SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-22219
FIRST SOUTH BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Virginia 56-1999749
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1311 Carolina Avenue, Washington, North Carolina 27889-2047
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(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (252) 946-4178
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
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 7, 2000, the aggregate market value of the 2,251,777 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $52.1 million based on the closing sale price of
$23.125 per share of the registrant's Common Stock as listed on the Nasdaq
National Market. For purposes of this calculation, it is assumed that directors,
executive officers and beneficial owners of more than 5% of the registrant's
outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of December 7, 2000: 3,101,559.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year
ended September 30, 2000. (Parts II and IV)
2. Portions of Proxy Statement for 2001 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
----------------
GENERAL
First South Bancorp, Inc. (the "Company") is a Virginia corporation that
serves as the holding company for First South Bank, a North Carolina chartered
commercial bank (the "Bank"). The Company's principal business is overseeing the
business of the Bank and investing the portion of the net stock conversion
proceeds retained by it.
First South Bank. The Bank is a North Carolina-chartered commercial bank
headquartered in Washington, North Carolina and serves eastern North Carolina.
The Bank was chartered by the State of North Carolina in 1902 under the name The
Home Building and Loan Association. The Bank received federal insurance of its
deposits in 1959. In 1992, the Bank converted to a North Carolina-chartered
savings bank, at which time it adopted the name Home Savings Bank, SSB. Upon
completion of the bank conversion in April 1997, the Bank became a North
Carolina-chartered commercial bank and adopted the name NewSouth Bank. In
December 1999, the Bank changed its name to First South Bank.
The Bank's principal business consists of attracting deposits from the
general public and investing these funds in loans secured by first mortgages on
owner-occupied, single-family residences in the Bank's market area, commercial
real estate loans, commercial business loans and consumer loans.
The Bank derives its income principally from interest earned on loans and
investments and, to a lesser extent, loan servicing and other fees and gains on
the sale of loans and investments. The Bank's principal expenses are interest
expense on deposits and borrowings and noninterest expense such as compensation
and employee benefits, office occupancy expenses and other miscellaneous
expenses. Funds for these activities are provided principally by deposits,
repayments of outstanding loans and investments and operating revenues.
MARKET AREA
Although the Company makes loans and obtains deposits throughout eastern
North Carolina, the Company's primary market area consists of Beaufort, Craven,
Cumberland, Edgecombe, Lenoir, Nash, Pasquotank, Pitt and Robeson Counties in
North Carolina, which are the counties in which the Bank's offices are located.
As of September 30, 2000, management estimates that more than 95% of deposits
and 90% of loans came from its primary market area.
The economy of the Company's primary market area is diversified, with
employment distributed among manufacturing, agriculture and non-manufacturing
activities. Major employers in the area include Weyerhaeuser Company, Dupont,
Abbott Laboratories, East Carolina University, Pitt Memorial Hospital, Kelly
Springfield Tire Company, Fort Bragg, Pope Air Force Base, Converse, Campbell
Soup and Kaiser-Roth Hosiery. The unemployment rate in the Company's market area
is equivalent to the national average and the unemployment rate for the State of
North Carolina.
LENDING ACTIVITIES
General. The Company's gross loan portfolio totaled $372.3 million at
September 30, 2000, representing 66.5% of total assets at that date. It is the
Company's policy to concentrate its lending within its market area. At September
30, 2000, $135.6 million, or 35.3% of the Company's gross loan portfolio,
consisted of single-family, residential mortgage loans. The Company's
construction loans totaled $29.3 million, or 7.6% of the Company's gross loan
portfolio, at September 30, 2000. The Company also originates a significant
amount of commercial real estate loans. At September 30, 2000, commercial real
estate loans amounted to $103.0 million, or 26.8% of the Company's gross loan
portfolio. In recent years, the Company has sought to increase originations of
commercial business loans and consumer loans. At September 30, 2000, commercial
business loans totaled $34.9 million, or 9.1% of the Company's gross loan
portfolio, and consumer loans totaled $75.0 million, or 19.5% of the Company's
gross loan portfolio. To a lesser extent, the Company also originates
multi-family residential and commercial real estate loans.
<PAGE>
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Company's loan portfolio by type of loan at
the dates indicated. At September 30, 2000, the Company had no concentrations of
loans exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans:
Single-family residential ..... $135,572 35.3% $ 62,422 27.2% $ 91,546 37.8% $ 67,959 31.7% $ 58,576 33.7%
Multi-family residential ...... 6,747 1.7 379 .2 848 .4 946 .4 998 .6
Construction .................. 29,332 7.6 25,809 11.3 27,817 11.5 33,249 15.5 35,240 20.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total residential mortgage
loans .................... 171,651 44.6 88,610 38.7 120,211 49.7 102,154 47.6 94,814 54.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial loans:
Commercial real estate ........ 103,027 26.8 68,403 29.9 51,480 21.3 45,990 21.4 31,168 17.9
Commercial business ........... 34,914 9.1 21,106 9.2 21,823 9.0 16,449 7.7 10,328 6.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total commercial loans ...... 137,941 35.9 89,509 39.1 73,303 30.3 62,439 29.1 41,496 23.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Automobile .................... 5,718 1.5 4,291 1.9 4,575 1.9 4,611 2.2 4,185 2.4
Savings account loans ......... 997 .3 620 .3 470 .2 617 .3 549 .3
Home equity loans ............. 35,845 9.3 23,795 10.4 22,898 9.5 21,665 10.1 17,949 10.3
Other ......................... 32,442 8.4 22,141 9.6 20,443 8.4 22,996 10.7 14,740 8.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans ........ 75,002 19.5 50,847 22.2 48,386 20.0 49,889 23.3 37,423 21.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total ..................... 384,594 100.0% 228,966 100.0% 241,900 100.0% 214,482 100.0% 173,733 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== -------- =====
Less:
Loans in process .............. 12,322 13,102 12,930 12,717 15,245
Deferred fees and discounts ... 903 513 606 731 456
Allowance for loan losses ..... 5,159 3,297 3,365 3,249 2,351
-------- -------- -------- -------- --------
Total ....................... $366,210 $212,054 $224,999 $197,785 $155,681
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Loan Maturities. The following table sets forth certain information at
September 30, 2000 regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of mortgage loans and may cause the
Company's repayment experience to differ from that shown below. Loan balances
are net of loans in process.
