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, 1998 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.
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(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 X NO
--- ---
The Registrant's revenues for the fiscal year ended June 30, 1998 were
$2,777,000.
As of September 14, 1998, there were issued and outstanding 937,174
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
14, 1998, the aggregate value of the Common Stock outstanding held by
nonaffiliates of the registrant was $13.3 million (858,782 shares at $15.50
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
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General
Mitchell Bancorp, Inc. ("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. The Corporation 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 for its portfolio
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.
Proposed Merger With First Western Bank
As previously disclosed, on August 13, 1998, the Corporation entered into
a definitive Agreement and Plan of Merger ("Agreement") with First Western
Bank, Burnsville, North Carolina ("First Western") pursuant to which the
Corporation and the Savings Bank will be merged into First Western. The
surviving entity will be First Western, a commercial bank chartered by the
State of North Carolina. The Agreement provides that each share of
Corporation's common stock will be exchanged for 1.60 shares of First Western
common stock, $20.00 in cash, or a combination thereof, subject to the
requirement that no more than 49.9% of the total merger consideration may be
paid in cash. Mitchell Savings' Employee Stock Ownership Plan ("ESOP") will
have first preference to the cash consideration in order to retire the loan
incurred by it (outstanding balance of approximately $679,000 at June 30,
1998) to acquire shares of the Corporation's common stock issued in the
Savings bank's mutual-to-stock conversion. The merger is intended to
constitute a tax-free reorganization and to be accounted for as a purchase.
Consummation of the merger is subject to several conditions, including receipt
of applicable regulatory approvals and approval by both the Corporation's and
First Western's stockholders.
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, Spruce Pine Community
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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.
At June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets..................... $28,109 $27,596 $36,776 $33,059 $37,306
Loans receivable, net............ 21,843 22,463 23,568 28,203 27,506
Cash, interest-earning deposits
and investment securities....... 5,710 4,254 12,414 4,073 8,787
FHLB stock....................... 291 291 291 291 291
Deposits......................... 22,195 20,940 20,346 17,672 21,564
Total stockholders' equity....... 5,694 6,078 14,634 14,325 14,632
For the Years Ended June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income.................. $2,193 $2,259 $2,271 $2,659 $2,773
Interest expense................. 903 962 1,161 975 1,064
------ ------ ------ ------ ------
Net interest income ............. 1,290 1,297 1,110 1,684 1,709
Provision for loan losses........ 24 24 60 24 24
------ ------ ------ ------ ------
Net interest income after provision
for loan losses ............... 1,266 1,273 1,050 1,660 1,685
Non-interest income.............. 5 45 6 7 4
Non-interest expenses............ 452 953 930 907 947
------ ------ ------ ------ ------
Income before income taxes and
cumulative effect adjustments .. 819 365 126 760 742
Income tax expense............... 317 112 35 289 309
------ ------ ------ ------ ------
Income before cumulative
effect adjustment............... 502 253 91 471 433
Cumulative effect on prior years
for accounting change........... -- 11 -- -- --
------ ------ ------ ------ ------
Net income....................... $ 513 $ 253 $ 91 $ 471 $ 433
====== ====== ===== ====== ======
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At June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans out-s
tanding(1)..................... 639 656 660 718 704
Deposit accounts................ 1,603 1,584 1,603 1,444 1,472
Full service offices............ 1 1 1 1 1
At or for the Year Ended June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
KEY FINANCIAL RATIOS:
Return on average assets (net
income divided by average
assets)........................ 1.89% 0.92% 0.32% 1.37% 1.23%
Return on average equity (net
income divided by average
equity)........................ 9.39 4.24 1.53 3.21 3.11
Average equity to average assets. 20.17 21.71 20.73 42.59 39.48
Interest rate spread (difference
between average yield on
interest-earning assets and
average cost of interest-
bearing liabilities)............ 3.97 3.79 2.81 2.73 2.74
Net interest margin (net interest
income as a percentage of average
interest-earning assets)........ 4.82 4.77 3.96 5.05 4.94
Non-interest expense to average
assets.......................... 1.67 3.45 3.23 2.64 2.69
Average interest-earning assets
to interest-bearing
liabilities.....................125.02 127.87 127.83 179.46 171.78
Allowance for loan losses to
total loans at end of period.... 0.31 0.40 0.63 0.61 0.72
Net charge offs to average out-
standing loans during the
period.......................... -- -- -- -- --
Ratio of nonperforming assets to
total assets at period end...... 1.12 1.43 2.54 2.03 1.54
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(1) All real estate loans have fixed-rates of interest.
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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, selected
commercial properties, and consumer loans. The Savings Bank's net loans
receivable totaled approximately $27.5 million at June 30, 1998, representing
approximately 73.7% of consolidated total assets.
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio at the dates indicated.
At June 30,
----------------------------------------
1997 1998
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Residential one- to four-family..... 23,909 83.22% $23,214 83.08%
Commercial real estate.............. 3,661 12.74 3,522 12.60
Multi-family........................ 20 0.07 18 0.06
Land................................ 1,013 3.53 1,010 3.61
------ ------ ------- ------
Total mortgage loans.............. 28,603 99.56% 27,764 99.35
Consumer loans...................... 126 0.44 181 0.65
------ ------ ------- ------
Total loans....................... 28,729 100.00% $27,945 100.00%
------ ====== ------- ======
Less:
Undisbursed portion
of loans in process............... 135 69
Unamortized loan origination
fees, net or direct costs......... 160 158
Allowance for loan losses.......... 176 200
Allowance for uncollected interest. 55 12
------- -------
Total loans receivable, net..... $28,203 $27,506
======= =======
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, 1998, $23.2
million, or 83.08%, 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 $36,400. 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
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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 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, 1998, such loans totaled $3.5 million, or 12.60%,
of total gross loans.
At June 30, 1998, a commercial real estate loan relationship of $1.2
million represented the Savings Bank's largest loan-to-one borrower
relationship at that date. The relationship consisted of a loan made to the
corporate owner and operator of a local commercial property. At June 30,
1998, this loan relationship was performing according to its terms.
At June 30, 1998, the second and third largest commercial real estate
loans had outstanding balances of $525,000 and $403,000, 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, 1998.
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, 1998, 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
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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, 1998.
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, 1998,
the Savings Bank had one multi-family loans in the amount of $18,000. 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, 1998, the
Savings Bank's land loan portfolio totaled $1.0 million, or 3.61%, 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, 1998,
the Savings Bank's consumer loan portfolio consisted entirely of loans secured
by deposit accounts, which totaled $181,000, or 0.65%, of total gross loans.
The interest rate charged on such loans is generally 2% above the interest
rate earned on the underlying deposit account. Deposit account loans are
payable in monthly payments of principal and interest or in a single payment.
Maturity of Loan Portfolio. The following table sets forth certain
information at June 30, 1998 regarding the dollar amount of loans maturing in
the Savings Bank's portfolio based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan
balances do not include undisbursed loan proceeds, unearned discounts,
unearned income and allowance for loan losses.
After After After
Due at June 30, 3 Years 5 Years 10 Years
----------------- Through Through Through
1999 2000 2001 5 Years 10 Years 15 Years Total
---- ---- ---- ------- -------- -------- -----
(In thousands)
Residential one-
to four-family...$ 12 $ 32 $ 58 $399 $2,686 $20,027 $23,214
Commercial real
estate............ -- 3 4 111 857 2,547 3,522
Multi-family....... -- -- -- -- 18 -- 18
Land loans......... -- -- -- 11 122 877 1,010
Consumer loans..... 181 -- -- -- -- -- 181
---- ---- ---- ---- ------ ------- -------
Total loans... $193 $ 35 $ 62 $521 $3,683 $23,451 $27,945
==== ==== ==== ==== ====== ======= =======
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The following table sets forth the dollar amount of all loans due after
June 30, 1999, 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.................... $23,202
Commercial real estate........... 3,522
Multi-family..................... 18
Land loans....................... 1,010
Consumer loans................... --
-------
Total....................... $27,752
=======
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,
-------------------
1997 1998
---- ----
(In thousands)
Total mortgage loans at beginning of period......... $23,796 $28,603
Loans originated:
Residential one- to four-family.................... 8,677 4,535
Commercial real estate............................. 1,353 220
Land loans......................................... 401 165
------- -------
Total loans originated........................... 10,431 4,920
------- -------
Mortgage loan principal repayments.................. (5,572) (5,324)
Other............................................... (52) (254)
Net loan activity................................... 4,807 (658)
------- -------
Total gross mortgage loans
at end of period................................... $28,603 $27,945
======= =======
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 $158,000 of net
deferred mortgage loan fees at June 30, 1998.
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,
---------------
1997 1998
---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
Residential one- to four-family.......... $561 $211
Commercial............................... 9 9
Multi-family............................. -- --
Land..................................... 11 11
Consumer..................................... -- --
---- ----
Total.................................... 581 231
---- ----
Accruing loans which are contractually past
due 90 days or more........................... -- --
---- ----
Total of nonaccrual and 90 days
past due loans............................. 581 231
Real estate owned.............................. 91 345
---- ----
Total nonperforming assets.................. $672 $576
==== ====
Total loans delinquent 90 days or more to
net loans.................................... 2.06% 0.84%
Total loans delinquent 90 days or more to
total assets................................. 1.76% 0.62%
Total nonperforming assets to total assets..... 2.03% 1.54%
Interest income, which would have been recorded for the year ended June
30, 1998 had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $10,000. The amount of interest included in
the results of operations on such loans for the year ended June 30, 1998
amounted to approximately $8,000.
