)% 3% 34% 34%
Ratio of interest-earning
assets to interest-
bearing liabilities 145% 21% 113% 720% 909% 154%
Ratio of cumulative gap
to total assets 9% (9)% (7)% 3% 34% 34%
Interest sensitivity gap to
total rate sensitive assets 31% (371)% 12% 86% 89% 35%
Ratio of cumulative gap to
total rate sensitive assets 31% (28)% (15)% 5% 35% 35%
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The Savings Bank's analysis of its interest-rate sensitivity, as
illustrated in the preceding table, incorporates certain assumptions regarding
the amortization of loans and other interest-earning assets and the withdrawal
of deposits. The Savings Bank's interest-rate sensitivity analysis, as
illustrated in the foregoing table, could vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used. The assumptions used in preparing the table are based on market loan
prepayment rates and market deposit decay rates observed by the FHLB-Atlanta
on or about June 30, 1996. The Savings Bank believes that the FHLB-Atlanta
assumptions are a realistic representation of its own portfolio.
Net Portfolio Value and Net Interest Income Analysis. In addition to the
interest rate gap analysis as discussed above, management monitors the Savings
Bank's interest rate sensitivity through the use of a model which estimates
the change in NPV (net portfolio value) and net interest income in response to
a range of assumed changes in market interest rates. NPV is the present value
of expected cash flows from assets, liabilities, and off-balance sheet items.
The model estimates the effect on the Savings Bank's NPV and net interest
income of instantaneous and permanent 200 and 400 basis point increases and
decreases in market interest rates. The Savings Bank's Board of Directors has
established maximum acceptable decreases in NPV and net interest income for
the various rate scenarios. The following information is presented as of June
30, 1996.
Change in Net Portfolio Value
Interest Rates
in Basis Points
(Rate Shock) Board
Amount $ Change % Change Limit
(Dollars in thousands)
+400 $7,180 $(1,763) (17%) (110%)
+200 8,710 (1,019) (10%) (60%)
0 10,161 -- -- --
-200 11,180 1,451 14% 65%
-400 11,924 2,981 29% 130%
Interest Rate Sensitivity of Net Portfolio Value. The table below
measures interest rate risk by estimating the change in market value of the
Savings Bank's assets, liabilities, and off-balance sheet contracts in
response to an instantaneous change in the general level of interest rates.
The procedure for measuring interest rate risk was developed to replace the
"gap" analysis (the difference between interest-earning assets and
interest-bearing liabilities that mature or reprice within a specific time
period). The model first estimates the level of the Savings Bank's NPV
(market value of assets, less market value of liabilities, plus or minus the
market value of any off-balance sheet items) under the current rate
environment. In general, market values are estimated by discounting the
estimated cash flows of each instrument by appropriate discount rates. The
model then recalculates the Savings Bank's NPV under different interest rate
scenarios. The change in NPV under the different interest rate scenarios
provides a measure of the Savings Bank's exposure to interest rate risk. The
data presented is as of June 30, 1996.
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-400 -200 +200 +400
Basis Basis No Basis Basis
Points Points Change Points Points
(Dollars in thousands)
ASSETS
Mortgage loans $25,286 $24,258 $22,863 $21,055 $19,203
Non-mortgage loans 154 154 154 154 154
Cash, deposits and
securities 7,808 7,761 7,716 7,671 7,625
Nonperforming
loans and
real estate 838 808 766 712 657
Premises and
equipment 70 70 70 70 70
Other assets 640 640 640 640 640
TOTAL ASSETS $34,796 $33,691 $32,209 $30,302 $28,348
LIABILITIES
Deposits $21,076 $20,715 $20,252 $19,796 $19,372
Borrowings -- -- -- -- --
Other liabilities 1,796 1,796 1,796 1,796 1,796
TOTAL LIABILITIES $22,872 $22,511 $22,048 $21,592 $21,168
Net portfolio
value 11,924 11,180 10,161 8,710 7,180
Percent change .17% .10% 0% (14)% (29)%
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, loan repayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
reflect any actions management may undertake in response to changes in
interest rates.
In the event of a 200 basis point decrease in interest rates, the Savings
Bank would be expected to experience an 10.0% increase in NPV and a 8.46%
decrease in net interest income. In the event of a 200 basis point increase
in interest rates, a 14.0% decrease in NPV and a 6.09% increase in net
interest income would be expected. Based upon the modelling described above,
the Savings Bank's asset and liability structure results in increases in NPV
and decreases in net interest income in a declining interest rate scenario and
decreases in NPV and increases in net interest income in a rising interest
rate scenario. However, the amount of change in value of specific assets and
liabilities due to changes in rates is not the same in a rising rate
environment as in a falling rate environment.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly
from those assumed in calculating the table.
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Liquidity and Capital Resources
The Savings Bank's primary sources of funds are customer deposits and
proceeds from principal and interest payments on loans. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The primary investing activity of the Savings Bank is the origination of
fixed-rate mortgage loans. During the years ended June 30, 1995 and 1996 and
the Savings Bank originated mortgage loans in the amounts of $3.7 million and
$5.9 million, respectively. Other investing activities include the purchase
of overnight deposits.
The Savings Bank must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. During fiscal years 1995 and 1996, the Savings Bank
used its liquidity primarily to fund deposit withdrawals.
From June 30, 1995 to June 30, 1996, deposits at the Savings Bank
decreased from $21.0 million to $20.3 million. Management believes that
deposits decreased during this period as customers withdrew deposits to use
for the purchase of common stock in the new holding company. In addition, in
light of its high liquidity and decreased loan demand, the Savings Bank has
not aggressively sought to attract deposits by increasing rates paid on
deposits. The Savings Bank believes that this strategy helps it to maintain a
larger interest rate spread. Because of its high level of liquidity, the
Savings Bank does not believe that a moderate decrease in deposits will have a
significant impact on its financial condition and results of operations.
At June 30, 1996, certificates of deposit amounted to $16.6 million, or
81.5%, of the Savings Bank's total deposits, including $12.3 million which
were scheduled to mature by June 30, 1997. Historically, the Savings Bank has
been able to retain a significant amount of its maturing deposits. Management
of the Savings Bank believes it can adjust the interest rates of savings
certificates to retain deposits in changing interest rate environments.
The Savings Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. At June 30, 1996,
the Savings Bank's liquidity ratio calculated in accordance with North
Carolina regulations, was approximately 24.1%. The Savings Bank consistently
maintains liquidity levels in excess of regulatory requirements, and believes
this is an appropriate strategy for proper asset and liability management.
The Savings Bank is required to maintain specific amounts of capital
pursuant to FDIC requirements. As of June 30, 1996, the Savings Bank was in
compliance with all regulatory capital requirements which were effective as of
such date with a Tier 1 leverage capital ratio of 29.9%.
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Impact of New Accounting Pronouncements
Accounting for Stock-Based Compensation. In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. Companies that
elect to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net income and, if presented,
earnings per share, as if this statement had been adopted. The accounting
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995; however, companies are
required to disclose information for awards granted in their first fiscal year
beginning after December 15, 1994. Management of the Savings Bank has not
completed an analysis of the potential effects of SFAS No. 123 on its
financial condition or results of operations.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. In March 1995, the FASB has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In evaluating
recoverability, if estimated future cash flows, undiscounted and without
interest charges, are less than the carrying amount of the asset, an
impairment loss is recognized. SFAS No. 121 also requires that certain
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
SFAS No. 121 applies prospectively for fiscal years beginning after December
15, 1995. Management does not expect that adoption of SFAS No. 121 will have
a material impact on the Savings Bank's financial statements.