<TABLE>
<CAPTION>
Due After Due After
1 Through 5 or More
Due One 5 Years After Years After
Year or Less September 30, 2000 September 30, 2000 Total
------------ ------------------ ------------------ -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $144,149 $103,721 $ 69,541 $317,411
Commercial ...... 26,971 13,327 387 40,685
Other ........... 7,648 6,277 251 14,176
-------- -------- -------- --------
Total ........ $178,768 $123,325 $ 70,179 $372,272
======== ======== ======== ========
</TABLE>
The following table sets forth at September 30, 2000 the dollar amount of
all loans due one year or more after September 30, 2000 which have predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rates Adjustable Rates
------------- ----------------
(In thousands)
Real estate loans $148,444 $ 24,813
Commercial ...... 11,958 1,758
Other ........... 6,531 --
-------- --------
Total ........ $166,933 $ 26,751
======== ========
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans can be substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a loan 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 when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the state of North Carolina and the United States. Consistent with
its emphasis on being a community-oriented financial institution, the Bank
concentrates its lending activities in its market area.
The Bank's loan originations are derived from a number of sources,
including referrals from depositors and borrowers, repeat customers,
advertising, calling officers as well as walk-in customers. The Bank's
solicitation programs consist of advertisements in local media, in addition to
participation in various community organizations and events. Real estate loans
are originated by the Bank's loan personnel. All of the Bank's loan personnel
are salaried, and though the Bank does not compensate loan personnel on a
commission basis for loans originated, it does pay an incentive percentage of
closed mortgage loan volume once a defined threshold has been achieved by the
participant. With the exception of applications for boat or recreational vehicle
loans, which may be originated on an indirect basis through an arrangement with
dealers, loan applications are accepted at the Bank's offices. In all cases, the
Bank has final approval of the application. Historically, the Bank generally has
not purchased loans. However, the Bank may in the future consider making limited
loan purchases, including purchases of commercial loans.
<PAGE>
In recent years, the Bank has sold or exchanged for mortgage-backed
securities a significant amount of fixed-rate, single-family mortgage loans that
it originated. During the years ended September 30, 2000, 1999 and 1998, these
transactions totaled $62.8 million, $86.1 million and $54.1 million,
respectively. Such loans are sold to or exchanged with the Federal Home Loan
Mortgage Corporation ("FHLMC"). The Bank generally retains servicing on loans
sold or exchanged.
Loan Underwriting Policies. The Bank's lending activities are subject to
the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. All loans are presented weekly by the management loan committee
to a loan committee of the Board of Directors of the Bank, made up of three
outside directors who serve on a rotating basis. The President does not serve on
the loan committee of the Board of Directors. Individual officers of the Bank
have been granted authority by the Board of Directors to approve consumer and
commercial loans up to varying specified dollar amounts, depending upon the type
of loan. In addition, committees of loan officers have loan authorities greater
than individual authorities. These authorities are based on aggregate borrowings
of an individual or entity. All loans to a single borrower aggregating in excess
of $500,000 must be approved by the full Board of Directors. On a monthly basis,
the full Board of Directors reviews the actions taken by the loan committee.
Applications for single-family real estate loans are underwritten and
closed in accordance with the standards of FHLMC. Generally, upon receipt of a
loan application from a prospective borrower, a credit report and verifications
are ordered to verify specific information relating to the loan applicant's
employment, income and credit standing. If a proposed loan is to be secured by a
mortgage on real estate, an appraisal of the real estate is usually undertaken
either by an appraiser approved by the Bank and licensed by the State of North
Carolina or by qualified Bank personnel. In the case of single-family
residential mortgage loans, except when the Bank becomes aware of a particular
risk of environmental contamination, the Bank generally does not obtain a formal
environmental report on the real estate at the time a loan is made. A formal
environmental report may be required in connection with nonresidential real
estate loans.
It is the Bank's policy to record a lien on the real estate securing a loan
and to obtain title insurance which insures that the property is free of prior
encumbrances and other possible title defects. Borrowers must also obtain hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, pay flood
insurance policy premiums.
With respect to single-family residential mortgage loans, the Bank makes a
loan commitment of between 15 and 30 days for each loan approved. If the
borrower desires a longer commitment, the commitment may be extended for good
cause and upon written approval. Fees of between $175 and $425 are charged in
connection with the issuance of a commitment letter. The interest rate is
guaranteed for the commitment period.
If the amount of a residential loan originated or refinanced exceeds 80% of
the lessor of the appraised value or contract price, the Bank's policy generally
is to obtain private mortgage insurance at the borrower's expense on that
portion of the principal amount of the loan that exceeds 80%. The Bank will make
a single-family residential mortgage loan with up to a 97% loan-to-value ratio
if the required private mortgage insurance is obtained. The Bank generally
limits the loan-to-value ratio on commercial real estate mortgage loans to 80%,
although the loan-to-value ratio on commercial real estate loans in limited
circumstances has been as high as 85%. The Bank limits the loan-to-value ratio
on multi-family residential real estate loans to 80%.
The Bank is subject to regulations that limit the amount the Bank can lend
to one borrower. See " -- Depository Institution Regulation -- Limits on Loans
to One Borrower." Under these limits, the Bank's loans-to-one-borrower were
limited to $6.6 million at September 30, 2000. At that date the Bank had no
lending relationships in excess of the loans-to-one-borrower limit.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
<PAGE>
Single-Family Residential Real Estate Lending. The Bank historically has
been and continues to be an originator of single-family, residential real estate
loans in its market area. At September 30, 2000, single-family, residential
mortgage loans, excluding home improvement loans, totaled $135.6 million, or
35.3% of the Company's gross loan portfolio.
The Bank originates fixed-rate mortgage loans at competitive interest
rates. At September 30, 2000, $74.4 million, or 54.9%, of the Company's
residential mortgage loan portfolio was comprised of fixed-rate residential
mortgage loans. Generally, the Company retains fixed-rate mortgages with
maturities 15 years or less while fixed-rate loans with longer maturities may be
retained in portfolio or sold in the secondary market. The Bank also offers FHA
and VA mortgage loans in its market area, which are underwritten and closed by a
correspondent lender.