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, 1998, the Savings Bank had $345,000 of real estate owned,
with no allowance for losses, consisting of three one- to four-family
residences and a tract of raw land. Subsequent to year end, the Savings Bank
has been able to sell three of the real estate owned properties.
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
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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,
--------------
1997 1998
---- ----
(In thousands)
Loss............................. $ 55 $ 12
Doubtful......................... -- --
Substandard assets............... 617 564
Special mention.................. -- --
General loss allowances.......... 176 200
Specific loss allowances(1)...... -- --
Charge-offs(1)................... 15 --
- -----------
(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
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.
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At June 30, 1998, the Savings Bank had an allowance for loan losses of
$200,000. 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,
-------------------
1997 1998
---- ----
(Dollars in thousands)
Allowance at beginning of period.......... $152 $176
Provision for loan losses ................ 24 24
Recoveries................................ -- --
Charge-offs............................... -- --
---- ----
Balance at end of period.............. $176 $200
==== ====
Ratio of allowance to total
loans outstanding at the end
of the period............................ 0.61% 0.72%
Ratio of net charge-offs to
average loans outstanding
during the period........................ -- --
Ratio of allowance to
non-performing loans.....................30.29 86.58
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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,
-----------------------------------------------------
1997 1998
-------------------------- --------------------------
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........... $100 0.42% 83.22% $120 0.45% 83.08%
Commercial............. 76 2.08 12.74 80 2.27 12.60
Multi-family........... -- -- 0.07 -- -- 0.06
Land................... -- -- 3.53 -- -- 3.61
Consumer................. -- -- 0.44 -- -- 0.65
---- ------ ---- ------
Total allowance
for loan losses........ $176 100.00% $200 100.00%
==== ====== ==== ======
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, 1998, the Savings Bank's
regulatory liquidity was 15.8%. See "REGULATION -- The Savings Bank --
Liquidity." The Corporation's consolidated liquidity was 21.9% at June 30,
1998.
As of June 30, 1998, 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, 1998, the Savings Bank's investment in
FHLMC stock and FHLB-Atlanta stock totaled $628,000 and $291,000,
respectively. The market value of the Savings Bank's investment portfolio
amounted to $758,000 and $919,000 at June 30, 1997 and 1998, 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, 1998 the Savings Bank had $18.2 million of certificates of
deposit. The Savings Bank does not solicit brokered deposits and believes
that its jumbo certificates of deposit, which represented 28.1% of total
deposits at June 30, 1998, 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, 1998.
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- ------ ---- ------------------------- ------- ------- ---------
(In thousands)
2.96% -- Money market accounts $1,000 $ 1,137 5.27%
2.25 -- Savings accounts 25 2,220 10.30
Certificates of Deposit
-----------------------
6.50 -- Fixed-term, fixed rate(1) -- 12 0.06
7.50 -- Fixed-term, fixed rate(1) -- 29 0.13
8.00 -- Fixed-term, fixed rate(1) -- 22 0.10
5.20 6 months Fixed-term, fixed-rate 2,500 3,820 17.71
5.60 12 months Fixed-term, fixed-rate 2,500 3,677 17.05
5.70 18 months Fixed-term, fixed-rate 500 1,336 6.20
5.96 30 months Fixed-term, fixed-rate 500 1,103 5.12
6.47 48 months Fixed-term, fixed-rate 2,500 2,156 9.99
Negotiable Fixed-term, fixed-rate 100,000 6,052 28.07
------- ------
$21,564 100.00%
======= ======
_________
(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, 1998. Jumbo certificates of
deposit require minimum deposits of $100,000, and have negotiable interest
rates.
Maturity Period Amount
--------------- ------
(In thousands)
Less than three months................ $1,727
Three through six months.............. 1,574
More than six through twelve months... 1,221
Over twelve months.................... 1,530
------
Total............................ $6,052
======
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,
---------------------------------------------
1997 1998
---------------- ---------------------------
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
------ ------- ------ ------- ----------
(Dollars in thousands)
Regular savings accounts $ 2,117 11.98% $2,220 10.30% $ 103
Money market deposit 1,443 8.17 1,137 5.27 (306)
Fixed-rate certificates which
mature in the year ended in(1):
Within 1 year 10,917 61.78 13,802 64.00 2,885
After 1 year, but within
2 years 1,947 11.02 2,251 10.44 304
After 2 years, but within
5 years 1,248 7.05 2,154 9.99 906
------- ------ ------- ------ ------
Total $17,672 100.00% $21,564 100.00% $3,892
======= ====== ======= ====== ======
_____________
(1) At June 30, 1997 and 1998, jumbo certificates amounted to $3.8 million
and $6.1 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,
------------------
1997 1998
---- ----
(In thousands)
2.00 - 3.99% ...................... $ 6 $ --
4.00 - 5.99% ...................... 10,202 12,888
6.00 - 7.99% ...................... 3,566 4,965
8.00% and over..................... 338 354
------- -------
Total............................. $14,112 $18,207
======= =======
The following table sets forth the amount and maturities of certificates
of deposit at June 30, 1998.
Amount Due
-----------------------------------------------------------
More More More
than than than
One Two Three Percent
Less Year Years Years Of Total
Than to to to After Certi-
One Two Three Four 4 ficate
Year Year Years Years Years Total Accounts
---- ---- ----- ----- ----- ----- --------
(In thousands)
4.00 - 5.99%... $11,242 $1,431 $ 161 $ 54 $ -- $12,888 70.79%
6.00 - 7.99%... 2,559 725 943 530 208 4,965 27.27
8.00% and over. -- 94 260 -- -- 354 1.94
------- ------ ------ ----- ---- ------- ------
Total...... $13,801 $2,250 $1,364 $ 584 $208 $18,207 100.00%
======= ====== ====== ===== ==== ======= ======
Deposit Activities
The following table sets forth the deposit activities of the Savings Bank
for the periods indicated.
Year Ended June 30,
-------------------
1997 1998
(In thousands)
Beginning balance. . . . $20,346 $17,672
------- -------
Net increase (decrease)
before interest credited . (3,639) 2,897
Interest credited. . . 965 995
_______ _____
Net increase (decrease) in
savings deposits. . . (2,674) 3,892
------- -----
Ending balance . . . . $17,672 $21,564
======= =======
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
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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, 1998, and during the two years ended June 30, 1998, 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, 1998, 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.
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
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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.
Deposit Insurance. The FDIC insures deposits at the Savings Bank to the
maximum extent permitted by law. The Savings Bank pays deposit insurance
premiums based on a risk-based assessment system established by the FDIC.
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, 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 that until
September 30, 1996 ranged from 0.23% for well capitalized, financially sound
institutions with only a few minor weaknesses to 0.31% for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless effective
corrective action is taken. The Savings Bank's assessments expensed for the
year ended June 30, 1998 equaled $12,000.
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Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for
the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
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. 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)
"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%.
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,
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significantly undercapitalized or critically undercapitalized. Immediately
upon becoming undercapitalized, an institution shall become subject to
mandatory and discretionary restrictions on its operations.
At June 30, 1998, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, 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; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the 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. FDIC 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 the FDIA unless the insured bank enters into a 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. The FDIC includes
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.
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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."
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, 1998, the Savings
Bank had a Tier 1 leverage capital ratio of 31.8% and net worth of 32.5% 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.
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Activities and Investments of Insured State-Chartered Banks. The FDIA
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.
Subject to certain regulatory exceptions, FDIC regulations 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 directly or indirectly engaged in any activity that is
not permitted for a national bank or for which the FDIC has granted and
exception 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 debt in an amount up to
50% of net worth.
At June 30, 1998 the Savings Bank's loans-to-one-borrower limit was
approximately $1.7 million. At June 30, 1998, the largest aggregate amount of
loans by the Savings Bank to any one borrower was approximately $1.2 million,
which was a loan 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
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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 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, 1998, 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, 1998, the Savings Bank's
liquidity ratio calculated in accordance with North Carolina regulations, was
approximately 15.8%.
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.
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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 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.
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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 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.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in 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
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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 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 Corporation and the Savings Bank report their income on a
calendar year basis using the accrual method of accounting and are 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 Corporation.
Tax Bad Debt Reserves. Historically, savings institutions such as the
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted
to establish a reserve for bad debts and to make annual additions thereto,
which may have been deducted in arriving at their taxable income. The Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on the Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications
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and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience, the Savings Bank
generally recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the percentage of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also required that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). For taxable years
beginning after December 31, 1995, the Savings Bank's bad debt deduction must
be determined under the experience method using a formula based on actual bad
debt experience over a period of years or, if the Savings Bank is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs
during the taxable year. The new rules allowed an institution to suspend bad
debt reserve recapture for the 1996 and 1997 tax years if the institution's
lending activity for those years is equal to or greater than the institutions
average mortgage lending activity for the six taxable years preceding 1996
adjusted for inflation. For this purpose, only home purchase or home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be
subject to provisions of present law referred to below that require recapture
of the pre-1988 bad debt reserve in the case of certain excess distributions
to shareholders.