Accounting for Postretirement Benefits Other Than Pensions. In December
1990, the FASB issued SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," which was effective for the Savings Bank for
fiscal years beginning after June 30, 1995. At June 30, 1996, SFAS No. 106
had a $45,000 impact on the Savings Bank's financial condition and results of
operations. See "MANAGEMENT OF THE SAVINGS BANK -- Directors' Compensation"
and "-- Benefits -- Supplemental Executive Retirement/Medical Care
Agreements."
Accounting for Postemployment Benefits. In November 1992, FASB issued
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which
requires accrual of the expected cost of providing post-employment benefits to
an employee and his beneficiaries and covered dependents during the years that
the employee renders the necessary services. Such benefits include salary
continuation, supplemental unemployment benefits, severance benefits, job
training and counseling, and continuation of health care benefits. The
effective date for this statement is for fiscal years beginning after December
15, 1993. At December 31, 1995, SFAS No. 112 did not have a material impact
on the Savings Bank's financial condition or results of operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1995, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS 125 supersedes SFAS 122. SFAS 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
the extinguishment of liabilities based on consistent application of a
financial components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it
no longer controls and liabilities that have been extinguished. The financial
components approach focuses on the assets and liabilities that exist after the
transfer. Many of these assets and liabilities are components
39
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<PAGE>
of financial assets that existed prior to the transfer. If a transfer does
not meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with pledge of collateral.
SFAS 125 extends the "available for sale" or "trading" approach in SFAS
115 to nonsecurity financial assets that can contractually be repaid or
otherwise settled in such a way that the holder of the assets would not
recover substantially all of its recorded investment. SFAS 125 also amends
SFAS 115 to prevent a security from being classified as held to maturity if
the security can be prepaid or otherwise settled in such a way that the holder
of the security would not recover substantially all of its recorded
investment.
SFAS 125 provides implementation guidance for accounting for (i)
securitizations, (ii) transfers of partial interests, (iii) servicing of
financial assets, (iv) securities lending transactions, (v) repurchase
agreements including "dollar rolls," (vi) loan syndications and
participations, (vii) risk participations in banker's acceptances, (viii)
factoring arrangements, (ix) transfers of receivables with recourse, (x)
transfers of sales type and direct financing lease receivables, and (xi)
extinguishments of liabilities.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
In addition, the extension of the SFAS 125 approach to certain nonsecurity
financial assets and the amendment of SFAS 115 is effective for financial
assets held on or acquired after January 1, 1997. Reclassifications that are
necessary because of the amendment do not call into question an entity's
ability to hold other debt securities to maturity in the future. Management
of the Corporation does not expect the adoption of SFAS 125 will have a
material effect on the Corporation's financial position or results of
operations.
Accounting for Employee Stock Ownership Plans. In November 1993, the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming shares of Common Stock appreciate in value
over time, the adoption of SOP 93-6 may increase compensation expense relating
to the ESOP established in connection with the Conversion as compared with
prior guidance which required the recognition of compensation expense based on
the cost of shares acquired by the ESOP. The effect of SOP 93-6 on net income
and book value per share in fiscal 1996 and future periods cannot be predicted
due to the uncertainty of the fair value of the shares of Common Stock
subsequent to their issuance.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the Savings Bank's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
do general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
Item 7. Financial Statements
<PAGE>
<PAGE>
- Independent Auditors' Report -
Board of Directors
Mitchell Bancorp, Inc. and Subsidiary
Spruce Pine, North Carolina
We have audited the accompanying consolidated balance sheets of Mitchell
Bancorp, Inc. and Subsidiary ("Company") as of June 30, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mitchell Bancorp, Inc. and
Subsidiary as of June 30, 1995 and 1996, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/Crisp, Hughes & Co., L.L.P
Asheville, North Carolina CRISP, HUGHES & CO., L.L.P
July 12, 1996
41
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<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
June 30,
Assets 1995 1996
Cash on hand $ 127 $ 133
Interest earning deposits
in other banks 4,114 11,996
Investment securities:
Available for sale
(amortized cost of $13,000
in 1995 and 1996) 229 285
Loans receivable, net 22,463 23,568
Real estate owned 111 84
Premises and equipment, net 74 70
Federal Home Loan Bank stock 291 291
Accrued interest receivable 5 5
Deferred income taxes 98 230
Prepaid expenses and other assets 84 114
Total assets $27,596 $36,776
Liabilities and Stockholders'
Equity
Deposits $20,940 $20,346
Accounts payable--conversion
cost - 347
Stock oversubscription - 523
Accrued interest payable 73 60
Accrued expenses and other
liabilities 497 818
Current income taxes payable 8 48
Total liabilities 21,518 22,142
Stockholders' equity:
Preferred stock ($.01 par
value, 500,000 shares
authorized; none
outstanding) - -
Common stock ($.01 par value,
3,000,000 shares authorized;
979,897 shares issued and
outstanding at June 30, 1996) - 10
Paid-in capital - 9,204
Retained earnings, substantially
restricted 5,947 6,038
Unrealized gain on securities
available for sale, net of
income taxes 131 166
Unearned compensation:
Employee stock ownership plan - (784)
Total stockholders' equity 6,078 14,634
Total liabilities and
stockholders' equity $27,596 $36,776
The accompanying notes are an integral part of these consolidated financial
statements.
42
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<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(in thousands)
For Years Ended June 30,
1995 1996
Interest income:
Loans $ 1,981 $ 2,006
Investments 23 25
Interest earning deposits 255 240
Total interest income 2,259 2,271
Interest expense:
Deposits 962 1,161
Net interest income 1,297 1,110
Provision for loan losses 24 60
Net interest income
after provision for
loan losses 1,273 1,050
Non-interest income:
Gain on real estate owned 41 2
Other 4 4
Total non-interest income 45 6
Non-interest expenses:
Compensation 268 269
Other employee benefits 486 435
Net occupancy expense 27 27
Deposit insurance premiums 50 48
Data processing 26 28
Provision for real estate losses 5 10
Other 91 113
Total non-interest expenses 953 930
Income before income taxes 365 126
Income tax expense 112 35
Net income $ 253 $ 91
The accompanying notes are an integral part of these consolidated financial
statements.
43
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<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands)
Unearned
Unrealized Compen-
Common Paid In Retained Gain on sation
Stock Capital Earnings Securities for ESOP Total
Balance at June
30, 1994 $ - $ - $ 5,694 $ - $ - $ 5,694
Net income - - 253 - - 253
Unrealized gain
on securities
available for
sale, net of
income taxes - - - 131 - 131
Balance at June
30, 1995 - - 5,947 131 - 6,078
Net income - - 91 - - 91
Unrealized gain
on securities
available for
sale, net of
income taxes - - - 35 - 35
Sale of common
stock (979,897
shares) 10 9,204 - - (784) 8,430
Balance at June
30, 1996 $ 10 $ 9,204 $ 6,038 $ 166 $ (784) $14,634
The accompanying notes are an integral part of these consolidated financial
statements.