The Bank also offers adjustable-rate residential mortgage loans. The
adjustable-rate loans currently offered by the Bank have interest rates which
adjust every one, three or five years from the closing date of the loan or on an
annual basis commencing after an initial fixed-rate period of one, three or five
years in accordance with a designated index (the primary index utilized by the
Bank is the weekly average yield on U.S. Treasury securities adjusted to a
constant comparable maturity equal to the loan adjustment period, as made
available by the Federal Reserve Board (the "Treasury Rate")), plus a stipulated
margin. The Bank offers adjustable-rate loans that meet FHLMC standards, as well
as loans that do not meet such standards. The Bank's adjustable-rate
single-family residential real estate loans that do not meet FHLMC standards
have a cap of generally 2% on any increase in the interest rate at any
adjustment date, and include a cap on the maximum interest rate over the life of
the loan, which cap generally is 3% to 4.5% above the initial rate. In return
for providing a relatively low cap on interest rate increases over the life of
the loan, the Bank's adjustable-rate loans provide for a floor on the minimum
interest rate over the life of the loan, which floor generally is the initial
rate. Further, the Bank generally does not offer "teaser" rates, i.e., initial
rates below the fully indexed rate, on such loans. The adjustable-rate mortgage
loans offered by the Bank that do conform to FHLMC standards have a cap of 6%
above the initial rate over the life of a loan but do not include a floor, may
be offered with a teaser rate and have a 25 basis point lower margin above the
index on which the interest rate is based. All of the Bank's adjustable-rate
loans require that any payment adjustment resulting from a change in the
interest rate of an adjustable-rate loan be sufficient to result in full
amortization of the loan by the end of the loan term and, thus, do not permit
any of the increased payment to be added to the principal amount of the loan, or
so-called negative amortization. At September 30, 2000, $61.2 million, or 45.1%,
of the Company's residential mortgage loans were adjustable-rate loans.
The retention of adjustable-rate loans in the Company's portfolio helps
reduce the Company's exposure to increases or decreases in prevailing market
interest rates. However, there are unquantifiable credit risks resulting from
potential increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, although adjustable-rate
loans allow the Company to increase the sensitivity of its interest-earning
assets to changes in interest rates, the extent of this interest sensitivity is
limited by the initial fixed-rate period before the first adjustment and the
lifetime interest rate adjustment limitations. Accordingly, there can be no
assurance that yields on the Company's adjustable-rate loans will fully adjust
to compensate for increases in the Company's cost of funds.
Construction Lending. The Bank also offers residential and commercial
construction loans, with a substantial portion of such loans originated to date
being for the construction of owner-occupied, single-family dwellings in the
Bank's primary market area. Residential construction loans are offered primarily
to individuals building their primary or secondary residence, as well as to
selected local developers to build single-family dwellings. Generally, loans to
owner/occupants for the construction of owner-occupied, single-family
residential properties are originated in connection with the permanent loan on
the property and have a construction term of six to 18 months. Such loans are
offered on a fixed-rate or adjustable-rate basis. Interest rates on residential
construction loans made to the owner/occupant have interest rates during the
construction period of 1% above the rate offered by the Bank on the permanent
loan product selected by the borrower. Upon completion of construction, the
permanent loan rate will be set at the rate then offered by the Bank on that
permanent loan product, except that if the permanent loan rate would be above
the construction loan rate then the borrower can maintain the same rate as on
the construction loan. Interest rates on residential construction loans to
builders are set at the prime rate plus a margin of between .50% and 1% or at
the Treasury Rate plus a margin of between 3% and 4.5%, and adjust annually.
Interest rates on commercial construction loans are based on the prime rate plus
a negotiated margin of
<PAGE>
between 0% and 1% and adjust annually, with construction terms generally not
exceeding 18 months. Advances are made on a percentage of completed basis. At
September 30, 2000, $29.3 million, or 7.6%, of the Company's gross loan
portfolio consisted of construction loans, virtually all of which was secured by
single-family residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of the feasibility of the proposed project. The Bank also reviews and
inspects each project at the commencement of construction and either weekly or
biweekly during the term of the construction loan. The Bank generally charges a
.50% to 1% construction loan fee for speculative builder loans. For construction
loans to owner-occupants, the Bank generally charges a 1% construction loan fee
and a $425 commitment fee.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate and the
borrower is unable to meet the Bank's requirements of putting up additional
funds to cover extra costs or change orders, then the Bank will demand that the
loan be paid off and, if necessary, institute foreclosure proceedings, or
refinance the loan. If the estimate of value proves to be inaccurate, the Bank
may be confronted, at or prior to the maturity of the loan, with collateral
having a value which is insufficient to assure full repayment. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers (i.e., borrowers who satisfy all credit requirements and whose loans
satisfy all other underwriting standards which would apply to the Bank's
permanent mortgage loan financing for the subject property) in the Bank's market
area. On loans to builders, the Bank works only with selected builders with whom
it has experience and carefully monitors the creditworthiness of the builders.
Builder relationships are analyzed and underwritten annually by the Bank's
credit administration department.
Multi-Family Residential and Commercial Real Estate Lending. The Bank
originates commercial real estate loans, as well as a limited amount of
multi-family residential real estate loans, generally limiting such originations
to loans secured by properties in its primary market area and to borrowers with
whom it has other loan relationships. The Company's multi-family residential
loan portfolio consists primarily of loans secured by small apartment buildings,
and the commercial real estate loan portfolio includes loans to finance the
acquisition of small office buildings and commercial and industrial buildings.
Such loans generally range in size from $100,000 to $2.0 million. At September
30, 2000, multi-family residential and commercial real estate loans totaled $6.7
and $103.0 million, respectively, which amounted to 1.7% and 26.8%,
respectively, of the Company's gross loan portfolio. Multi-family and commercial
real estate loans are originated either for 15 year terms with interest rates
that adjust every one, three or five years based on either the prime rate as
quoted in THE WALL STREET JOURNAL plus a negotiated margin of between 0% and 1%
for shorter term loans or, for longer term loans, or the Treasury Rate plus a
negotiated margin of between 3% and 4.5%, or on a fixed-rate basis with interest
calculated on a 15 year amortization schedule with a balloon payment due after
five years.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve larger loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project, retail establishment or business. These
risks can be significantly affected by supply and demand conditions in the
market for office, retail and residential space, and, as such, may be subject to
a greater extent to adverse conditions in the economy generally. To minimize
these risks, the Bank generally limits itself to its market area or to borrowers
with which it has prior experience or who are otherwise known to the Bank. It
has been the Bank's policy to obtain annual financial statements of the business
of the borrower or the project for which commercial or multi-family residential
real estate loans are made. In addition, in the case of commercial mortgage
loans made to a partnership or a corporation, the Bank seeks, whenever possible,
to obtain personal guarantees and annual financial statements of the principals
of the partnership or corporation.
Commercial Lending. The Company's commercial loans consist of loans secured
by commercial real estate and commercial business loans, which are not secured
by real estate. For a discussion of the Company's commercial real estate lending
see "-- Multi-Family and Commercial Real Estate Lending."
<PAGE>
In recent years, the Bank has emphasized commercial business lending. The
Bank originates commercial business loans to small and medium sized businesses
in its market area. The Bank's commercial borrowers are generally small
businesses engaged in manufacturing, distribution or retailing, or professionals
in healthcare, accounting and law. Commercial business loans are generally made
to finance the purchase of inventory, new or used equipment or commercial
vehicles, to support trading assets and for short-term working capital. Such
loans generally are secured by equipment and inventory, and, if possible,
cross-collateralized by a real estate mortgage, although commercial business
loans are sometimes granted on an unsecured basis. Such loans generally are made
for terms of five years or less, depending on the purpose of the loan and the
collateral, with loans to finance operating expenses made for one year or less,
with interest rates that adjust at least annually at a rate equal to the prime
rate as stated in The Wall Street Journal plus a margin of between 0% and 2%.