Distributions. To the extent that the 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
corporations, 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 corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with
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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.
Audits. The Corporation's and the Savings Bank's Federal income tax
returns have not been audited during the last five years.
State and Local Taxation
The North Carolina corporate income tax is 7.5% 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.
The Corporation's and the Savings Bank's North Carolina income tax
returns have not been audited during the last five years.
Personnel
As of June 30, 1998, 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 30,1998, the net book value of the property (including land and
building) and the Savings Bank's fixtures, furniture and equipment was
$56,000.
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, 1998.
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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 14, 1998, there were approximately 302 shareholders of record.
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 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 dividends will continue.
The stock prices shown below reflect the initial public offering ("IPO")
price and the high and low prices by quarter as reported by The Nasdaq Stock
Market from July 12, 1996, the initial offering date, through the year ended
June 30, 1998.
Market Price Cash
------------ Dividends Paid
High Low Per Share
---- --- ---------
IPO.....................$10.00 $10.00 $ --
September 30, 1996...... 12.75 10.125 --
December 31, 1996....... 14.25 12.125 --
March 31, 1997.......... 16.00 13.75 .20
June 30, 1997........... 16.75 15.25 --
September 30, 1997......17.375 16.375 .20
December 31, 1997....... 18.00 17.00 --
March 31, 1998.......... 17.50 16.625 .20
June 30, 1998........... 17.50 16.50 --
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 Company. Since the operations of the Savings
Bank significantly impact those of the Company, the following discussion will
include references to both the Company and the Savings Bank. The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes thereto.
29
<PAGE>
<PAGE>
Proposed Merger with First Western Bank
As previously announced, on August 13, 1998, the Company entered into a
definitive Agreement and Plan of Merger ("Agreement") with First Western Bank,
Burnsville, North Carolina ("First Western") pursuant to which the Company and
the Savings Bank will be merged into First Western. The surviving entity will
be First Western, a commercial bank chartered by the State of North Carolina.
The Agreement provides that each share of the Company's common stock will be
exchanged for 1.60 shares of First Western common stock, $20.00 in cash, or a
combination thereof, subject to the requirement that no more than 49.9% of the
total merger consideration may be paid in cash. The Savings Bank's Employee
Stock Ownership Plan ("ESOP") will have first preference to the cash
consideration in order to retire the loan incurred by it (outstanding balance
of approximately $679,000 at June 30, 1998) to acquire shares of the Company's
common stock issued in the Savings Bank's mutual-to-stock conversion. The
merger is intended to constitute a tax-free reorganization and to be accounted
for as a purchase. Consummation of the merger is subject to several
conditions, including receipt of applicable regulatory approvals and approval
by both the Company's and First Western's stockholders.
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.
Comparison of Financial Condition at June 30, 1997 and June 30, 1998
The Company's total consolidated assets increased by approximately $4.2
million, or 12.8% from $33.1 million at June 30, 1997 to $37.3 million at June
30, 1998. The increase in assets for the year was primarily attributable to
the increase in deposits, appreciation in investments and retained net income
from operations for the year.
The composition of the Company's balance sheet has not been materially
affected by market conditions between June 30, 1997 and June 30, 1998. Net
loans decreased $443,000 after considering the $254,000 increase in real
estate owned which was acquired in satisfaction of mortgage loans.
30
<PAGE>
<PAGE>
Consistent with its historical lending practices, virtually all of the
Company's loan portfolio at June 30, 1998 consisted of fixed rate loans with
maturities up to 16 years. Consequently, the Company is exposed to a high
degree of interest rate risk in a rising interest rate environment. The
Company has historically accepted this risk in light of its relatively high
capital levels. See "-- Liquidity and Capital Resources" discussion below.
Deposits increased $3.9 million, or 22.0%, from $17.7 million at June 30,
1997 to $21.6 million at June 30, 1998. The increase in deposits was
primarily attributable to the Company's ability to attract new certificate
accounts of which $2.3 million was in jumbo certificates. The Company has
concentrated its efforts on the competitive pricing and advertisement of its
certificate products.
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 Results of Operations for the Year June 30, 1997 and 1998
Net Income. Net income decreased $38,000 from net income of $471,000 for
the year ended June 30, 1997 to $433,000 for the year ended June 30, 1998.
The decrease was primarily attributable to an overall increase in compensation
and employee benefits of $154,000 offset by a decrease in deposit insurance
premiums of $143,000. Additional compensation and benefits resulted from a
$98,000 accrual of expense for the MRP plan awards granted in 1998, normal
salary increases and the addition of one new director during 1998. The return
on average assets was 1.23% for the year ended June 30, 1998 compared to 1.37%
for 1997.
Net Interest Income. Net interest income increased $25,000 to $1.7
million for the year ended June 30, 1998. The improvement in net interest
income primarily reflects additional interest earned on a $1.9 million
increase in the balance of average loans outstanding for 1998 as compared to
1997, offset by higher interest expense for an increase in average deposits
outstanding and lower interest income derived from interest-earning deposits.
The interest rate spread remained relatively constant for the two years. The
interest rate spread was 2.74% for 1998 and the net interest margin decreased
11 basis points from 5.05% in 1997 to 4.94% in 1998.
Interest Income. Total interest income increased $114,000 from $2.7
million for the year ended June 30, 1997 to $2.8 million for the year ended
June 30, 1998. Interest on loans increased $185,000 as a result of a $1.9
million increase in average loans outstanding and an 8 basis point increase in
the average yield. Interest on overnight funds decreased by $71,000 as the
average invested balance for 1998 decreased by approximately $655,000 and the
average yield decreased by 57 basis points.
Interest Expense. Interest expense increased $89,000 from $975,000 for
the year ended June 30, 1997 to approximately $1.1 million for the year ended
June 30, 1998. The increase for 1998 was the result of a $1.6 million
increase in average deposits outstanding, principally certificates of deposits
which have the highest cost of funds. Of the total increase of $89,000,
$59,000 was attributable to an increase in average jumbo certificates of
deposits outstanding during 1998.
Provision for Loan Losses. The provision for loan losses for 1997 and
1998 was $24,000. Historically, management has emphasized the Company's loss
experience over other factors in establishing provisions for loan losses.
However, management has reviewed the allowance for loan losses in relating to
the Company's composition of its loan portfolio and observations of the
general economic climate and loan loss expectations. The ratio of the loss
allowance to non-performing loans at June 30, 1988 was 86.58% and
nonperforming assets to total assets was 1.54%.
31
<PAGE>
<PAGE>
Non-Interest Income. Non-interest income continues to be an
insignificant source of income for the Company.
Non-Interest Expense. Non-interest expense increased by $40,000 from
$907,000 for the year ending June 30, 1997 to $947,00 for 1998. This increase
was the result of additional compensation and employee benefits offset by
reduced deposit insurance premiums as previously discussed. Other
non-interest expense includes in 1998 cost association with the Company's
strategic planning and ultimate announcement of a definitive agreement for
merger on August 13, 1998. Expenses for net occupancy and data processing
remained unchanged in comparison to 1997.
Income Taxes. Income tax expense for the year ending June 30, 1998 was
$309,000 compared to income tax expense of $289,000 for the same period in
1997. The effective tax rate for 1998 was 41.6% compared to 38.0% for 1997.
Income tax expense is the product of taxable income less deductible expenses.
In 1998, there were additional expenses which are not deductible for income
tax purposes. These expenses related to the merger activity and additional
expense recognized for the fair value of ESOP shares released in excess of
cost.
32
<PAGE>
<PAGE>
<TABLE>
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.
Year Ended June 30, At
----------------------------------------------------------- June 30,
1996 1997 1997
--------------------------- ---------------------------- ----
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans............... $26,470 $2,248 8.49% $28,376 $2,433 8.57% 8.33%
Consumer loans............... 143 9 6.29 145 9 6.21 6.18
------- ------ ------- ------
Total net loans............ 26,613 2,257 8.48 28,521 2,442 8.56 8.28
FHLMC stock(1)................ 13 6 46.15 13 6 46.15 46.15
Daily interest-bearing
deposits ................... 6,419 375 5.84 5,764 304 5.27 5.25
FHLB stock.................... 292 21 7.19 292 21 7.19 7.20
------- ------ ------- ------
Total interest-earning
assets................... 33,337 $2,659 7.98 34,590 $2,773 8.02 7.64
====== ======
Non-interest-earning assets:
Office properties and
equipment, net.............. 67 60
Real estate, net............. 72 180
Non-interest-earning assets.. 939 434
------- -------
Total assets............... $34,415 $35,264
======= =======
Interest-bearing liabilities:
Passbook accounts............ $ 2,129 60 2.82 $ 2,161 49 2.27 2.25
Money market accounts........ 1,544 46 2.98 1,283 38 2.96 2.96
Certificates of deposit...... 14,903 869 5.83 16,692 977 5.85 5.90
------- ------ ------- ------
Total interest-bearing
liabilities.............. 18,576 975 5.25 20,136 1,064 5.28 5.37
Non-interest-bearing
liabilities................. 1,181 1,206
------- -------
Total liabilities.......... 19,757 21,342
Stockholders' equity.......... 14,658 13,922
------- -------
Total liabilities and
stockholders' equity..... $34,415 $35,264
======= =======
Net interest income........... $1,684 $1,709
====== ======
Interest rate spread (2)...... 2.73% 2.74% 2.27%
==== ==== ====
Net interest margin (3)....... 5.05% 4.94%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities.......... 179.46% 171.78%
====== ======
</TABLE>
<PAGE>
- ------------
(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 interest margin represents net interest income divided by average
interest-earning assets.