44
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<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
1995 1996
Operating activities:
Net income $ 253 $ 91
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities:
Depreciation 15 11
Provision for loan losses 24 60
Provision for losses on
real estate 5 10
Increase (decrease) in
reserve for uncollected
interest (2) 36
Deferred income taxes (benefit) (170) (153)
Net increase in deferred loan
fees 3 8
Gain on real estate owned (41) (2)
(Increase) decrease in accrued
interest receivable (1) -
(Increase) decrease in prepaid
expenses and other assets (25) (5)
(Increase) decrease in accrued
interest payable 7 (13)
Increase in accrued expenses
and other liabilities 398 361
Net cash provided by
operating activities 466 404
Investing activities:
Net increase in loans (645) (1,193)
Purchase of premises and
equipment (10) (7)
Proceeds from sale of real
estate owned 60 3
Investment in life insurance
cash surrender value (25) (25)
Net cash used by investing
activities (620) (1,222)
Financing activities:
Increase (decrease) in bank
overdraft (47) -
Net decrease in deposits (1,255) (594)
Proceeds from sale of common
stock - 8,430
Proceeds from stock over-
subscriptions - 523
Accrued conversion cost - 347
Net cash provided (used)
by financing activities (1,302) 8,706
Increase (decrease) in
cash and cash
equivalents (1,456) 7,888
Cash and cash equivalents at
beginning of year 5,697 4,241
Cash and cash equivalents at
end of year $ 4,241 $ 12,129
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 956 $ 1,174
Income taxes 306 147
Noncash transactions:
Real estate acquired in
satisfaction of mortgage
loans $ - $ 17
Loans to facilitate sale
of real estate owned - 33
Transfer of securities from
held to maturity to avail-
able for sale 13 -
Unrealized gain on securities
available for sale, net of
deferred tax liability of
$85,000 and $21,000 in 1995
and 1996, respectively 131 35
The accompanying notes are an integral part of these consolidated financial
statements.
45
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<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995 and 1996
(tabular amounts in thousands)
1. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Mitchell Bancorp, Inc. ("the Company")
and its wholly-owned subsidiary, Mitchell Savings Bank, S.S.B. ("Savings
Bank"). The Company became the holding company of the Savings Bank upon the
conversion of the Savings Bank from a North Carolina-chartered mutual savings
bank to a North Carolina-chartered stock savings bank (see Note 16). This
transaction has been accounted for in a manner similar to a "pooling of
interest" in accordance with APB Opinion No. 16, "Business Combinations".
The Company's consolidated financial statements also include the assets and
liabilities of Mitchell Mortgage and Investment Co., Inc. (MMI) which is
wholly owned by the Savings Bank. MMI was organized in September of 1980 and
has had no significant business activity. All significant intercompany
balances and transactions have been eliminated in consolidation.
Estimates - The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Loans Receivable - Loans receivable are carried at their unpaid principal
balance less, where applicable, unearned income, net deferred loan fees, and
allowance for losses. Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current economic
conditions and such other factors which, in management's judgment, deserve
recognition in estimating loan losses. Interest accrual is discontinued when
a loan becomes 90 days delinquent unless, in management's opinion, the loan is
well secured and in process of collection. Interest income is subsequently
recognized only to the extent cash payments are received, until such time
that, in management's opinion, the borrower will be able to meet payments as
they become due.
The Savings Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures, an amendment of SFAS No. 114,"
effective July 1, 1995. These statements address the accounting by creditors
for impairment of certain loans. They apply to all creditors and to all
loans, uncollateralized as well as collateralized, except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or at lower of cost or fair value,
leases, and debt securities. The Savings Bank considers all one-to-four
family residential mortgage loans and all consumer and other loans to be
smaller homogeneous loans. These statements apply to all loans that are
restructured involving a modification of terms. Loans within the scope of
these statements are considered impaired when, based on current information
and events, it is probable that all principal and interest will not be
collected in accordance with the contractual terms of the loans. Management
determines the impairment of loans based on knowledge of the borrower's
ability to repay the loan according to the contractual agreement and the
borrower's repayment history. Pursuant to SFAS No. 114, Paragraph 8,
management does not consider an insignificant delay or insignificant shortfall
to impair a loan. Management has determined that a delay less than 90 days
will be considered an insignificant delay and that an amount less than $25,000
will be considered an insignificant shortfall. The Savings Bank does not
apply
46
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<PAGE>
SFAS No. 114 using major risk classifications, but applies SFAS No. 114 on a
loan by loan basis. All nonaccrual loans are considered to be impaired.
Impaired loans are considered to be nonaccrual loans only if they are 90 days
or more past due. All loans are charged off when management determines that
principal and interest are not collectible. At June 30, 1996, the Savings
Bank had $834,000 of nonaccrual loans, of which $144,000 would be considered
impaired. The total allowance for credit loss on those impaired loans was
approximately $6,500 at June 30, 1996. The average recorded investment in
impaired loans during the year ending June 30, 1996, was approximately
$52,000.
The Savings Bank's policy on single-family mortgage loans is to lend within
its primary market area which is defined as Mitchell County and the
surrounding counties in Western North Carolina. It is the Savings Bank's
general policy to limit an individual single-family mortgage loan to 80% of
the appraised value of the property securing the loan. However, it will
occasionally lend more than 80% of the appraised value of the property, but
generally will require that the borrower pay a higher interest rate for the
borrowed funds.
The Savings Bank's multi-family and commercial real estate loans consist of
properties located in its primary market. The general policy is to limit
loans on multi-family residential complexes and commercial real estate to 50%
of the appraised value of the property securing the loan.
Management of the Savings Bank believes that its allowances for losses on its
loan portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Savings Bank's
allowance for losses as an integral part of their examination processes. Such
agencies may require the Savings Bank to recognize additions to the allowances
based on their judgments of information available to them at the time of their
examinations.
Any excess of the Savings Bank's recorded investment in the loans (unpaid
principal balance, adjusted for unamortized premium or discount and net
deferred loan origination fees or costs) over the measured value of the loans
in accordance with SFAS No. 114 are provided for in the allowance for loan
losses. The Savings Bank reviews its loans for impairment on a quarterly
basis.
Loan Origination Fees - Loan fees result from the Savings Bank originating
mortgage loans. Such fees and certain direct incremental costs related to
origination of such loans are deferred ("net deferred loan fees") and
reflected as a reduction of the carrying value of mortgage loans. The net
deferred fees (or costs) are amortized using the interest method over the
contractual lives of the loans. Unamortized net deferred loan fees on loans
sold prior to maturity are credited to income at the time of sale.
Investment Securities - The Savings Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115) effective July 1, 1994. Under the Statement,
debt securities that the Savings Bank has the positive intent and ability to
hold to maturity are classified as "held-to-maturity" securities and reported
at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
"trading" securities and reported at fair value with unrealized gains and
losses included in earnings. Debt and equity securities not classified as
either held-to-maturity or trading securities are classified as
"available-for-sale" securities and reported at fair value with unrealized
gains and losses excluded from earnings and reported as a separate component
of stockholders' equity. Transfers of securities between classifications will
be accounted for at fair value. No securities have been classified as trading
securities. The accounting change had no effect on current year operations,
nor did it require a restatement of any prior periods. Gains or losses on
sales of securities available for sale are based on the specific
identification method.
Premises and Equipment - Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the following useful lives of the respective assets:
Buildings 50 years
Building improvements 15 to 25 years
Office furniture and equipment 5 to 10 years
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The cost of maintenance and repairs is charged to expense as incurred while
expenditures which materially increase property lives are capitalized.
Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan Bank
is required by law of every federally insured savings and loan or savings
bank. The investment is carried at cost. No ready market exists for the
stock, and it has no quoted market value.
Real Estate Owned - Real estate acquired through, or in lieu of, loan
foreclosure is carried at the lower of fair value minus estimated costs to
sell or cost, which is redefined as the fair value at the time of foreclosure.
If fair value minus estimated costs to sell is less than cost, a valuation
allowance is recognized. If the fair value less estimated costs to sell
subsequently increases, the valuation allowance is reduced, but not below
zero. Increases or decreases in the valuation allowance are charged or
credited to income. Gains on sales of real estate owned are deferred to the
extent that gains are not received in cash. Deferred gains are taken into
income in the same ratio as the loan balances are reduced.