Generally, commercial loans are made in amounts ranging between $5,000 and
$250,000. At September 30, 2000, commercial business loans totaled $34.9
million, or 9.1% of the Company's gross loan portfolio.
The Bank underwrites its commercial business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of underlying collateral value, and the Bank seeks to structure
such loans to have more than one source of repayment. The borrower is required
to provide the Bank with sufficient information to allow the Bank to make its
lending determination. In most instances, this information consists of at least
two years of financial statements, a statement of projected cash flows, current
financial information on any guarantor and any additional information on the
collateral. For loans with maturities exceeding one year, the Bank requires that
borrowers and guarantors provide updated financial information at least annually
throughout the term of the loan.
The Bank's commercial business loans may be structured as short-term loans,
term loans or as lines of credit. Short-term commercial business loans are for
periods of 12 months or less and are generally self-liquidating from asset
conversion cycles. Commercial business term loans are generally made to finance
the purchase of assets and have maturities of five years or less. Commercial
business lines of credit are typically made for the purpose of supporting
trading assets and providing working capital. Such loans are usually approved
with a term of 12 months and are reviewed at that time to see if extension is
warranted. The Bank also offers standby letters of credit for its commercial
borrowers. The terms of standby letters of credit generally do not exceed one
year, and they are underwritten as stringently as any commercial loan and
generally are of a performance nature.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Bank seeks
to minimize these risks through its underwriting guidelines, which require that
the loan be supported by adequate cash flow of the borrower, profitability of
the business, collateral and personal guarantees of the individuals in the
business. In addition, the Bank limits this type of lending to its market area
and to borrowers with which it has prior experience or who are otherwise well
known to the Bank.
Consumer Lending. In recent years, the Bank has been successful in its
strategy of increasing its portfolio of consumer loans. The consumer loans
originated by the Bank include automobile loans, certificate of deposit loans,
home equity loans and miscellaneous other consumer loans, including unsecured
loans. At September 30, 2000, consumer loans totaled $75.0 million, or 19.5% of
the Company's gross loan portfolio.
The Bank's automobile loans are generally underwritten in amounts up to 90%
of the lesser of the purchase price of the automobile or, with respect to used
automobiles, the loan value as published by the National Automobile Dealers
Association. The terms of most such loans do not exceed 60 months. The Bank
requires that the vehicles be insured and the Bank be listed as loss payee on
the insurance policy.
The Bank makes certificate of deposit loans for up to 90% of the
depositor's account balance. The interest rate is normally 3% above the annual
percentage yield paid on the account and the account must be pledged as
collateral to secure the loan. Interest generally is billed on a quarterly
basis. At September 30, 2000, loans on certificates of deposit totaled $997,000,
or .3% of the Company's total loan portfolio.
At September 30, 2000, the Company had approximately $35.8 million in home
equity line of credit loans, representing approximately 9.3% of its gross loan
portfolio. The Company's home equity lines of credit have
<PAGE>
adjustable interest rates tied to the prime interest rate plus a margin. The
home equity lines of credit require monthly payments until the loan is paid in
full. Home equity lines of credit are generally secured by subordinate liens
against residential real property. The Bank requires that fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least sufficient to cover its loan. Home equity loans are
generally limited so that the amount of such loans, along with any senior
indebtedness, does not exceed 85% of the value of the real estate security.
The Company offers credit card loans through its participation as a Visa
and MasterCard issuer. Management believes that providing credit card services
to its customers helps the Bank remain competitive by offering customers an
additional service, and the Bank does not actively solicit credit card business
beyond its customer base and market area. The rate currently charged by the Bank
on its credit card loans ranges from 12% to 17%, and the Bank is permitted to
change the interest rate on 30 days notice. Processing of bills and payments is
contracted to an outside servicer. At September 30, 2000, the Company had a
commitment to fund an aggregate of $7.7 million of credit card loans, which
represented the aggregate credit limit on credit cards, and had $1.2 million of
credit card loans outstanding, representing .3% of its gross loan portfolio. The
Company intends to continue and expand credit card lending, but estimates that
at current levels of credit card loans, it makes little or no monthly profit net
of service expenses and write-offs.
Consumer lending affords the Company the opportunity to earn yields higher
than those obtainable on single-family residential lending. However, consumer
loans entail greater risk than do residential mortgage loans, particularly in
the case of loans which are unsecured (as is the case with credit card loans) or
secured by rapidly depreciable assets such as automobiles. Repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer and credit card loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by events such as job loss, divorce, illness or personal bankruptcy.
Further, the application of various state and federal laws, including federal
and state bankruptcy and insolvency law, may limit the amount which may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income and ability to repay the
loan, and the value of the collateral.
Loan Fees and Servicing. The Bank receives fees in connection with late
payments and for miscellaneous services related to its loans. The Bank also
charges fees in connection with loan originations. These fees can consist of
origination, discount, construction and/or commitment fees, depending on the
type of loan. The Bank generally does not service loans for others except as set
forth below and except for mortgage loans originated and sold by the Bank with
servicing retained.
In addition, the Bank has developed a program to originate loans for a
local credit union. The Bank receives a $600 origination fee for each loan as
well as an annual servicing fee of .375% of the loan amount. All of these loans
are funded and closed in the name of the credit union. The Bank has explored the
possibility of developing similar arrangements with other institutions, although
none are currently planned.
Nonperforming Loans and Other Problem Assets. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status. Loans which are delinquent more than 15 days incur a late fee
of 4% of the monthly payment of principal and interest due. As a matter of
policy, the Bank will contact the borrower after the loan has been delinquent 15
days. If payment is not promptly received, the borrower is contacted again, and
efforts are made to formulate an affirmative plan to cure the delinquency.
Generally, after any loan is delinquent 45 days or more, a default letter is
sent to the borrower. If the default is not cured after 30 days, formal legal
proceedings are commenced to collect amounts owed.
Loans generally are placed on nonaccrual status, and accrued but unpaid
interest is reversed, when, in management's judgment, it is determined that the
collectibility of interest, but not necessarily principal, is doubtful.
Generally, this occurs when payment is delinquent in excess of 90 days. Consumer
loans are generally charged off, or any expected loss is reserved for, after
they become more than 120 days past due. All other loans are charged off
<PAGE>
when management concludes that they are uncollectible. See Note 5 of Notes to
Financial Statements included in the Annual Report to Stockholders for the
Fiscal Year Ended September 30, 2000 (the "Annual Report").