33
<PAGE>
<PAGE>
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);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) the net change (the sum of the prior columns).
<PAGE>
<TABLE>
Year Ended June 30, 1997 Year Ended June 30, 1998
Compared to June 30, 1996 Compared to June 30, 1997
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans............. $ (54) $315 $ (7) $254 $ 21 $162 $ 2 $ 185
Consumer loans............. (1) (2) -- (3) -- -- -- --
----- ---- ---- ---- ---- ---- --- ----
Total loans............... (55) 313 (7) 251 21 162 2 185
Investment securities....... 2 -- -- 2 -- -- -- --
Daily interest-earning
deposits ................. 35 87 13 135 (37) (38) 4 (71)
FHLB stock................. -- -- -- -- -- -- -- --
----- ---- ---- ---- ---- ---- --- ----
Total interest-earning
assets.................... (18) 400 6 388 (16) 124 6 114
----- ---- ---- ---- ---- ---- --- ----
Interest expense:
Interest-bearing deposits... (36) (144) (6) (186) (9) 97 1 89
----- ---- ---- ---- ---- ---- --- ----
Total interest-bearing
liabilities............... (36) (144) (6) (186) (9) 97 1 89
----- ---- ---- ---- ---- ---- --- ----
Net change in net
interest income.......... $ 18 $544 $ 12 $574 $ (7) $ 27 $ 5 $ 25
===== ==== ==== ==== ==== ==== === ====
</TABLE>
<PAGE>
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
34
<PAGE>
<PAGE>
interest rate risk associated with this strategy. As an integral part of this
strategy, the Savings Bank has historically 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, 1998, 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, 1998, 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 $3.5 million for
a cumulative one-year negative gap to total rate sensitive assets of 30%. 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,
1998 was negative 30%. At June 30, 1998, the Savings Bank's three year
cumulative interest rate sensitivity gap as a percentage of total
interest-earning assets was positive 1% and its five year cumulative interest
rate sensitivity gap as a percentage of total interest-earning assets was
positive 16%.
35
<PAGE>
<PAGE>
<TABLE>
The following table presents the Savings Bank's interest sensitivity gap between interest-earning
assets and interest-bearing liabilities at June 30, 1998.
Within Over Over
Six 6 Months 1-3 3-5 5-10
Months to One Year Years Years Years Total
------ ----------- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Residential one- to four-family
loans........................... $3,095 $2,690 $7,679 $4,388 $ 5,059 $22,911
Commercial real estate........... 93 98 434 512 2,392 3,529
Multi-family..................... -- -- -- -- 18 18
Land............................. -- -- -- -- 1,010 1,010
Consumer loans................... 181 -- -- -- -- 181
Investment securities and
interest-bearing deposits....... 5,448 -- -- -- -- 5,448
------ ------- ------ ------ ------- -------
Total rate sensitive assets.... $8,817 $2,788 $8,113 $4,900 $ 8,479 $33,097
====== ======= ====== ====== ======= =======
Interest-bearing liabilities:
Deposits:
Regular savings................. $ 197 $ 180 $ 573 $ 374 $ 896 $ 2,220
Money market deposit accounts... 616 282 125 60 54 1,137
Certificates of deposit......... 5,977 7,840 3,618 772 -- 18,207
Other borrowings................ 9 -- 111 -- 559 679
------ ------- ------ ------ ------- -------
Total rate sensitive
liabilities.................. $6,799 $8,302 $4,427 $1,206 $ 1,509 $22,243
====== ======= ====== ====== ======= =======
Excess (deficiency) of interest
sensitivity assets over interest
sensitivity liabilities ......... $2,018 $(5,514) $3,686 $3,694 $ 6,970 $10,854
====== ======= ====== ====== ======= =======
Cumulative excess (deficiency) of
interest sensitivity assets...... $2,018 $(3,496) $ 190 $3,884 $10,854 $10,854
====== ======= ====== ====== ======= =======
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities ............. 130% 77% 101% 119% 149% 149%
Interest sensitivity gap to total
assets.......................... 6% (16)% 11% 11% 20% 31%
Ratio of interest-earning assets to
interest-bearing liabilities.... 130% 34% 183% 406% 562% 149%
Ratio of cumulative gap to total
assets.......................... 6% (10)% 1% 11% 31% 31%
Interest sensitivity gap to
total rate sensitive assets...... 23% (198)% 45% 75% 82% 33%
Ratio of cumulative gap to
total rate sensitive assets...... 23% (30)% 1% 16% 33% 33%
</TABLE>
36
<PAGE>
Rate/Volume Analysis
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, 1998. 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, 1998.
Change in Net Portfolio Value
Interest Rates -----------------------------------------------
in Basis Points Board
(Rate Shock) Amount $ Change % Change Limit
------------ ------ --------- -------- -----
(Dollars in thousands)
400 $ 8,984 $(3,039) (25)% 110%
200 10,697 (1,326) (11) 60
0 12,023 -- -- --
(200) 12,947 924 8 60
(400) 14,231 2,208 18 130
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, 1998.
37
PAGE
<PAGE>
-400 -200 +200 +400
Basis Basis No Basis Basis
Points Points Change Points Points
------ ------ ------ ------ ------
(Dollars in thousands)
ASSETS
Mortgage loans............ $31,217 $29,508 $28,167 $26,356 $24,201
Non-mortgage loans........ 181 181 181 180 180
Cash, deposits and
securities.............. 6,212 6,147 6,081 6,015 5,950
Nonperforming loans and
real estate ............. 393 390 388 385 382
Premises and equipment.... 56 56 56 56 56
Other assets.............. 606 605 604 602 599
------- ------- ------- ------- -------
TOTAL ASSETS.............. 38,665 36,887 35,477 33,594 31,368
------- ------- ------- ------- -------
LIABILITIES
Deposits ................. 22,363 21,978 21,586 21,110 20,667
Other liabilities......... 2,071 1,962 1,868 1,787 1,717
------- ------- ------- ------- -------
TOTAL LIABILITIES......... 24,434 23,940 23,454 22,897 22,384
------- ------- ------- ------- -------
Net portfolio value....... 14,231 12,947 12,023 10,697 8,984
Percent change ........... 18% 8% --% (11)% (25)%
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 7.7% increase in NPV and a 2.4%
increase in net interest income. In the event of a 200 basis point increase
in interest rates, a 11.1% decrease in NPV and a .88% decrease in net interest
income would be expected. Based upon the modeling described above, the
Savings Bank's asset and liability structure results in increases in NPV and
in net interest income in a declining interest rate scenario and decreases in
NPV and 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.
38
<PAGE>
<PAGE>
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, 1997 and 1998 and
the Savings Bank originated mortgage loans in the amounts of $10.4 million and
$4.9 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 1997 and 1998, the Savings Bank
used its liquidity primarily to fund deposit withdrawals and loan
originations.
From June 30, 1997 to June 30, 1998, deposits at the Savings Bank
increased from $17.7 million to $21.6 million. The increase during this
period is a result of new certificate of deposits, primarily jumbo
certificates, attracted by the Savings Bank. 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. However, the Savings Bank plans to develop strategies to
continue attracting new deposits.
At June 30, 1998, certificates of deposit amounted to $18.2 million, or
84.43%, of the Savings Bank's total deposits, including $13.8 million which
were scheduled to mature by June 30, 1999. 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 required to maintain specific amounts of capital
pursuant to FDIC requirements. As of June 30, 1998, 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 31.8%.
Impact of New Accounting Pronouncements
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements.
SFAS No. 130 requires that companies (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. SFAS 130 was
adopted for the June 30, 1998 financial statements.
Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," issued in February 1998, standardizes disclosure requirements for
pensions and other postretirement benefits and requires additional disclosure
on changes in benefit obligations and fair values of plan assets in order to
facilitate financial analysis. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997, with earlier application encouraged.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and
39
<PAGE>
<PAGE>
reporting standards for derivative instruments and requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position. Under this standard, all derivative instruments should be
measured at fair value. At the date of initial application, an entity may
transfer any held-to-maturity securities into the available-for-sale category
or the trading category, although the Company has no intention of doing so.
An entity will then be able in the future to designate a security transferred
into the available-for-sale category as a hedged item. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Because the Company and the Savings Bank do not invest in derivative
instruments or enter into hedging transactions, adoption of this statement is
not anticipated to have a significant effect on the Company's financial
position or results of operations.
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 Company'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.
Year 2000 Compliance
The Company has established a plan to address Year 2000 issues.
Successful implementation of this plan will eliminate any extraordinary
expenses related to the Year 2000 issue. The Company has received
confirmation from its sole data processing company regarding their Year 2000
plans and compliance. The Company has requested from its data processing
company information that would enable it to test all critical systems by mid
1998 in order to ensure compliance by December 31, 1998. The Company has a
reasonable basis to conclude that the Year 2000 issue will not materially
affect future financial results, or cause reported financial information not
to be necessarily indicative of future operating results or future financial
condition.