Income Taxes - The Company utilizes the liability method of computing income
taxes in accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted for
tax rate changes. The focus is on accruing the appropriate balance sheet
deferred tax amount, with the statement of earnings effect being the result of
changes in balance sheet amounts from period to period. Current income tax
expense is provided based upon the actual tax liability incurred for tax
return purposes.
Cash Flow Information - As presented in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand and interest-earning
deposits in other banks.
Impact of New Accounting Pronouncements - The FASB has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In evaluating
recoverability, if estimated future cash flows, undiscounted and without
interest charges, are less than the carrying amount of the asset, an
impairment loss is recognized. SFAS 121 also requires that certain long-lived
assets and certain identifiable intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. SFAS 121
applies prospectively for fiscal years beginning after December 15, 1995.
Management does not expect that adoption of SFAS 121 will have a material
impact on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to all transactions in which an entity acquires
goods or services issuing equity instruments or by incurring liabilities where
the payment amounts are based on the entity's common stock price, except for
employee stock ownership plans (ESOP's). The SFAS covers transactions with
employees and non-employees and is applicable to both public and non-public
entities.
SFAS No. 123 requires that, except for transactions with employees that are
within the scope of APB Opinion No. 25, all transactions in which goods or
services are the consideration received for the issuance of equity instruments
are to be accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more reliably
measurable. However, it also allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Entities electing to follow the accounting methods in Opinion No.
25 must make proforma disclosures of net income and, if presented, earnings
per share, as if the fair value method of accounting defined in the statement
had been applied.
48
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SFAS No. 123 is effective for years beginning after December 15, 1995, or for
an earlier fiscal year for which this statement is initially adopted for
recognizing compensation costs. Proforma disclosures required for entities
that elect to continue to measure compensation cost using Opinion No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994. Management does not expect that the adoption of SFAS 123
will have a material impact on the Company's financial statements.
Earnings Per Share - Earnings per share is computed based on weighted average
number of shares for common stock and common stock equivalents assumed to be
outstanding during the period. Earnings per share was not calculated as no
shares were outstanding during the year ending June 30, 1996. See Note 16.
2. Loans Receivable
Loans receivable are summarized as follows:
June 30,
1995 1996
Real estate mortgage loans:
One-to-four-family residential $ 18,600 $ 19,751
Commercial real estate 2,666 2,810
Multi-family residential 166 157
Land 1,143 1,078
Total real estate loans 22,575 23,796
Consumer loans:
Loans secured by deposit accounts 148 154
Total loans 22,723 23,950
Less:
Undisbursed portion of loans
in process (44) (62)
Allowance for loan losses (92) (152)
Deferred loan fees (116) (124)
Reserve for uncollected interest (8) (44)
(260) (382)
$ 22,463 $ 23,568
A summary of the activity in the allowance for loan losses is summarized as
follows:
Years Ended June 30,
1995 1996
Beginning balance $ 68 $ 92
Provision for losses charged
to income 24 60
Ending balance $ 92 $ 152
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3. Real Estate Owned
Real estate owned is summarized as follows:
June 30,
1995 1996
One-to-four family residential $ 35 $ 52
Commercial real estate 81 47
Allowance for losses on real estate (5) (15)
$ 111 $ 84
A summary of activity in the valuation allowance for losses on real estate is
summarized as follows:
Years Ended June 30,
1995 1996
Beginning balance $ - $ 5
Provision for losses charged
to income 5 10
Ending balance $ 5 $ 15
4. Premises and Equipment
Premises and equipment is summarized as follows:
June 30,
1995 1996
Land $ 16 $ 16
Office building and improvements 80 83
Furniture and equipment 182 186
278 285
Less accumulated depreciation 204 215
$ 74 $ 70
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5. Deposits
Deposits are summarized as follows:
June 30,
1995 1996
Weighted Weighted
Average Rate Amount Average Rate Amount
Passbook 2.50% $ 2,066 2.50% $ 2,184
Money market 2.91% 1,659 3.02% 1,581
Certificates of
deposit 6.02% 17,215 5.93% 16,581
Total deposits $ 20,940 $ 20,346
Weighted average
cost of deposits 4.60% 5.33%
Contractual maturities of certificates of deposit are as follows:
June 30,
1995 1996
12 months or less $ 10,575 $ 12,257
1-2 years 3,211 2,456
2-3 years 2,239 1,359
3-5 years 1,190 509
$ 17,215 $ 16,581
Interest expense on deposits is summarized as follows:
Years Ended June 30,
1995 1996
Passbook $ 59 $ 66
Money market 64 50
Certificates of deposit 839 1,045
$ 962 $ 1,161
Certificates of deposit with balances of $100,000 or more totaled
approximately $5,282,000 and $5,052,000 at June 30, 1995 and 1996,
respectively.
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6. Income Taxes
The components of income tax expense (benefit) are as follows:
Years Ended June 30,
1995 1996
Current $ 282 $ 188
Deferred (benefit) (170) (153)
Total $ 112 $ 35
The differences between actual income tax expense and the amount computed by
applying the federal statutory income tax rate of 34% to income before income
taxes are reconciled as follows:
Years Ended June 30,
1995 1996
Computed income tax expense
(benefit) $ 124 $ 43
Increase (decrease) resulting
from:
State income tax net of
federal benefits (2) (6)
Other (10) (2)
Actual income tax expense (benefit) $ 112 $ 35
The components of the net deferred income tax assets are as follows:
June 30,
1995 1996
Deferred tax assets:
Loan origination fees $ 44 $ 28
Bad debt reserve 17 38
Pension accrual under FASB 87 7 9
Reserve for uncollected interest 3 18
Deferred post-retirement benefits - 29
Deferred compensation 168 270
Deferred gain REO 4 4
Valuation allowance - -
243 396
Deferred tax liabilities:
FHLB stock dividends 51 51
Excess tax depreciation 9 9
Unrealized gain on investments
available for sale 85 106
145 166
Net deferred income
tax asset $ 98 $230
The Savings Bank's annual addition to its reserve for bad debts allowed under
the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt deductions
for income tax purposes are included in taxable income of later years only if
the bad debt reserves are used for purposes other than to absorb bad debt
losses. Since the Savings Bank does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided on the amount of bad debt reserves for tax purposes that arose in tax
years beginning before December 31, 1987, in accordance with SFAS No. 109.
Therefore, retained income at June 30, 1996, includes approximately
$1,118,000, representing such bad debt deductions for which no deferred income
taxes have been provided.
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7. Retained Income
Retained income represents the accumulated net income of the Company since its
origination date. In connection with the insurance of savings accounts, the
Federal Deposit Insurance Corporation (FDIC) requires that certain minimum
amounts be restricted to absorb certain losses as specified in the insurance
of accounts regulations. Because restricted retained income is not related to
amounts of losses actually anticipated, the appropriations thereto have not
been charged to income in the accompanying consolidated financial statements.
Furthermore, the use of retained income by the Company is restricted by
certain requirements of the Internal Revenue Code as disclosed in Note 6.
8. Pension Plan
The Company has a defined benefit pension plan covering all full-time
employees over the age of twenty and one-half who have completed six months of
continuous employment.