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate acquired through foreclosure until such time as it is sold and is
recorded at the lower of the estimated fair value of the underlying real estate
or the carrying amount of the loan. Costs relating to holding or improving such
real estate are charged against income in the current period. Any required
write-down of the loan to its fair value less estimated selling costs upon
foreclosure is charged against the allowance for loan losses. See Note 5 of
Notes to Financial Statements in the Annual Report.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates shown, the Bank had no
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
<S> <C> <C> <C> <C> <C>
Residential mortgage:
Single-family ........................ $1,110 $ 487 $ 323 $ 298 $ 376
Construction ......................... 258 -- 406 916 647
Commercial real estate ................. -- -- -- 16 --
Commercial business .................... 139 48 25 14 8
Consumer ............................... 139 33 48 18 3
------ ------ ------ ------ ------
Total nonperforming loans ............ $1,646 $ 567 $ 802 $1,262 $1,034
====== ====== ====== ====== ======
Percentage of total loans, net ........... .45% .27% .36% .64% .66%
====== ====== ====== ====== ======
Real estate owned ........................ $ 220 $ 591 $ 412 $ 358 $ 179
====== ====== ====== ====== ======
</TABLE>
During the year ended September 30, 2000, additional gross interest income
of approximately $40,000 would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout this period. Interest
on such loans included in income during the period amounted to approximately
$28,000.
At September 30, 2000, the Bank had no loans not classified as nonaccrual,
90 days past due or restructured loans where known information about possible
credit problems of borrowers caused management to have serious concerns as to
the ability of the borrowers to comply with present loan repayment terms and may
result in disclosure as nonaccrual, 90 days past due or restructured.
There were no loans accruing interest which were contractually past due 90
days or more at the end of any reported period.
At September 30, 2000, an analysis of the Bank's portfolio did not reveal
any impaired loans that needed to be classified under SFAS No. 114 or 118. A
loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
arrangement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral dependent loans are measured for
impairment based on the fair value of the collateral. The Bank uses several
factors in determining if a loan is impaired. The internal asset classification
procedures include a thorough review of significant loans and lending
relationships and include the accumulation of related data. This data includes
loan payments status, borrowers' financial data and borrowers' operating factors
such as cash flows, operating income or loss, and various other matters.
At September 30, 2000, the Company had $1.6 million of nonaccrual loans,
which consisted of 16 single-family residential real estate loans totaling $1.1
million, two residential mortgage construction loans totaling $256,000, two
commercial business loans totaling $139,000, and seven consumer loans totaling
$139,000.
<PAGE>
At September 30, 2000, the Bank had $220,000 of real estate owned, which
consisted of three single-family residences.
Classified Assets. Federal regulations require that the Bank classify its
assets on a regular basis. In addition, in connection with examinations of
insured institutions, examiners have authority to identify problem assets and if
appropriate, classify them in their reports of examination. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require a bank to establish general allowances for
loan losses. If an asset or portion thereof is classified loss, a bank must
either establish a specific allowance for loss in the amount of the portion of
the asset classified loss, or charge off such amount. The Bank regularly reviews
its assets to determine whether any assets require classification or
re-classification. At September 30, 2000, the Company had $8.2 million in
classified assets, including $2.7 million in assets classified as special
mention, $4.9 million in assets classified as substandard, $558,000 in assets
classified as doubtful and $27,000 in assets classified as loss.
Allowance for Loan Losses. The Company's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb potential losses
in the portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income.
Although management believes it uses the best information available to make
determinations with respect to the allowances for losses and believes such
allowances are adequate, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations. Management anticipates that the
Company's allowance for loan losses will increase in the future as it implements
the Board of Directors' strategy of continuing existing lines of business while
gradually expanding commercial business and consumer lending, which loans
generally entail greater risks than single-family residential mortgage loans.
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ...... $3,297 $3,365 $3,249 $2,351 $1,877
------ ------ ------ ------ ------
Loans charged-off:
Residential mortgage:
Single-family ................... -- -- -- -- 44
Commercial real estate ............ -- -- -- -- --
Commercial business ............... 58 206 128 -- --
Consumer .......................... 99 58 74 72 19
------ ------ ------ ------ ------
Total charge-offs ................... 157 264 202 72 63
------ ------ ------ ------ ------
Recoveries:
Residential real estate mortgage:
Single-family residential ....... -- -- -- 33 25
Commercial ........................ 70 65 -- -- --
Consumer .......................... 9 11 8 6 1
------ ------ ------ ------ ------
Total recoveries .................... 79 76 8 39 26
------ ------ ------ ------ ------
Net loans charged-off ............... 78 188 194 33 37
------ ------ ------ ------ ------
Additions:
Balance transferred in acquisition .. 963 -- -- -- --
Provision for loan losses ........... 977 120 310 931 511
------ ------ ------ ------ ------
Total additions ............... 1,940 120 310 931 511
------ ------ ------ ------ ------
Balance at end of period ............ $5,159 $3,297 $3,365 $3,249 $2,351
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period .02% .08% .09% .02% .02%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. 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 category.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage ... $1,034 44.6% $1,071 38.7% $1,071 49.7% $1,070 47.6% $1,037 54.6%
Commercial (1) ......... 3,125 35.9 1,577 39.1 1,598 30.3 1,456 29.1 879 23.9
Consumer ............... 1,000 19.5 649 22.2 696 20.0 723 23.3 435 21.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for
loan losses ...... $5,159 100.0% $3,297 100.0% $3,365 100.0% $3,249 100.0% $2,351 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
---------------
(1) Includes commercial real estate and commercial business loans.
<PAGE>
INVESTMENT ACTIVITIES
General. Interest income from mortgage-backed securities and investment
securities generally provides the second largest source of income to the Company
after interest on loans. The Bank's Board of Directors has authorized investment
in U.S. Government and agency securities, state government obligations,
municipal securities, obligations of the Federal Home Loan Bank ("FHLB") and
mortgage-backed securities. The Bank's objective is to use such investments to
reduce interest rate risk, enhance yields on assets and provide liquidity. At
September 30, 2000, the Company's mortgage-backed securities and investment
securities portfolio amounted to $108.5 million and $45.2 million, respectively.
At such date, the Company had an unrealized loss of $1.3 million, net of
deferred taxes, with respect to its securities, all of which are classified as
available for sale.
Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Bank's investment
policy. The Bank performs analyses on mortgage-backed securities and investment
securities prior to forming mortgage pools and on an ongoing basis to determine
the impact on earnings and market value under various interest rate and
prepayment conditions. Securities purchases are subject to the oversight of the
Bank's Investment Committee consisting of four directors and are reviewed by the
Board of Directors on a monthly basis. The Bank's President has authority to
make specific investment decisions within the parameters determined by the Board
of Directors.