Item 7. Financial Statements
- -----------------------------
Index to Financial Statements
Independent Auditors Report
Consolidated Balance Sheets, June 30, 1997 and 1998
Consolidated Statements of Comprehensive Income For the Years Ended
June 30, 1997 and 1998
Consolidated Statements of Stockholders' Equity For the Years Ended
June 30, 1997 and 1998
Consolidated Statements of Cash Flows For the Years Ended June 30,
1997 and 1998
Notes to Consolidated Financial Statements
40
<PAGE>
<PAGE>
[Letterhead of Crisp Hughes and Evans LLP]
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 as of June 30, 1997 and 1998, and the related
consolidated statements of comprehensive 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, 1997 and 1998, 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 and Evans LLP
Asheville, North Carolina
July 23, 1998, except for
Note 19, as to which the
date is August 17, 1998
41
<PAGE>
<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
---------------------------
Assets 1997 1998
------ ---- ----
Cash and due from banks $ 211 $ 44
Interest earning deposits 3,395 8,115
Investment securities:
Available for sale (amortized cost
of $13 in 1997 and 1998) 467 628
Loans receivable, net 28,203 27,506
Real estate owned 91 345
Premises and equipment, net 65 56
Federal Home Loan Bank stock 291 291
Accrued interest receivable 7 5
Deferred income taxes 164 142
Prepaid expenses and other assets 165 174
--------- ---------
Total assets $ 33,059 $ 37,306
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 17,672 $ 21,564
Accrued interest payable 63 76
Accrued expenses and other liabilities 845 992
Current income taxes payable 154 42
--------- ---------
Total liabilities 18,734 22,674
--------- ---------
Stockholders' equity:
Common stock ($.01 par value,
3,000,000 shares authorized;
979,897 issued; 930,902 shares
outstanding at June 30, 1997
and 1998) 10 10
Paid in capital 9,225 9,274
Retained earnings, substantially
restricted 6,329 6,419
Treasury stock, at cost (48,995
shares at June 30,1997 and 1998) (784) (784)
Accumulated other comprehensive
income 277 374
Unearned compensation:
Employee stock ownership plan (732) (661)
--------- ---------
Total stockholders' equity 14,325 14,632
--------- ---------
Total liabilities and stock-
holders' equity $ 33,059 $ 37,306
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
For Years Ended June 30,
------------------------
1997 1998
---- ----
Interest income:
Loans $ 2,257 $ 2,442
Investments 27 27
Interest earning deposits 375 304
--------- ---------
Total interest income 2,659 2,773
Interest expense:
Deposits 975 1,064
--------- ---------
Net interest income 1,684 1,709
Provision for loan losses 24 24
--------- ---------
Net interest income after
provision for loan losses 1,660 1,685
Non-interest income:
Gain on real estate owned 3 -
Other 4 4
--------- ---------
Total non interest income 7 4
--------- ---------
Non interest expenses:
Compensation 318 498
Other employee benefits 159 133
Net occupancy expense 27 27
Deposit insurance premiums 155 12
Data processing 27 27
Other 221 250
--------- ---------
Total non interest expenses 907 947
--------- ---------
Income before income taxes 760 742
Income tax expense 289 309
--------- ---------
Net income 471 433
Other comprehensive income:
Net unrealized gains on securities
available for sale, net of income
taxes of $71 and $64, respectively 111 97
--------- ---------
Comprehensive income $ 582 $ 530
========= =========
Basic and diluted net income per share $ .53 $ .50
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
<PAGE>
<TABLE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands)
Accumulated
Other
Compre- Unearned
Common Paid-in Retained Treasury hensive Compensation
Stock Capital Earnings Stock Income For ESOP Total
----- ------- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 10 $ 9,204 $ 6,038 $ - $ 166 $ (784) $ 14,634
Comprehensive income:
Net income - - 471 - - - 471
Other comprehensive income:
Unrealized gain on
securities available
for sale, net of income
taxes - - - - 111 - 111
------- -------- -------- ------- ------- ------- --------
Comprehensive income - - 471 - 111 - 582
------- -------- -------- ------- ------- ------- --------
Dividends paid ($.20 per
share) - - (180) - - - (180)
Earned compensation ESOP - 21 - - - 52 73
Repurchase of common stock
(48,995 shares) - - - (784) - - (784)
------- -------- -------- ------- ------- ------- --------
Balance at June 30, 1997 10 9,225 6,329 (784) 277 (732) 14,325
Comprehensive income:
Net income - - 433 - - - 433
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of income
taxes - - - - 97 - 97
------- -------- -------- ------- ------- ------- --------
Comprehensive income - - 433 - 97 - 530
------- -------- -------- ------- ------- ------- --------
Dividends paid ($.40 per share) - - (343) - - - (343)
Earned compensation ESOP - 49 - - - 71 120
------- -------- -------- ------- ------- ------- --------
Balance at June 30, 1998 $ 10 $ 9,274 $ 6,419 $ (784) $ 374 $ (661) $ 14,632
======= ======== ======== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
44
</TABLE>
<PAGE>
<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
---------------------
1997 1998
---- ----
Operating activities:
Net income $ 471 $ 433
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 11 10
Provision for loan losses 24 24
Amortization of ESOP compensation 73 120
Increase (decrease) in reserve for
uncollected interest 11 (43)
Deferred income taxes (benefit) (5) (42)
Net increase (decrease) in
deferred loan fees 36 (2)
Gain on real estate owned (3) -
(Increase) decrease in accrued
interest receivable 2 2
(Increase) decrease in prepaid
expenses and other assets (27) 16
Increase in accrued interest
payable 3 13
Increase in accrued expenses and
other liabilities 133 35
-------- --------
Net cash provided by operating
activities 729 566
-------- --------
Investing activities:
Net (increase) decrease in loans (4,714) 464
Purchase of premises and equipment (6) (1)
Investment in life insurance cash
surrender value (24) (25)
-------- --------
Net cash provided (used) by
investing activities (4,744) 438
-------- --------
Financing activities:
Net increase (decrease) in deposits (2,674) 3,892
Repurchase of common stock (784) -
Dividends paid (180) (343)
Repayment from stock oversubscriptions (523) -
Paid conversion cost (347) -
-------- --------
Net cash provided (used) by
financing activities (4,508) 3,549
-------- --------
Increase (decrease) in cash and
cash equivalents (8,523) 4,553
Cash and cash equivalents at beginning
of year 12,129 3,606
-------- --------
Cash and cash equivalents at end of year $ 3,606 $ 8,159
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 972 $ 1,051
Income taxes 196 463
======== ========
Noncash transactions:
Real estate acquired in satisfac-
tion of mortgage loans $ 74 $ (254)
Loans to facilitate sale of real
estate owned 70 -
Unrealized gain on securities avail-
able for sale, net of deferred tax
liability of $71 and $64 in 1997
and 1998, respectively 111 97
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
<PAGE>
MITCHELL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1997 and 1998
(tabular amounts in thousands)
1. Organization
------------
Mitchell Bancorp, Inc. ("Bancorp") is a bank holding company organized in
February 1996 to become the holding company for Mitchell Savings Bank, Inc.
S.S.B. ("Savings Bank"). Bancorp 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
15).
Mitchell Mortgage and Investment Co., Inc. ("MMI") is wholly owned by the
Savings Bank. MMI was organized in September of 1980 and has had no
significant business activity.
Bancorp, Savings Bank, and MMI are herein collectively referred to as the
"Company".
2. Summary of Significant Accounting Policies
------------------------------------------
The following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting its
consolidated financial statements.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Bancorp, Savings Bank, and MMI. 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, undisbursed funds, 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,
46
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
the loan is well secured and in process of collection. Interest income on
impaired loans is subsequently recognized on a cash basis, until such time
that, in management's opinion, the borrower will be able to meet payments as
they become due.
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.
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.
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 - All of the Company's investments which consist solely
of FHLMC stock have been identified as available for sale and recorded at
market value. The unrealized gains are reported as a component of
stockholders' equity. 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 estimated useful lives. 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
47
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
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. 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. 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 and due from banks and interest-
earning deposits.
Impact of New Accounting Pronouncement - During 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 provides accounting and
reporting standards for displaying comprehensive income and components of
comprehensive income in a complete set of financial statements. SFAS 130
addresses reporting and display only and is effective for fiscal years
beginning after December 15, 1997. The provisions of SFAS 130 have been
reflected in the accompanying financial statements.
2. Earnings Per Share
------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) in 1998. SFAS 128 establishes standards for
computing earnings per share and requires the presentation of basic and
diluted earnings per share amounts. Net income per share amounts for all
periods presented have been restated to conform with SFAS 128.