The following is a summary of the components of pension cost:
Years Ended June 30,
1995 1996
Service cost--benefits earned
during the year $ 6 $ 7
Interest cost on projected
benefit obligation 8 10
Actual return on plan assets (5) (7)
Net amortization of initial
transition liability and
deferral of subsequent gains
under SFAS No. 87 1 1
Net amortization of loss not
reflected in market related value 1 1
$ 11 $ 12
A summary of the plan's funding status is as follows:
June 30,
1995 1996
Actuarial present value of
benefit obligations:
Vested benefits $ 94 $ 123
Non-vested benefits - -
Accumulated benefit obligation $ 94 $ 123
Projected benefit obligations for
services rendered to date $ 109 $ 136
Plan assets at fair value,
primarily cash and contracts
with insurance companies 62 101
Deficit of plan assets over
projected benefit obligations 47 35
Unrecognized transition asset (22) (20)
Minimum liability adjustment 28 38
Unrecognized net loss (21) (30)
Accrued pension expense $ 32 $ 23
The weighted average discount rate and rate of increase in future compensation
levels in determining the actuarial present value of the projected benefit
obligation for 1995 and 1996 were 8% and 5%. The expected long-term rate of
return on assets was 8%.
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9. Commitments
The Company had outstanding commitments to originate mortgage loans of
approximately $365,000 and $1,512,000 at June 30, 1995 and 1996, respectively.
The commitments to originate loans at June 30, 1995, were composed of fixed
rate loans having interest rates ranging from 8.5% to 9.0% with terms ranging
from 15 to 16 years. The commitments to originate loans at June 30, 1996, were
composed of fixed rate loans having interest rates ranging from 7.75% to 8.00%
with terms ranging from 15 to 16 years.
10. Compensation Benefit Agreements
The Savings Bank established in the 1995 fiscal year nonqualified compensation
agreements with its directors providing for fixed benefits payable monthly
over a ten year period. The benefits are payable to those directors beginning
upon attainment of age 62 or, in the event of their death, to their designated
beneficiary. The expense before income tax effect associated with these
agreements was approximately $278,000 and $12,000 for the years ending June
30, 1995 and 1996, respectively.
The Savings Bank also has established nonqualified compensation agreements
with certain key executives providing for benefits payable monthly over a
specified period. One agreement was in place at June 30, 1994. Two subsequent
agreements were executed in the 1995 fiscal year. On December 31, 1995, the
three existing agreements were amended and consolidated in order to provide
for new benefit terms. The current terms provide for the payment of a certain
sum monthly for ten years upon their attainment of age 62 or at their
discretion thereafter, or, in the event of their death, to their designated
beneficiary. The expense before income tax effect associated with these
agreements was approximately $176,000 and $273,000 for the years ending June
30, 1995 and 1996, respectively.
The Company has purchased life insurance contracts with respect to directors
and key executives covered by these agreements. The Company is the owner and
beneficiary of the insurance contracts. The directors and key executives are
general creditors of the Company with respect to these benefits. The cash
surrender value of the Company-owned life insurance is reflected in other
assets on the accompanying consolidated balance sheets. The liability for the
benefits have been accrued at the balance sheet dates at the net present value
of the expected benefits. Annual expense is based on the increase in the
present value of expected future benefits.
11. Postretirement Benefits Other Than Pensions
Effective December 31, 1995, the Company adopted an unfunded postretirement
health care benefit plan covering certain executive officers and their spouses
for life beginning at their date of retirement. The Company plans to provide
health insurance coverage under their existing group plan for these retirees.
The benefits are recorded in accordance with SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions". Under SFAS No.
106, the Company is required to accrue the estimated cost of retiree benefit
payments during the employee's active service period. Based on the full
eligibility of the covered executive officers, the Company has accrued the
expected postretirement benefit obligation of approximately $73,000 at June
30, 1996. This liability consists entirely of unrecognized prior service cost.
For measuring the expected postretirement benefit obligation, a 2% annual rate
of increase in the group insurance premiums was assumed. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7% at June 30, 1996. If the assumed health care cost trend
rate were increased by 1%, the accumulated postretirement benefit obligation
as of June 30, 1996, would have increased by approximately 2%.
12. Employment and Change of Control Agreements
The Company entered into employment agreements with certain key officers. The
employment agreements provide for three-year terms. Commencing on the first
anniversary date and continuing each anniversary date thereafter, the board of
directors may extend the agreements for an additional year so that the
remaining terms shall be three years, unless written notice of termination of
the agreement is given by the executive officer.
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The agreements provide for severance payments and other benefits in the event
of involuntary termination of employment in connection with any change in
control of the employers. Severance payments also will be provided on a
similar basis in connection with voluntary termination of employment where,
subsequent to a change in control, officers are assigned duties inconsistent
with their positions, duties, responsibilities and status immediately prior to
such change in control. The severance payments will equal 2.99 times the
executive officer's average annual compensation during the preceding five
years. Such amount will be paid within five business days following the
termination of employment, unless the officer elects to receive equal monthly
installments over a three-year period. The employment agreements provide for
termination by the Company for just cause at any time. The Company has not
accrued any benefits under these postemployment agreements.
13. Regulatory Capital Requirements
The Savings Bank must comply with certain capital requirements established by
the Federal Deposit Insurance Corporation (FDIC). The regulations require the
Savings Bank to have minimum Tier I capital equal to 4% of total assets, Tier
I capital equal to 4% of risk-based assets (as defined by FDIC), and total
capital equal to 8% of risk-based assets. In addition, the Savings Bank is
subject to a North Carolina Savings Institution (State) capital requirement of
at least 5% of total assets.
At June 30, 1995 and 1996, the Savings Bank exceeded all of its capital
requirements, as defined by FDIC and the State. The Savings Bank had the
following capital ratios at June 30, 1995 and 1996:
June 30,
1995 1996
Tier I capital to adjusted
total assets 21.5% 29.93%
Tier I to risk-weighted assets 48.2% 71.64%
Total capital to risk-weighted
assets 49.9% 72.74%
The following is a reconciliation of the Savings Bank's generally accepted
accounting principles (GAAP) capital to regulatory capital at June 30, 1996:
Tier I Total
Tier I Risk-Based Risk-Based
Capital Capital Capital
GAAP capital $10,028 $10,028 $10,028
Adjustments:
Unrealized gain on
securities available
for sale (166) (166) (166)
General valuation
allowances - - 152
Regulatory capital computed 9,862 9,862 10,014
Minimum capital requirement 1,318 551 1,101
Regulatory capital excess $ 8,544 $ 9,311 $ 8,913
14. Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the accompanying consolidated
balance sheet. The contract or notional amounts of those instruments reflect
the extent of the Company's involvement in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those
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instruments. The Company uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness. The amount of collateral obtained, if it is
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral may include
one to four family residences and nonresidential properties.
The Company's only financial instruments with off-balance sheet risk at June
30, 1995 and 1996, are outlined in Note 9.
15. Deposit Insurance Premiums
The Savings Bank currently pays an insurance premium to the Federal Deposit
Insurance Corporation (FDIC) equal to a percentage of its total deposits as a
member of the Savings Association Insurance Fund (SAIF). In August 1995, the
FDIC announced plans to lower the insurance premium rates for members of the
Bank Insurance Fund (BIF). The disparity in insurance premiums between BIF
and SAIF could create a competitive disadvantage for SAIF members. A proposed
alternative to mitigate the effect is the assessment of a special premium of
approximately .85% of deposits in order to recapitalize the SAIF and a
subsequent lowering of the SAIF insurance premium rates.
If the proposal is realized, the Savings Bank would recognize an immediate
charge to income for the amount of the fee which would immediately reduce its
capital. After recapitalization, it is expected that the SAIF and BIF
premiums would initially be equal and therefore provide the Savings Bank with
reduced insurance premiums in the future. However, management of the Savings
Bank is unable to predict whether this proposal will be enacted or whether
ongoing SAIF premiums will be reduced to a level equal to that of BIF
premiums.