Mortgage-Backed Securities. At September 30, 2000, the Company's
mortgage-backed securities amounted to $108.5 million, or 19.4% of total assets.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators through intermediaries that pool
and repackage the participation interest in the form of securities to investors
such as the Bank. Such intermediaries may include quasi-governmental agencies
such as FHLMC, FNMA and GNMA which guarantee the payment of principal and
interest to investors. Mortgage-backed securities generally increase the quality
of the Bank's assets by virtue of the guarantees that back them, are more liquid
than individual mortgage loans and may be used to collaterize borrowings or
other obligations of the Bank. At September 30, 2000, all of the Company's
mortgage-backed securities were backed by loans originated by the Bank and
swapped with the FHLMC in exchange for such mortgage-backed securities.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 FHLBs and federally insured savings institutions. The FHLMC
issues participation certificates backed principally by conventional mortgage
loans. The FHLMC guarantees the timely payment of interest and the ultimate
return of principal on participation certificates. FHLMC securities are not
backed by the full faith and credit of the United States, but because the FHLMC
is not a U.S. Government-sponsored enterprise, these securities are considered
to be among the highest quality investments with minimal credit risks. The
maximum loan limit for FNMA and FHLMC currently is $252,700.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and having varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings of the Bank in the event that the Bank determined to
utilize borrowings as a source of funds. Mortgage-backed securities issued or
guaranteed by the FHLMC (except interest-only securities or the residual
interests in CMOs) are weighted at no more than 20% for risk-based capital
purposes, compared to a weight of 50% to 100% for residential loans. See
"Depository Institution Regulation -- Capital Requirements."
At September 30, 2000, mortgage-backed securities with an amortized cost of
$110.5 million and a carrying value of $108.5 million were held as available for
sale, and no mortgage-backed securities were classified as held to maturity.
Mortgage-backed securities which are held to maturity are carried at cost,
adjusted for the
<PAGE>
amortization of premiums and the accretion of discounts using a method which
approximates a level yield. Mortgage-backed securities classified as available
for sale are carried at fair value. Unrealized gains and losses on available for
sale mortgage-backed securities are recognized as direct increases or decreases
in equity, net of applicable income taxes. See Notes 1 and 4 of the Notes to
Consolidated Financial Statements in the Annual Report. At September 30, 2000,
the Bank's mortgage-backed securities had a weighted average yield of 6.84%.
At September 30, 2000, the average contractual maturity of the Company's
fixed-rate mortgage-backed securities was approximately 19 years. The actual
maturity of a mortgage-backed security varies, depending on when the mortgagors
prepay or repay the underlying mortgages. Prepayments of the underlying
mortgages may shorten the life of the investment, thereby adversely affecting
its yield to maturity and the related market value of the mortgage-backed
security. The yield is based upon the interest income and the amortization of
the premium or accretion of the discount related to the mortgage-backed
security. Premiums and discounts on mortgage-backed securities are amortized or
accreted over the estimated term of the securities using a level yield method.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of the mortgage-backed
security, and these assumptions are reviewed periodically to reflect the actual
prepayment. The actual prepayments of the underlying mortgages depend on many
factors, including the type of mortgage, the coupon rate, the age of the
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates. The
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. During periods of falling mortgage interest rates, prepayments
generally increase, and, conversely, during periods of rising mortgage interest
rates, prepayments generally decrease. If the coupon rate of the underlying
mortgage significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable-rate mortgage-backed securities.
Investment Securities. The Company's investment securities consist
primarily of securities issued by the U.S. government and government agencies.
At September 30, 2000, the Company's entire portfolio of investment securities
was classified available for sale and amounted to $45.2 million. The Company
attempts to maintain a high degree of liquidity in its investment securities
portfolio by choosing those that are readily marketable. As of September 30,
2000, the estimated average life of the Company's investment securities
portfolio was approximately one year. In addition, at September 30, 2000, the
Company had $2.7 million of FHLB stock.
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
amortized cost and average yields for the Company's investment securities and
mortgage-backed securities portfolio at September 30, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
----------------- ----------------- ----------------- ----------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Amortized Average
Value Yield Value Yield Value Yield Value Yield Value Cost Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ---- -----
(Dollars in thousands)
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities ... $ -- --% $ 30,690 6.55% $ 14,496 6.57% $ -- --% $ 45,186 $ 45,358 6.56%
Mortgage-backed
securities ........... -- -- 1,051 6.71 3,464 6.51 104,004 6.85 108,519 110,462 6.84
Securities held to maturity:
FHLB stock (1) .......... -- -- -- -- -- -- 2,651 7.75 2,651 2,651 7.75
-------- ---- -------- ---- -------- ---- -------- ---- -------- -------- ----
Total ................ $ -- --% $ 31,741 6.56% $ 17,960 6.56% $106,655 6.87% $156,356 $158,471 6.77%
======== ==== ======== ==== ======== ==== ======== ==== ======== ======== ====
</TABLE>
---------------
(1) As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in FHLB stock, which has no stated maturity.
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities and mortgage-backed securities portfolio at the dates
indicated.
At September 30,
--------------------------------
2000 1999 1998
------ ------ ------
(In thousands)
Securities available for sale:
U.S. government and agency securities $ 45,186 $ 3,024 $ 3,108
Mortgage-backed securities .......... 108,519 56,326 27,017
-------- -------- --------
Total ............................ 153,705 59,350 30,125
Securities held to maturity:
FHLB stock .......................... 2,651 1,460 1,364
-------- -------- --------
Total ............................ $156,356 $ 60,810 $ 31,489
======== ======== ========
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending,
investment activities and general operational purposes. In addition to deposits,
the Bank derives funds from loan principal and interest repayments, maturities
of investment securities and mortgage-backed securities and interest payments
thereon. Although loan repayments are a relatively stable source of funds,
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds, or on a longer term
basis for general operational purposes. The Bank has access to borrow from the
FHLB of Atlanta.
Deposits. The Bank attracts deposits principally from within its market
area by offering a variety of deposit instruments, including checking accounts,
money market accounts, statement and passbook savings accounts, Individual
Retirement Accounts, and certificates of deposit which range in maturity from
seven days to five years. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Bank on a periodic basis. The Bank reviews its
deposit pricing on a weekly basis. In determining the characteristics of its
deposit accounts, the Bank considers the rates offered by competing
institutions, lending and liquidity requirements, growth goals and federal
regulations. Management believes it prices its deposits comparably to rates
offered by its competitors. The Bank does not accept brokered deposits.