For the years ending June 30, 1997 and 1998, net income available to the
common stockholders for both basic and diluted earnings per share was equal to
net income. The weighted average shares outstanding for basic and diluted
earnings per share for 1997 and 1998 are as follows:
1997 1998
---- ----
Weighted average common shares outstanding 894,871 862,163
Dilutive effects:
Stock options and MRP shares granted - 3,675
------- -------
Weighted average common shares outstanding,
diluted 894,871 865,838
======= =======
48
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
June 30,
-------------------
1997 1998
---- ----
Real estate mortgage loans:
One-to-four family residential $ 23,909 $ 23,214
Commercial real estate 3,661 3,522
Multi-family residential 20 18
Land 1,013 1,010
-------- --------
Total real estate loans 28,603 27,764
Consumer loans:
Loans secured by deposit accounts 126 181
-------- --------
Total loans 28,729 27,945
-------- --------
Less:
Undisbursed portion of loans in
process (135) (69)
Allowance for loan losses (176) (200)
Deferred loan fees (160) (158)
Reserve for uncollected interest (55) (12)
-------- --------
(526) (439)
-------- --------
$ 28,203 $ 27,506
======== ========
At June 30, 1997 and 1998 loans which were contractually past due ninety days
or more totaled approximately $581,000 and $231,000, respectively. All of
these loans would be categorized as homogeneous loans and therefore excluded
from consideration for impairment in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114. The Savings Bank had no loans considered
impaired as defined under SFAS No. 114 for 1997 and 1998. A summary of the
activity in the allowance for loan losses is summarized as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Beginning balance $ 152 $ 176
Provision for losses charged to income 24 24
-------- --------
Ending balance $ 176 $ 200
======== ========
49
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
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.
4. Real Estate Owned
-----------------
Real estate owned is summarized as follows:
June 30,
----------------------
1997 1998
---- ----
One-to-four family residential $ 91 $ 345
======== ========
A summary of activity in the valuation allowance for losses on real estate is
summarized as follows:
Years Ended June 30,
----------------------
1997 1998
---- ----
Beginning balance $ 15 $ -
Chargeoffs (15) -
Provision for losses charged to income - -
-------- --------
Ending balance $ - $ -
======== ========
5. Premises and Equipment
----------------------
Premises and equipment is summarized as follows:
June 30,
----------------------
1997 1998
---- ----
Land $ 16 $ 16
Office building and improvements 84 84
Furniture and equipment 191 192
-------- --------
291 292
Less accumulated depreciation 226 236
-------- --------
$ 65 $ 56
======== ========
50
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
6. Deposits
--------
Deposits are summarized as follows:
June 30,
----------------------------------------
1997 1998
------------------- ------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
Passbook 2.25% $ 2,117 2.25% $ 2,220
Money market 2.87% 1,443 2.96% 1,137
Certificates of deposit 5.78% 14,112 5.90% 18,207
-------- --------
Total deposits
$ 17,672 $ 21,564
======== ========
Weighted average cost of deposits 5.12% 5.37%
==== ====
Contractual maturities of certificates of deposit are as follows:
June 30,
----------------
1997 1998
---- ----
12 months or less $ 10,917 $ 13,801
1-2 years 1,947 2,251
2-3 years 738 1,362
3-5 years 510 793
-------- --------
$ 14,112 $ 18,207
======== ========
Interest expense on deposits is summarized as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Passbook $ 60 $ 49
Money market 46 38
Certificates of deposit 869 977
-------- --------
$ 975 $ 1,064
======== ========
Certificates of deposit with balances of $100,000 or more totaled
approximately $3,891,000 and $6,052,000 at June 30, 1997 and 1998,
respectively.
51
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
7. Income Taxes
------------
The components of income tax expense (benefit) are as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Current $ 294 $ 351
Deferred (benefit) (5) (42)
-------- --------
Total $ 289 $ 309
======== ========
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,
--------------------
1997 1998
---- ----
Computed income tax expense $ 259 $ 253
Increase (decrease) resulting from:
State income tax net of federal
tax benefits 22 26
Other 8 30
-------- --------
Actual income tax expense $ 289 $ 309
======== ========
The components of the net deferred income tax assets are as follows:
June 30,
--------------------
1997 1998
---- ----
Deferred tax assets, principally deferred
compensation expenses $ 402 $ 485
Valuation allowance - -
-------- --------
402 485
Deferred tax liabilities, principally
unrealized gain on securities available
for sale 238 343
-------- --------
Net deferred income tax asset $ 164 $ 142
======== ========
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
earnings at
52
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<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
June 30, 1997 and 1998, includes approximately $1.1 million representing such
bad debt deductions for which no deferred income taxes have been provided.
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,
---------------------
1997 1998
---- ----
Service cost-benefits earned during
the year $ 16 $ 12
Interest cost on projected benefit
obligation 14 11
Actual return on plan assets (10) (12)
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 3 -
-------- --------
$ 24 $ 12
======== ========
A summary of the plan's funding status is as follows:
June 30,
---------------------
1997 1998
---- ----
Actuarial present value of benefit
obligations:
Vested benefits $ 138 $ 154
Non-vested benefits 1 1
-------- --------
Accumulated benefit obligation $ 139 $ 155
======== ========
Projected benefit obligations for
services rendered to date $ 207 $ 163
Plan assets at fair value, primarily
cash and contracts with insurance
companies 135 160
-------- --------
Deficit of plan assets over projected
benefit obligations 72 3
Unrecognized transition asset (19) (18)
Minimum liability adjustment 25 -
Unrecognized net loss (74) (11)
-------- --------
Accrued (prepaid) pension expense $ 4 $ (26)
======== ========
53
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
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 1997 and 1998 was 8% and 5%, respectively. The expected long
term rate of return on assets was 8%.
9. Compensation Benefit Agreements
-------------------------------
The Savings Bank has established 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 $17,000 for the years ending June 30, 1997 and 1998.
The Savings Bank also has established nonqualified compensation agreements
with certain key executives providing for benefits payable monthly over a ten
year period beginning at retirement and to their designated beneficiary in the
event of death. The expense before income tax effect recognized on these
agreements was approximately $84,000 and $50,000 for the years ending June 30,
1997 and 1998, 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.
10. 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 and
$78,000 at June 30, 1997 and 1998, respectively. This liability consists
entirely of unrecognized prior service cost.
54
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<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
11. Employment and Change of Control Agreements
-------------------------------------------
The Company entered into three year employment agreements with certain key
officers which may be extended by the Board for an additional year at each
anniversary date so that the remaining terms shall be three years. 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. The severance payments will equal 2.99 times the executive
officer's average annual compensation during the preceding five years. 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.
12. Regulatory Matters
------------------
The Savings Bank is subject to various regulatory capital requirements
administered by the Federal Deposit Insurance Company ("FDIC"). Failure to
meet minimum capital requirements can initiate certain mandatory, and possible
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. In addition, the Savings Bank is subject to a North Carolina
Savings Institution (State) capital requirement of at least 5% of total
assets.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk weighted assets (as defined), and of Tier I capital to average assets
( as defined). Management believes, as of June 30, 1998, that the Savings Bank
meet all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the FDIC categorized
the Savings Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Savings Bank must
maintain minimum total risked-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or event
since the notification that management believes have changed the Savings
Bank's category.
55
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
Following are the required and actual capital amounts and ratios for the
Savings Bank:
<PAGE>
<TABLE>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Tier 1 Capital (to greater or greater or
average assets) $ 10,869 31.8% $ 1,368 less than 4% $ 1,710 less than 5%
Tier 1 Capital (to
risk-weighted greater or greater or
assets) $ 10,869 59.8% $ 727 less than 4% $ 1,091 less than 6%
Total Capital (to
risk-weighted greater or greater or
assets) $ 11,069 60.9% $ 1,459 less than 8% $ 1,819 less than 10%
As of June 30, 1997:
Tier 1 Capital (to greater or greater or
average assets) $ 10,328 34.5% $ 1,198 less than 4% $ 1,497 less than 5%
Tier 1 Capital (to
risk-weighted greater or greater or
assets) $ 10,328 56.9% $ 726 less than 4% $ 907 less than 6%
Total Capital (to
risk-weighted greater or greater or
assets) $ 10,504 57.9% $ 1,451 less than 8% $ 1,814 less than 10%
</TABLE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
13. 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 instruments. The
Company uses the same credit policies in making commitments as it does for on-
balance-sheet instruments.
The Company had outstanding commitments to originate fixed rate mortgage loans
of approximately $563,000 and $228,000 at June 30, 1997 and 1998,
respectively. The commitments to originate loans at June 30, 1997, had
interest rates ranging from 8.00% to 8.50% with terms ranging from 15 to 16
years. The commitments to originate loans at June 30, 1998, had interest rates
of 8.5% with terms of 16 years.
56
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
14. Deposit Insurance Premiums
---------------------------
The Savings Bank recorded an expense in 1997 for the one-time industry-wide
special assessment levied by the omnibus appropriation bill to recapitalize
the Savings Association Insurance Fund (SAIF). The special assessment for
deposit insurance premiums of approximately $137,000 has been reflected in
income for the year ending June 30, 1997, with an after tax impact on net
income of approximately $87,000. Effective January 1, 1997, the Savings Bank
began paying reduced premium assessments in accordance with the new SAIF
assessment schedule.
15. Stockholders' Equity
--------------------
Bancorp 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, Bancorp 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. Bancorp retained one-half of the net proceeds and used
the remaining net proceeds to purchase the newly issued capital stock of the
Savings Bank. Since, the conversion was essentially consummated prior June 30,
1996, the conversion was 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.
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 established a liquidation account
in an amount equal to its retained earnings 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.