16. Stockholders' Equity
The Company was incorporated under North Carolina law in February 1996 to
acquire and hold all the outstanding common stock of the Savings Bank, as part
of the Savings Bank's conversion from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank. In connection
with the conversion which was consummated on July 12, 1996, the Company issued
and sold 979,897 shares of common stock at a price of $10.00 per share for
total net proceeds of approximately $9.2 million after conversion expenses of
approximately $585,000. The Company retained one-half of the net proceeds and
used the remaining net proceeds to purchase the newly issued capital stock of
the Savings Bank. The net conversion proceeds of approximately $9.2 million
and over-subscription proceeds of approximately $523,000 were held in
withdrawable accounts at the Savings Bank at June 30, 1996. Since, the
conversion was essentially consummated prior June 30, 1996, the conversion has
been accounted for as being effective as of June 30, 1996, with the net
conversion offering proceeds of approximately $9.2 million shown on the
statements of stockholders' equity as proceeds from the sale of common stock
and stock oversubscription proceeds of approximately $523,000 recorded as a
liability. The oversubscription proceeds were refunded, with accrued
interest, by July 12, 1996.
The stockholders of the Company will be asked to approve a proposed stock
option plan and a proposed management recognition plan at a meeting of the
stockholders after the conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common stock
or they may be purchased in the open market. In the event that options or
shares are issued under these plans such issuances will be included in the
earnings per share calculation, thus, the interests of existing stockholders
would be diluted.
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The Savings Bank may not declare or pay a cash dividend if the effect thereof
would cause its net worth to be reduced below either the amounts required for
the liquidation account discussed below or the regulatory capital requirements
imposed by federal and state regulations.
At the time of conversion, the Savings Bank will establish a liquidation
account in an amount equal to its retained income as reflected in the latest
consolidated balance sheet used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their deposit accounts in the Savings Bank
after conversion. In the event of a complete liquidation of the Savings Bank
(and only in such an event), eligible depositors who continue to maintain
accounts shall be entitled to receive a distribution from the liquidation
account before any liquidation may be made with respect to common stock.
17. Employee Stock Ownership Plan
As part of the conversion discussed in Note 16, an Employee Stock Ownership
Plan (ESOP) was established for all employees who have attained the age of 21
and have been credited with at least 500 hours of service during a 12-month
period. The ESOP borrowed approximately $784,000 from the Company and used
the funds to purchase 78,391 shares of common stock of the Company issued in
the conversion. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of 15 years. On June
30, 1996, the loan had an outstanding balance of approximately $784,000 and an
interest rate of 8.25%. The loan obligation of the ESOP is considered
unearned compensation and, as such, recorded as a reduction of the Company's
stockholders' equity. Both the loan obligation and the unearned compensation
are reduced by an amount of the loan repayments made by the ESOP. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. Contributions to the ESOP and
shares released from the suspense account are allocated among participants on
the basis of compensation in the year of allocation. Benefits become fully
vested at the end of seven years of service under the terms of the ESOP Plan.
Benefits may be payable upon retirement, death, disability, or separation from
service. Since the Company's annual contributions are discretionary, benefits
payable under the ESOP cannot be estimated. Compensation expenses are
recognized to the extent of the fair value of shares committed to be released.
The Company did not record compensation expense under the ESOP in 1996 and
holds 78,391 shares in a suspense account as of June 30, 1996.
18. Financial Instruments
The approximate stated and estimated fair value of financial instruments are
summarized below:
Stated Estimated
Amount Fair Value
Financial assets:
Cash and interest earning deposits $ 12,129 $ 12,129
Securities available for sale 285 285
Loans receivable, net 23,568 23,860
Federal Home Loan Bank stock 291 291
Interest receivable 5 5
$36,278 $36,570
Financial liabilities:
Deposits $20,346 $20,526
Stock oversubscriptions 523 523
Other liabilities 1,273 1,273
$22,142 $22,322
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized
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in the balance sheet, for which it is practicable to estimate that value. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash - The carrying amount of such instruments is deemed to be a reasonable
estimate of fair value.
Investments - Fair values for investment securities are based on quoted market
prices.
Loans - Fair values for loans held for investment are estimated by segregating
the portfolio by type of loan and discounting scheduled cash flows using
interest rates currently being offered for loans with similar terms, reduced
by an estimate of credit losses inherent in the portfolio. A prepayment
assumption is used as an estimate of the portion of loans that will be repaid
prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and it
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed to
be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required by
SFAS 107, equal to the amounts payable on demand at the reporting date (i.e.,
their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
Other Assets and Other Liabilities - Other assets represent accrued interest
receivable; other liabilities represent accrued expenses and stock
oversubscriptions. Since these financial instruments will typically be
received or paid within three months, the carrying amounts of such instruments
are deemed to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point of time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
current interest rates and prepayment trends, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in any of these
assumptions used in calculating fair value also would affect significantly the
estimates. Further, the fair value estimates were calculated as of June 30,
1996. Changes in market interest rates and prepayment assumptions could
change significantly the estimated fair value.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of these estimates.
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19. Parent Company Financial Information
Condensed financial information at and as of June 30, 1996, for Mitchell
Bancorp, Inc. is presented and should be read in conjunction with the
consolidated financial statements and the notes thereto:
STATEMENT OF FINANCIAL CONDITION June 30,
1996
Assets
Cash and cash equivalents $ 4,693
Equity investment in net assets of savings bank 10,645
Loan receivable--ESOP 784
Total assets $16,122
Liabilities and Stockholders' Equity
Stock oversubscriptions $ 523
Accrued conversion cost 347
Total liabilities 870
Stockholders' equity:
Common stock 10
Paid-in capital 9,204
Retained income 6,038
Total stockholders' equity 15,252
Total liabilities and stockholders' equity $16,122
For the Period
Ending June 30,
STATEMENT OF CASH FLOWS 1996
Investing activities:
Investment in savings bank $(4,607)
Net cash used by investing activities (4,607)
Financing activities:
Proceeds from sale of common stock 8,430
Proceeds from stock oversubscription 523
Accrued conversion cost 347
Net cash provided by financing activities 9,300
Net increase in cash and cash equivalents 4,693
Cash and cash equivalents at beginning of period -
Cash and cash equivalents at end of period $4,693
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Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The Board of Directors of the Corporation is presently composed of five
members, each of who are elected for a term of one year. The executive
officers of the Corporation and the Savings Bank are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The following
tables sets forth information with respect to the Directors and executive
officers of the Corporation and the Savings Bank.
Directors of the Corporation and the Savings Bank
Age at Current
June 30, Director Term
Name 1996 Since(1) Expires
Calvin F. Hall 67 1974 1996
Edward Ballew, Jr. 74 1948 1996
Emma Lee M. Wilson 60 1983 1996
Baxter D. Johnson 86 1952 1996
Lloyd Hise, Jr. 51 1988 1996
S. W. Enloe 94 * *
______________
(1) Includes prior service on the Board of Directors of the Savings Bank.
* Director Emeritus
Executive Officers of the Corporation and Savings Bank
Age at
June 30, Position
Name 1996 Corporation Savings Bank
Calvin F. Hall 67 President President
Edward Ballew, Jr. 74 Executive Vice Executive Vice
President and President and
and Chief and Chief
Executive Officer Executive Officer
Emma Lee M. Wilson 60 Assistant Managing Assistant Managing
Officer, Secretary Officer, Secretary
and Treasurer and Treasurer
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Corporation and the Savings Bank. There are no
family relationships among or between the directors or executive officers.