The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially, all of the
Bank's depositors are North Carolina residents. To provide additional
convenience, the Bank participates in the STAR Automatic Teller Machine network
at locations throughout the United States, through which customers can gain
access to their accounts at any time. To better serve its customers, the Bank
has installed automatic teller machines at seven office locations.
<PAGE>
The following tables set forth the distribution of the Bank's deposit
accounts at the dates indicated, the weighted average interest rates and the
change in dollar amounts for each category of deposits presented. Management
does not believe that the use of year-end balances instead of average balances
resulted in any material difference in the information presented.
<TABLE>
<CAPTION>
As of and for the Year Ended September 30,
------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Checking .............. $ 62,322 .26% $ 31,151 .28% $ 26,494 .42%
Money market .......... 48,271 4.29 22,375 3.92 16,379 3.62
Savings accounts ........ 22,069 1.49 7,220 1.50 6,398 1.78
-------- ------ -------- ------ -------- ------
Total ............... 132,662 1.93 60,746 1.76 49,271 1.66
Certificate accounts:
Less than 12 months (1) 112,553 5.99 50,671 5.05 30,155 4.89
12 - 14 months (1) .... 121,941 6.25 82,655 5.06 66,064 5.70
15 - 72 months (1) .... 104,786 5.73 40,546 5.44 59,145 5.71
-------- ------ -------- ------ -------- ------
Total ............... 339,280 6.00 173,872 5.15 155,364 5.54
-------- ------ -------- ------ -------- ------
Total deposits .......... $471,942 100.00% $234,618 4.27% $204,635 4.58%
======== ====== ======== ====== ======== ======
</TABLE>
---------------
(1) Original term.
<PAGE>
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more (in thousands) by time remaining until maturity as
of September 30, 2000. At such date, such deposits represented 11.9% of total
deposits and had a weighted average rate of 6.1%.
Maturity Period
---------------
(In thousands)
Three months or less ............... $ 1,102
Over three through six months ...... 3,169
Over six through 12 months ......... 36,664
Over 12 months ..................... 15,401
-------
Total ........................... $56,336
=======
At September 30, 2000, mortgage-backed securities with an amortized cost of
$5.4 million were pledged as collateral for deposits from public entities.
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending, investment and general operating activities. The
Bank is authorized, however, to use advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, the Bank is required to own stock in the FHLB of
Atlanta and is authorized to apply for advances. Advances are pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank has a Blanket Agreement for advances with the FHLB under
which the Bank may borrow up to 25% of assets subject to normal collateral and
underwriting requirements. Advances from the FHLB of Atlanta are secured by the
Bank's stock in the FHLB of Atlanta and other eligible assets. During the years
ended September 30, 2000, 1999 and 1998, the Bank's borrowings consisted of FHLB
advances and retail repurchase agreements. Retail repurchase agreements
represent agreements to sell securities under terms which require the Bank to
repurchase the same or substantially similar securities by a specified date.
The following table sets forth certain information regarding short-term
borrowings by the Company at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended
September 30,
----------------------------------
2000 1999 1998
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances .......................................... $24,000 $ -- $ 9,500
Federal funds purchased and securities
sold under repurchase agreements ..................... 6,388 $ 1,318 $ 2,432
Weighted average rate paid on:
FHLB advances .......................................... 6.94% 0.00% 6.00%
Federal funds purchased and securities sold under
agreements to repurchase ............................. 4.38% 3.13% 3.33%
Maximum amount of borrowings outstanding at any month end:
FHLB advances .......................................... $60,200 $19,000 $10,000
Federal funds purchased and securities
sold under repurchase agreements ..................... 6,388 2,374 2,652
<PAGE>
<CAPTION>
At or for the Year Ended
September 30,
----------------------------------
2000 1999 1998
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances .......................................... $ 9,168 $10,558 $ 1,071
Federal funds purchased and securities
sold under repurchase agreements ..................... 3,306 1,773 1,918
Approximate weighted average rate paid on: (1)
FHLB advances .......................................... 6.09% 5.19% 5.90%
Federal funds purchased and securities
sold under repurchase agreements ..................... 4.30% 2.69% 3.98%
</TABLE>
------------
(1) Based on month-end balances.
COMPETITION
The Company faces strong competition in originating real estate, commercial
business and consumer loans and in attracting deposits. The Bank competes for
real estate and other loans principally on the basis of interest rates, the
types of loans it originates, the deposit products it offers and the quality of
services it provides to borrowers. The Bank also competes by offering products
which are tailored to the local community. Its competition in originating real
estate loans comes primarily from other commercial banks, savings institutions,
mortgage bankers and mortgage brokers. Commercial banks, credit unions and
finance companies provide vigorous competition in consumer lending. Competition
may increase as a result of the recent reduction of restrictions on the
interstate operations of financial institutions.
The Bank attracts its deposits through its branch offices primarily from
the local communities. Consequently, competition for deposits is principally
from other commercial banks, savings institutions, credit unions and brokers in
the Bank's primary market area. The Bank competes for deposits and loans by
offering what it believes to be a variety of deposit accounts at competitive
rates, convenient business hours, a commitment to outstanding customer service
and a well-trained staff. The Bank believes it has developed strong
relationships with local realtors and the community in general.
Management considers its primary market area for gathering deposits and
originating loans to be Beaufort, Craven, Lenoir, Nash, Pasquotank and Pitt
Counties in eastern North Carolina, which are the counties in which the Bank's
offices are located. The Bank originates loans throughout eastern North
Carolina.
EMPLOYEES
As of September 30, 2000, the Bank had 184 full-time and 14 part-time
employees, none of whom were represented by a collective bargaining agreement.
Management considers the Bank's relationships with its employees to be good.
DEPOSITORY INSTITUTION REGULATION
General. The Bank is a North Carolina-chartered commercial bank and its
deposit accounts are insured by the Savings Association Insurance Fund ("SAIF")
of the FDIC. The Bank is subject to supervision, examination and regulation by
the Commissioner and the FDIC and to North Carolina and federal statutory and
regulatory provisions governing such matters as capital standards, mergers,
subsidiary investments and establishment of branch offices. The FDIC also has
the authority to conduct special examinations. The Bank is required to file
reports with the Commissioner and the FDIC concerning its activities and
financial condition and will be required to obtain regulatory approval prior to
entering into certain transactions, including mergers with, or acquisitions of,
other depository institutions.
<PAGE>
As a federally insured depository institution, the Bank is subject to
various regulations promulgated by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), including Regulation B (Equal Credit
Opportunity), Regulation D (Reserve Requirements), Regulations E (Electronic
Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds and Collection of Checks) and Regulation DD (Truth in Savings).