57
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
16. Employee Stock Plans
--------------------
Employee Stock Ownership Plan - As part of the conversion discussed in Note
15, an Employee Stock Ownership Plan (ESOP) was established and the ESOP
borrowed approximately $784,000 from Bancorp to purchase 78,391 shares of
common stock issued by Bancorp. The loan will be repaid principally from the
Savings Bank's discretionary contributions to the ESOP over a period of 15
years. On June 30, 1998, the loan had an outstanding balance of approximately
$679,000 and an interest rate of 8.25%. The unearned compensation for
unallocated shares is recorded as a reduction of the Company's stockholders'
equity. Contributions to the ESOP and shares released from the suspense
account are allocated to the participants on the basis of compensation in the
year of allocation. Benefits become fully vested at the end of seven years of
service. Since Savings Bank's annual contributions are discretionary, benefits
payable under the ESOP cannot be estimated. Compensation expense is recognized
to the extent of the fair value of shares committed to be released. In 1997
and 1998, compensation expense of approximately $73,000 and $120,000 was
recorded for the release of shares. At June 30, 1997 and 1998, there remained
approximately 73,000 and 66,000 shares in suspense, respectively. The value of
the unreleased shares at June 30, 1998, was approximately $1.1 million.
Management Recognition and Retention Plan - The Company 1996 Management
Recognition and Development Plan ("MRP") reserved 39,160 shares of common
stock for issuance. Shares totaling 31,358 were granted to directors, officers
and employees of the Company on July 13, 1997. The awards will vest ratably
over a five year period with acceleration of vesting as defined by the Plan.
Compensation expense, in the amount of the fair value of the common stock at
the date of grant, will be recognized during the periods the participants
become vested. For the year ended June 30, 1998, compensation expense of
approximately $98,000 has been accrued. It is management's intent to fund
vested MRP shares out of shares held in treasury.
Stock Option Plan - The Company 1996 Stock Option Plan reserved 97,990 shares
for the benefit of directors, officers, and other key employees of the
Company. The Plan provides for incentive options for officers and employees
and nonincentive options for directors. The Plan is administered by a
committee of at least three directors of the Company. The option exercise
price cannot be less than the fair value of the underlying common stock at the
date of the option grant, and the maximum option term cannot exceed ten years.
The following table summarizes the non-incentive stock options that have been
granted to directors and the incentive stock options granted to officers and
other key employees. No options grants were exercisable at June 30, 1998.
58
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
Option
Nonincentive Incentive Total Price
------------ --------- ----- -----
Shares under options:
Outstanding at July 1,
1997 - - - $ -
Granted--July 13 14,700 53,896 68,596 16.375
------- ------- ------- -------
Outstanding at June 30,
1998 14,700 53,896 68,596 16.375
------- ------- ------- -------
Options available to grant
at June 30, 1998 29,384
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the Company's
plan been determined based on the fair value at the grant dates for awards
under the Plan consistent with methods under FASB Statement 123 (SFAS 123),
the Company's net income and earnings per share would not have been materially
reduced and therefore no proforma disclosure has been presented.
17. Financial Instruments
---------------------
The approximate stated and estimated fair value of certain financial
instruments are summarized below:
1997 1998
---------------------- ---------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Loans receivable, net $ 28,203 $ 27,950 $ 27,506 $ 28,606
Investments 758 758 919 919
Cash and cash
equivalents 3,606 3,606 8,159 8,159
Financial liabilities:
Deposits:
Demand deposits 3,560 3,560 3,357 3,357
Certificates of
deposit 14,112 14,130 18,207 18,300
59
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
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 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:
. Fair value approximates book value for the following financial
instruments due to the short-term nature of the instruments: Cash,
interest earning deposits, accrued interest receivable and accrued
expenses.
. 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.
. Fair values for demand deposits with no fixed maturity date is equal to
the carrying value. 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.
. 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, 1997 and
1998. 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 assets, 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.
60
PAGE
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
18. Condensed Parent Company Financial Information
----------------------------------------------
The following condensed balance sheets as of June 30, 1997 and 1998, and
condensed statements of income and cash flows for the years then ended for
Mitchell Bancorp, Inc. should be read in conjunction with the consolidated
financial statements and the notes thereto.
Parent Company Only June 30, June 30,
Balance Sheets (in thousands) 1997 1998
----------------------------- ---- ----
Assets:
Cash and cash equivalents $ 1,965 $ 2,705
Equity in net assets of bank subsidiary 10,607 11,242
Loans receivable 1,740 679
Prepaid expenses and other assets 20 8
-------- --------
Total assets $ 14,332 $ 14,634
======== ========
Liabilities 7 2
Stockholders' equity 14,325 14,632
-------- --------
Total liabilities and stockholders'
equity $ 14,332 $ 14,634
======== ========
For the Years Ended
June 30,
Parent Company Only -------------------
Statements of Income (in thousands) 1997 1998
----------------------------------- ---- ----
Interest income $ 228 $ 185
Expenses (109) (145)
Income taxes (42) (27)
Undistributed equity earnings 394 420
-------- --------
Net income $ 471 $ 433
======== ========
No dividends have been paid from the Savings Bank to the parent for the years
ending June 30, 1997 and 1998.
61
<PAGE>
<PAGE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
For the Years Ended
June 30,
Parent Company Only -------------------
Statements of Cash Flow (in thousands) 1997 1998
-------------------------------------- ---- ----
Operating activities:
Net income $ 471 $ 433
Undistributed equity earnings of
Savings Bank (394) (420)
Other, net (15) 9
-------- --------
62 22
-------- --------
Investing activities:
Loan to savings bank (1,000) -
Repayments on loans receivable 44 1,061
-------- --------
Net cash provided (used) by investing
activities (956) 1,061
-------- --------
Financing activities:
Repurchase of common stock (784) -
Dividends paid (180) (343)
Repayment of stock oversubscription (523) -
Payment of conversion cost (347) -
-------- --------
Net cash provided by financing activities (1,834) (343)
-------- --------
Net increase in cash and cash equivalents (2,728) 740
Cash and cash equivalents at beginning of year 4,693 1,965
-------- --------
Cash and cash equivalents at end of year $ 1,965 $ 2,705
======== ========
19. Subsequent Event
----------------
The Company announced on August 13, 1998, its signing of a definitive
agreement by which the Company will merge with a commercial bank. Under the
agreement, the Company's shareholders will receive cash and/or shares of the
commercial bank's common stock subject to an exchange ratio as defined in the
merger agreement. The completion of the transaction is subject to regulatory
and shareholder approval of the reorganization agreement.
The pending change in control, when approved and consummated, will result in
the payment of certain employee severance benefits, the payment of employment
contract settlements, and the acceleration of certain benefit payments from
qualified and nonqualified retirement plans. At June 30, 1998, the Company has
not accrued any liabilities with regard to these potential benefit payments
that would only result upon approval and completion of the merger.
62
<PAGE>
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 six
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 Year First Elected Current
Name June 30, 1998 (1) or Appointed Director (2) Term Expires
---- ----------------- ------------------------- ------------
Calvin F. Hall 69 1974 1999
Edward Ballew, Jr. 76 1948 1999
Emma Lee M. Wilson 62 1983 1999
Baxter D. Johnson 88 1952 1999
Lloyd Hise, Jr. 53 1988 1999
Michael B. Thomas 43 1997 1999
___________
(1) As of June 30, 1998.
(2) Includes prior service on the Board of Directors of the Savings Bank,
if any.
Executive Officers of the Corporation and Savings Bank
Age at
June 30,
Name 1998 Position
---- ------------------------------------------------
Corporation Savings Bank
------------------- -------------------------
- ----
Calvin F. Hall 69 President President
Edward Ballew, Jr 76 Executive Vice Executive Vice President
President and Chief and Chief Executive
Executive Officer Officer
Emma Lee M. Wilson 62 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. All of the
directors and officers listed above have held positions with or been employed
by the Corporation for five years unless otherwise stated. There are no
family relationships among or between the directors or executive officers.
63
<PAGE>
<PAGE>
Calvin F. Hall is President and an agent of Fortner Insurance Agency,
Inc., with which he has been affiliated with for over 39 years. Mr. Hall was
appointed President of the Savings Bank in January 1995. Mr. Hall is a member
of the Spruce Pine Rotary Club.
Edward Ballew, Jr. has been employed as an executive officer by the
Savings Bank since 1947 and serves as its 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 since 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, Spruce Pine,
North Carolina, for 68 years.
Lloyd Hise, Jr. has been a practicing attorney in Spruce Pine, North
Carolina since 1969.
Michael B. Thomas is a salesman for Buck Stove, Inc., Spruce Pine, North
Carolina. He is a past president of the Mitchell County Chamber of Commerce
and has served on the Town of Spruce Pine Board of Alderman.
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 SEC. 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 for the fiscal year ended
June 30, 1998.
Item 10. Executive Compensation
- --------------------------------
Summary Compensation Table
<PAGE>
<TABLE>
Long-term Compensation
Annual Compensation(1) Awards
----------------------- -------------------------
Restricted Number All
Name and Stock of Other Annual
Position Year Salary(2) Bonus Awards(3) Options(4) Compensation(5)
- -------- ---- --------- ----- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edward Ballew, Jr. 1998 $83,868 $ -- $160,459 24,498 $38,319
Executive Vice President 1997 73,800 -- -- -- 31,647
and Chief Executive Officer 1996 74,000 6,200 -- -- --
</TABLE>
<PAGE>
_______________
(1) All compensation is paid by the Savings Bank. Excludes certain
additional benefits received by each individual, the aggregate amounts
of which do not exceed 10% of the particular individual's total annual
salary and bonus.