Calvin F. Hall is President and an agent of Fortner Insurance Agency,
Inc., with which he has been affiliated with for over 37 years. Mr. Hall was
appointed President of the Savings Bank in January 1995 to succeed the
retiring President S.W. Enloe. Mr. Hall is a member of the Spruce Pine Rotary
Club.
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Edward Ballew, Jr. has been employed as an executive officer by the
Savings Bank since 1947 and serves as Executive Vice President and Chief
Executive Officer.
Emma Lee M. Wilson has been employed by the Savings Bank since 1958 and
has served in various capacities during that time. Mrs. Wilson is the
Assistant Managing Officer, Secretary and Treasurer of the Savings Bank.
Baxter D. Johnson has been the owner of Johnson Electric in Spruce Pine,
North Carolina for 66 years.
Lloyd Hise, Jr. has been a practicing attorney in Spruce Pine, North
Carolina since 1969.
S. W. Enloe is retired, after serving as President of the Savings Bank
from 1966 to 1995. Mr. Enloe became a Director Emeritus in February 1996.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act") requires the Corporation's executive officers and directors,
and persons who own more than 10% of any registered class of the Corporation's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Executive officers, directors and
greater than 10% shareholders are required by regulation to furnish the
Corporation with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above
referenced persons, the Corporation believes that all filing requirements
applicable to its reporting officers, directors and greater than 10%
shareholders were properly and timely complied with since the date of
completion of the Corporation's initial stock offering (July 15, 1996).
Item 10. Executive Compensation
Summary Compensation Table. The following information is furnished for
the Chief Executive Officer of the Corporation for the year ended June 30,
1996. No executive officers of the Corporation received salary and bonus in
excess of $100,000 during the year ended June 30, 1996.
SUMMARY COMPENSATION TABLE (1)
Annual Compensation
Other Annual
Name and Salary Bonus Compensation
Position Year ($) ($) ($)
Edward Ballew, Jr. 1996 $74,000(2) $6,200 $--(3)
Executive Vice
President, Chief 1995 68,250(2) 8,100 $--(3)
Executive Officer
and Director
_____________
(1) Compensation information for the fiscal year ended June 30, 1994 has
been omitted as the Corporation was not a public company, nor a
subsidiary thereof, at such times.
(2) Includes Board of Directors fees of $600.00.
(3) Does not include perquisites which, in the aggregate, did not exceed
the lesser of $50,000 or 10% of salary and bonus.
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Employment Agreements. Effective December 31, 1995, the Savings Bank
entered into three-year employment agreements with Mr. Ballew and Mrs. Wilson
(individually, the "Executive"). The agreements provide for the extension of
the term of the agreement for an additional year annually unless the Savings
Bank provides the Executive with prior notice that the current term will not
be extended. The agreements provide for an initial salary level for Mr.
Ballew and Mrs. Wilson of $72,000 and $58,000, respectively. Under the
agreements, the compensation of each Executive is subject to annual review.
In addition, each Executive is eligible to participate in all employee benefit
plans or arrangements which the Savings Bank makes available to its senior
executive officers. The agreements provide that upon the Executive's
termination of employment without cause or the Executive's resignation
following the occurrence of certain events, including a material change in the
Executive's functions, duties or responsibilities, the Savings Bank will make
a severance payment equal to the greater of the payments due to the Executive
over the remaining term of the agreement or three times the average of the
Executive's base salary over the preceding three years. In addition, the
Savings Bank is obligated to continue the Executive's life, dental and
disability coverage through the expiration of the current term of the
agreement. The agreements also restrict the Executive's right to compete
against the Savings Bank for a period of two years from the date of the
Executive's termination without cause or resignation in the circumstances
described above.
In connection with the Conversion, the agreements were amended to provide
for severance payments and continuation of other employee benefits in the
event of the Executive's involuntary termination of employment in connection
with any change in control of the Savings Bank or the Corporation. Severance
payments also will be provided on a similar basis in connection with voluntary
termination of employment where, subsequent to a change in control, Mr. Ballew
and Mrs. Wilson are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" will be defined as having occurred when, among other
things, (i) a person other than the Corporation purchases shares of Common
Stock pursuant to a tender or exchange offer for such shares, (ii) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is
or becomes the beneficial owner, directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities, (iii) the membership of the Board
of Directors changes as the result of a contested election, or (iv)
stockholders of the Corporation approve a merger, consolidation, sale or
disposition of all or substantially all of the Corporation's assets, or a plan
of partial or complete liquidation.
The severance payments from the Savings Bank will equal 2.99 times each
Executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within 10
business days following the termination of employment. Assuming that a change
in control had occurred at June 30, 1996, Mr. Ballew and Mrs. Wilson would be
entitled to severance payments of approximately $200,000 and $155,000,
respectively. Section 280G of the Internal Revenue Code of 1986, as amended
("Code"), states that severance payments that equal or exceed three times the
base compensation of the individual are deemed to be "excess parachute
payments" if they are contingent upon a change in control. Individuals
receiving excess parachute payments are subject to a 20% excise tax on the
amount of such excess payments, and the Executives would not be entitled to
deduct the amount of such excess payments.
Compensation Committee Interlocks and Insider Participation. Mr. Ballew,
Executive Vice President and Chief Executive Officer of the Corporation,
serves as a member of the Compensation Committee. Although the Chief
Executive Officer recommends compensation to be paid to executive officers,
the entire Board of Directors of the Savings Bank reviews such recommendations
and sets the compensation for Mr. Ballew.
Directors' Compensation
Board Fees. Except for the President who receives a monthly fee of
$1,000, directors received a fee of $500 per month during the year ended June
30, 1996. Director fees totalled $48,000 for the year ended June 30, 1996.
Directors do not receive any additional compensation for serving on committees
of the Board of Directors. No separate fees are paid for service on the Board
of Directors of the Holding Company.
Directors' Retirement Plan. The Savings Bank established a retirement
plan for incumbent directors in 1994. The intent of the plan is to compensate
directors for their past services to the Savings Bank and to provide
incentives for continued service to the Savings Bank to ensure the continued
success of the Savings Bank and to
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provide management of the Savings Bank with the benefits of the expertise and
experience of its directors. Normal retirement age under the plan is age 62.
The plan provides a normal retirement benefit equal to $500 per month for a
period of 120 months following retirement. However, the Savings Bank may
elect to pay the normal retirement benefit in a lump sum at any time following
a director's retirement. The plan also provides for the payment of benefits
equal to the normal retirement benefit in the case of a director who dies or
becomes disabled prior to retirement. Directors who participate in the plan
are subject to a noncompetition restriction during the benefit payment period.
In addition, a retired director is obligated to provide consulting services to
the Savings Bank during such period. Expenses associated with the plan
totalled $12,000 for the fiscal year ended June 30, 1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing
such ownership pursuant to the Exchange Act. Based on such reports, the
following table sets forth, as of August 1, 1996, certain information as to
those persons who were beneficial owners of more than 5% of the outstanding
shares of Common Stock. Management knows of no persons other than those set
forth below who beneficially owned more than 5% of the outstanding shares of
Common Stock at August 1, 1996. The following table also sets forth, as of
August 1, 1996, information as to the shares of Common Stock beneficially
owned by each director, by the Chief Executive Officer of the Corporation and
by all executive officers and directors of the Corporation as a group.
Number
of Shares Percent
Beneficially of Shares
Name Owned (1) Outstanding
Beneficial Owners of More Than 5%
Mitchell Savings Bank, Inc., SSB
Employee Stock Ownership Plan Trust 78,391 8.00%
Jerome H. and Susan B. Davis (2) 97,880 9.98%
Great Meadows, Inc. (3)
Samuel L. Phillips
Van F. Phillips
G. Byron Phillips
Gina A. Phillips 97,650 9.97%
Directors
Calvin F. Hall 12,190 1.2
Emma Lee M. Wilson 11,000 1.1
Baxter D. Johnson 2,000 *
Lloyd Hise, Jr. 5,005 *
S. W. Enloe** -- *
Named Executive Officers
Edward Ballew, Jr.*** 12,190 1.2
All Executive Officers and 42,385 4.3
Directors as a Group
(5 persons)
(footnotes on following page)
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_______________
* Less than 1 percent of shares outstanding.
** Director Emeritus.
*** Mr. Ballew is also a director of the Corporation.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock if he or she has voting and/or investment power
with respect to such security. The table includes shares owned by
spouses, other immediate family members in trust, shares held in
retirement accounts or funds for the benefit of the named individuals,
and other forms of ownership, over which shares the persons named in
the table may possess voting and/or investment power.
(2) This information is based on a Schedule 13D filed with the SEC on July
19, 1996.
(3) This information is based on a Schedule 13D filed with the SEC on
August 19, 1996.
(c) Changes In Control
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
Item 12. Certain Relationships and Related Transactions
Current law requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features. The Savings Bank is
therefore prohibited from making any new loans or extensions of credit to the
Savings Bank's executive officers and directors and at different rates or
terms than those offered to the general public and has adopted a policy to
this effect. The aggregate amount of loans by the Savings Bank to its
executive officers and directors was approximately $72,000 at June 30, 1996.
Such loans (i) were made in the ordinary course of business, (ii) were made on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
the Savings Bank's other customers, and (iii) did not involve more than the
normal risk of collectibility or present other unfavorable features when made.
PART IV
Item 13. Exhibits List and Reports on Form 8-K
(a) (1) (2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets, June 30, 1995 and 1996
(b) Consolidated Statements of Income For the Years
Ended June 30, 1994, 1995 and 1996
(c) Consolidated Statements of Stockholders' Equity For
the Years Ended June 30, 1994, 1995 and 1996
(d) Consolidated Statements of Cash Flows For the Years
Ended June 30, 1994, 1995 and 1996
(e) Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have been
omitted as the required information is inapplicable.
64
<PAGE>
<PAGE>
(3) Exhibits
3.1 Certificate of Incorporation of Mitchell Bancorp, Inc.*
3.2 Bylaws of Mitchell Bancorp, Inc.*
10.1 Employment Agreement with Emma Lee M. Wilson*
10.2 Employment Agreement with Edward Ballew, Jr.*
10.2 Mitchell Savings Bank, Inc., SSB 1996 Employee Stock
Ownership Plan*
21 Subsidiaries of Registrant
27 Financial data schedule
(b) The Corporation did not file any Reports on Form 8-K during the quarter
ended June 30, 1996.
_________________
* Incorporated by reference to the Corporation's Registration Statement
on Form S-1 (File No. 333-1888).
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MITCHELL BANCORP, INC.
Date: September 26, 1996 By: /s/Edward Ballew, Jr.
__________________________________
Edward Ballew, Jr.
Executive Vice President and Chief
Executive Officer
Pursuant to 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.
SIGNATURES TITLE DATE
/s/ Edward Ballew, Jr. Executive Vice President, September 26, 1996
_________________________
Edward Ballew, Jr. Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Emma Lee M. Wilson Assistant Managing Officer, September 26, 1996
_________________________
Emma Lee M. Wilson Secretary, Treasurer and
Director (Principal
Financial and Accounting
Officer)
/s/ Calvin F. Hall President and Director September 26, 1996
_________________________
Calvin F. Hall
/s/ Baxter D. Johnson Director September 26, 1996
_________________________
Baxter D. Johnson
/s/ Lloyd Hise, Jr. Director September 26, 1996
_________________________
Lloyd Hise, Jr.
PAGE
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
Percentage Jurisdiction or
Subsidiaries (1) Owned State of Incorporation
Mitchell Savings Bank, Inc., SSB 100% North Carolina
Mitchell Mortgage and Investment
Co., Inc. (2) 100% North Carolina
___________
(1) The operations of the Corporation's subsidiaries are included in the
Corporation's consolidated financial statements.
(2) Wholly-owned subsidiary of Mitchell Savings Bank, Inc., SSB.
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the consolidated
financial statements of Mitchell Bancorp, Inc. for the year ended June 30,
1996 and is qualified in its entirety by reference to such financial
statements.
Financial Data
as of or for the year
Item Number ended June 30, 1996 Item Description
9-03 (1) 133 Cash and due from Banks
9-03 (2) 11,996 Interest-bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 285 Investment and mortgage backed
securities held for sale
9-03 (6) -- Investment and mortgage backed
securities held to
maturity - carrying value
9-03 (6) -- Investment and mortgage backed
securities held to
maturity - market value
9-03 (7) 23,720 Loans
9-03 (7)(2) 152 Allowance for losses
9-03 (11) 36,776 Total assets
9-03 (12) 20,346 Deposits
9-03 (13) -- Short-term borrowings
9-03 (15) 1,796 Other liabilities
9-03 (16) -- Long-term debt
9-03 (19) -- Preferred stock - mandatory
redemption
9-03 (20) -- Preferred stock - no mandatory
redemption
9-03 (21) 10 Common stocks
9-03 (22) 14,624 Other stockholders' equity
9-03 (23) 36,776 Total liabilities and stockholders'
equity
9-04 (1) 2,006 Interest and fees on loans
9-04 (2) 25 Interest and dividends on investments
9-04 (4) 240 Other interest income
9-04 (5) 2,271 Total interest income
9-04 (6) 1,161 Interest on deposits
9-04 (9) 1,161 Total interest expense
9-04 (10) 1,110 Net interest income
9-04 (11) 60 Provision for loan losses
9-04 (13)(h) -- Investment securities gains/(losses)
9-04 (14) 930 Other expenses
9-04 (15) 126 Income/loss before income tax
9-04 (17) 126 Income/loss before extraordinary
items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting
principles
9-04 (20) 91 Net income or loss
9-04 (21) -- Earnings per share - primary
9-04 (21) -- Earnings per share - fully diluted
I.B. 5 7.40% Net yield - interest earning assets -
actual
III.C.1. (a) 834 Loans on non-accrual
III.C.1. (b) -- Accruing loans past due 90 days or
more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 92 Allowance for loan loss - beginning
of period
<PAGE>
<PAGE>
IV.A.2 -- Total chargeoffs
IV.A.3 -- Total recoveries
IV.A.4 152 Allowance for loan loss - end of
period
IV.B.1 152 Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to
foreign loans
IV.B.3 -- Loan loss allowance - unallocated
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 133
<INT-BEARING-DEPOSITS> 11996
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 285
<INVESTMENTS-CARRYING> 0
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<LOANS> 23720
<ALLOWANCE> 152
<TOTAL-ASSETS> 36776
<DEPOSITS> 20346
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1796
<LONG-TERM> 0
0
0
<COMMON> 10
<OTHER-SE> 14624
<TOTAL-LIABILITIES-AND-EQUITY> 36776
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<INTEREST-TOTAL> 2271
<INTEREST-DEPOSIT> 1161
<INTEREST-EXPENSE> 1161
<INTEREST-INCOME-NET> 1110
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<EXPENSE-OTHER> 930
<INCOME-PRETAX> 126
<INCOME-PRE-EXTRAORDINARY> 126
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.40
<LOANS-NON> 834
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 92
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 152
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</TABLE>