(2) Includes Board of Directors fees of $6,000.
(footnotes continued on following page)
64
<PAGE>
<PAGE>
(3) Represents the value of restricted stock awards at July 13, 1997, the
date of grant, pursuant to the Management Recognition Plan ("MRDP").
Dividends are paid on such awards if and when declared and paid by the
Corporation on the Common Stock. At June 30, 1998, the value of the
unvested awards (which vest pro rata over a five-year period with the
first 20% installment vesting on July 13, 1998) for Mr. Ballew was
$161,684 (9,799 shares at $16.50 per share).
(4) Subject to pro rata vesting over a five year period with the first 20%
installment vesting on July 13, 1998.
(5) Represents contribution made to the ESOP.
Options Grants Table. The following information is provided for Mr.
Ballew.
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted (1) Fiscal Year Price Date
- ---- ----------- ----------- -------- ----------
Edward Ballew, Jr. 24,498 55% $16.375 07/13/07
_____________
(1) Subject to pro rata vesting over a five year period with the first 20%
installment vesting on July 13, 1998.
Option Exercise/Value Table. The following information is provided for
Mr. Ballew.
<PAGE>
<TABLE>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year End(#) at Fiscal Year End($)
Acquired on Value --------------------------- -------------------------
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward Ballew, Jr. -- -- -- 24,498 -- $3,062
</TABLE>
<PAGE>
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 Savings Bank's mutual to stock 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
65
<PAGE>
<PAGE>
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)
shareholders 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, 1998, Mr. Ballew and Mrs. Wilson would be
entitled to severance payments of approximately $216,000 and $173,000,
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. If the proposed merger with First
Western is consummated, it would be deemed a change in control under the terms
of the agreements.
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 of the Savings Bank received a fee of $500 per month during
the year ended June 30, 1998. Director fees totaled $39,000 for the year
ended June 30, 1998. 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 Corporation.
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 its continued
success and to 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. Plan
expenses totaled $17,000 for the fiscal year ended June 30, 1998.
66
<PAGE>
<PAGE>
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 the close of business on the Voting Record
Date, 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 the close of business on the
Voting Record Date. The following table also sets forth, as of the close of
business on the Voting Record Date, information as to the shares of Common
Stock beneficially owned by each director, by the named executive officers of
the Corporation, and by all executive officers and directors of the
Corporation as a group.
Number of Shares Percent of Shares
Name Beneficially Owned (1) Outstanding
- ---- ---------------------- -----------
Beneficial Owners of More Than 5%
Mitchell Savings Bank, Inc., SSB
Employee Stock Ownership Plan Trust 78,392 8.36%
Jerome H. and Susan B. Davis (2) 93,000 9.92
Great Meadows, Inc. (3) 97,550 10.41
Samuel L. Phillips
Van F. Phillips
G. Byron Phillips
Gina A. Phillips
Jewel Phillips 48,502 5.18
Directors
Calvin F. Hall 12,582 1.34%
Emma Lee M. Wilson 12,568 1.34
Baxter D. Johnson 2,393 *
Lloyd Hise, Jr. 5,398 *
Michael B. Thomas 3,165 *
Named Executive Officers(4)
Edward Ballew, Jr. 14,150 1.51
All Executive Officers and
Directors as a Group (6 persons) 50,256 5.36
_______________
* Less than 1 percent of shares outstanding.
(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 or investment power with respect to
such security. The table includes shares owned by spouses, other
immediate family members in trust, shares
(footnotes continued on following page)
67
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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) As disclosed in a Schedule 13D filed with the Securities and Exchange
Commission ("SEC") on July 19, 1996, as subsequently amended on November
19, 1996, May 5, 1997, September 24, 1997 and October 31, 1997.
(3) As disclosed in a Schedule 13D filed with the SEC on August 19, 1996.
(4) Under SEC regulations, the term "named executive officer" is defined to
include the chief executive officer, regardless of compensation level,
and the four most highly compensated executive officers, other than the
chief executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. Edward Ballew, Jr. was the
Corporation's only "named executive officer" for the fiscal year ended
June 30, 1998. He is also a director of the Corporation.
(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,
except for the following:
Jerome H. Davis and Susan B. Davis, Greenwich, Connecticut, have filed
with the SEC a Schedule 13D dated July 19, 1996, as subsequently amended
on November 19, 1996, May 5, 1997, September 24, 1997 and October 31,
1997, with respect to the Corporation's common stock. The Schedule 13D
discloses that Mr. Davis and Mrs. Davis beneficially own an aggregate of
93,000 shares of common stock, or 9.92% of the outstanding shares. Item
4 of the Schedule 13D, entitled "Purpose of Transaction," states, in
part, "Mr. and Mrs. Davis now believe that Mitchell must consider several
options which will enhance shareholder value, including a merger
transaction."
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
therefore is 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 $58,000 at June 30, 1998.
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, (unless the loan or extension of credit is
made under a benefit program generally available to all other employees and
does not give preference to any insider over any other employee) 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) 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*
68
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<PAGE>
10.3 Mitchell Bancorp, Inc. 1996 Stock Option Plan**
10.4 Mitchell Bancorp, Inc. 1996 Management Recognition and
Development Plan**
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended June 30, 1998.
_________________
* Incorporated by reference to the Corporation's Registration Statement on
Form SB-2 (File No. 333-1888).
** Incorporated by reference to the Corporation's Annual Meeting Proxy
Statement dated December 16, 1996.
69
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<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 25, 1998 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, Chief September 25, 1998
- ------------------------- Executive Officer and
Edward Ballew, Jr. Director (Principal
Executive Officer)
/s/ Emma Lee M. Wilson Assistant Managing Officer, September 25, 1998
- ------------------------- Secretary, Treasurer and
Emma Lee M. Wilson Director (Principal Financial
and Accounting Officer)
/s/ Calvin F. Hall President and Director September 25, 1998
- -------------------------
Calvin F. Hall
/s/ Baxter D. Johnson Director September 25, 1998
- -------------------------
Baxter D. Johnson
- ------------------------- Director September 25, 1998
Lloyd Hise, Jr.
/s/ Michael B. Thomas Director September 25, 1998
- -------------------------
Michael B. Thomas
<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 23
Consent of Independent Auditors
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated July 23, 1998, accompanying the
Consolidated Financial Statements included in the Annual Report of Mitchell
Bancorp, Inc. on Form 10-KSB for the year ending June 30, 1998. We hereby
consent to the incorporation by reference of said reports in the Registration
Statement of Mitchell Bancorp, Inc. on Form S-8 (File No. 333- 31253,
effective July 14, 1997).
/s/Crisp Hughes Evans LLP
----------------------------
CRISP HUGHES EVANS, LLP
Asheville, North Carolina
September 21, 1998
<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,
1998 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, 1998 Item Description
- ----------------- --------------------- ----------------
9-03 (1) 44 Cash and due from Banks
9-03 (2) 8,115 Interest-bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 628 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) 27,706 Loans
9-03 (7)(2) 200 Allowance for losses
9-03 (11) 37,306 Total assets
9-03 (12) 21,564 Deposits
9-03 (13) -- Short-term borrowings
9-03 (15) 1,110 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) 14,622 Other stockholders' equity
9-03 (23) 37,306 Total liabilities and
stockholders' equity
9-04 (1) 2,442 Interest and fees on loans
9-04 (2) 27 Interest and dividends on
investments
9-04 (4) 304 Other interest income
9-04 (5) 2,773 Total interest income
9-04 (6) 1,064 Interest on deposits
9-04 (9) 1,064 Total interest expense
9-04 (10) 1,709 Net interest income
9-04 (11) 24 Provision for loan losses
9-04 (13)(h) -- Investment securities
gains/(losses)
9-04 (14) 947 Other expenses
9-04 (15) 742 Income/loss before income tax
9-04 (17) 742 Income/loss before extraordinary
items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting
principles
9-04 (20) 433 Net income or loss
9-04 (21) .50 Earnings per share - primary
9-04 (21) .50 Earnings per share - fully
diluted
I.B. 5 4.94 Net yield - interest earning
assets - actual
III.C.1. (a) 231 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
<PAGE>
<PAGE>
V.A.1 176 Allowance for loan loss -
beginning of period
IV.A.2 -- Total chargeoffs
IV.A.3 -- Total recoveries
IV.A.4 200 Allowance for loan loss - end of
period
IV.B.1 200 Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to
foreign loans
IV.B.3 -- Loan loss allowance -
unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 44
<INT-BEARING-DEPOSITS> 8115
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 628
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 27706
<ALLOWANCE> 200
<TOTAL-ASSETS> 37306
<DEPOSITS> 21564
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1110
<LONG-TERM> 0
0
0
<COMMON> 10
<OTHER-SE> 14622
<TOTAL-LIABILITIES-AND-EQUITY> 37306
<INTEREST-LOAN> 2442
<INTEREST-INVEST> 27
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<INTEREST-TOTAL> 2773
<INTEREST-DEPOSIT> 1064
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<EXPENSE-OTHER> 947
<INCOME-PRETAX> 742
<INCOME-PRE-EXTRAORDINARY> 742
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 4.94
<LOANS-NON> 231
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 176
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 200
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</TABLE>