The system of regulation and supervision applicable to the Bank establishes
a comprehensive framework for the operations of the Bank, and is intended
primarily for the protection of the FDIC and the depositors of the Bank. Changes
in the regulatory framework could have a material effect on the Bank that in
turn, could have a material effect on the Company.
Financial Modernization Legislation. On November 12, 1999, President
Clinton signed legislation which could have a far-reaching impact on the
financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding companies and national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to bank holding
companies are securities and insurance brokerage, securities underwriting,
insurance underwriting and merchant banking. The Federal Reserve Board, in
consultation with the Secretary of the Treasury, may approve additional
financial activities. The G-L-B Act, however, prohibits future acquisitions of
existing unitary savings and loan holding companies by firms which are engaged
in commercial activities and limits the permissible activities of unitary
savings and loan holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to nonaffiliated third parties unless the customer has been
given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions became
effective in November 2000, with full compliance required by July 1, 2001.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for
federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to nongovernmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time.
Capital Requirements. The Federal Reserve Board and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies with consolidated assets of $150 million or
more and state nonmember banks, respectively. The regulations impose two sets of
capital adequacy requirements: minimum leverage rules, which require bank
holding companies and state nonmember banks to maintain a specified minimum
ratio of capital to total assets, and risk-based capital rules, which require
the
<PAGE>
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the FDIC and the Federal Reserve Board require bank holding
companies and state nonmember banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" to total assets of 3.0%. Tier 1 capital is
the sum of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus), and minority interests in consolidated
subsidiaries; minus all intangible assets (other than certain purchased mortgage
servicing rights and purchased credit card receivables), identified losses and
investments in certain subsidiaries. As a SAIF-insured, state-chartered bank,
the Bank must also deduct from Tier 1 capital an amount equal to its investments
in, and extensions of credit to, subsidiaries engaged in activities that are not
permissible for national banks, other than debt and equity investments in
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities or in subsidiary depository institutions or their
holding companies. Although setting a minimum 3.0% leverage ratio, the capital
regulations state that only the strongest bank holding companies and banks, with
composite examination ratings of 1 CAMELS under the rating system used by the
federal bank regulators, are permitted to operate at or near such minimum level
of capital. All other bank holding companies and banks must maintain a leverage
ratio of at least 4%. Any bank or bank holding companies experiencing or
anticipating significant growth would be expected to maintain capital well above
the minimum levels. In addition, the Federal Reserve Board has indicated that
whenever appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to engage in new activities or otherwise facing
unusual or abnormal risks, it will consider, on a case-by-case basis, the level
of an organization's ratio of tangible Tier 1 capital to total assets in making
an overall assessment of capital.
In addition to the leverage ratio, the regulations of the Federal Reserve
Board and the FDIC require bank holding companies and state-chartered nonmember
banks to maintain a minimum ratio of qualifying total capital to risk-weighted
assets of at least 8.0% of which at least 4.0% must be Tier 1 capital.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or
"supplementary capital, items which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and
preferred stock with a maturity of 20 years or more, certain other capital
instruments and up to 45% of unrealized gains of equity securities. The
includible amount of Tier 2 capital cannot exceed the institution's Tier 1
capital. Qualifying total capital is further reduced by the amount of the bank's
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes, reciprocal cross-holdings of capital securities
issued by other banks and certain other deductions. The risk-based capital
regulations assign balance sheet assets and the credit equivalent amounts of
certain off-balance sheet items to one of four broad risk weight categories. The
aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category based principally on the degree of credit risk
associated with the obligor. The sum of these weighted values equals the bank
holding company or the bank's risk-weighted assets.
In addition to FDIC regulatory capital requirements, the North Carolina
Bank Commissioner requires that the Bank have adequate capitalization which is
determined based upon each Bank's particular set of circumstances. The Bank is
subject to the Commissioner's capital surplus regulation which requires
commercial banks to maintain a capital surplus of at least 50% of common
capital. Common capital is defined as the total of the par value of shares times
the number of shares outstanding.
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
<PAGE>
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level" established by the appropriate federal
banking regulator, the institution will be subject to conservatorship or
receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the FDIC, generally measure an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more* Less than 4.0%* Less than 3.0%
</TABLE>
-----------
* 3.0% if institution has a composite 1 CAMELS rating.
A "critically undercapitalized" savings institution is defined as an
institution that has a ratio of "tangible equity" to total assets of less than
2.0%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The FDIC
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the FDIC determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency was required to establish safety and soundness
standards for institutions under its authority. The interagency guidelines
require depository institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that depository
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the appropriate federal banking agency
determines that a depository institution is not in compliance with the safety
and soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A depository institution must
submit an acceptable compliance plan to its primary federal regulator within 30
days of receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank already substantially meets all the standards adopted in
the interagency guidelines.
<PAGE>
Community Reinvestment Act. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act ("CRA"). The purpose of the CRA is to
encourage financial institutions to help meet the credit needs of their entire
communities, including the needs of low-and moderate-income neighborhoods.
During the Bank's last compliance examination, the Bank received an
"outstanding" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve Board and the FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and, if such rating was less than "satisfactory," could
result in the denial of such applications.
The federal banking regulatory agencies have issued a revision of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a bank will first be
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
"needs to improve," or "substantial non-compliance." A set of criteria for each
rating has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to its service area should
be considered. The ratings received under the three tests will be used to
determine the overall composite CRA rating. The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily for member
institutions. As a member of the FHLB of Atlanta, the Bank is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever is
greater. The Bank was in compliance with this requirement with investment in
FHLB of Atlanta stock at September 30, 2000, of $2.7 million. The FHLB of
Atlanta serves as a reserve or central bank for its member institutions within
its assigned district. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Atlanta. Long-term advances may only be
made for the purpose of providing funds for residential housing finance, small
businesses, small farms and small agribusinesses.
Reserves. Pursuant to regulations of the Federal Reserve Board, the Bank
must maintain average daily reserves against their transaction accounts.
Reserves equal to 3% must be maintained on transaction accounts between $4.9
million and $42.8 million, plus 10% on the remainder. This percentage is subject
to adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of September 30, 2000,
the Bank met its reserve requirements.
The Bank is also subject to the reserve requirements of North Carolina
commercial banks. North Carolina law requires state nonmember banks to maintain,
at all times, a reserve fund in an amount set by the State Banking Commission.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial
<PAGE>
condition and the risk posed to the deposit insurance fund. Subgroup A consists
of financially sound institutions with only a few minor weaknesses. Subgroup B
consists of institutions that demonstrate weaknesses which, if not corrected,
could result in significant deterioration of the institution and increased risk
of loss to the deposit insurance fund. Subgroup C consists of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. The assessment rate for SAIF members
ranges from zero for well capitalized institutions in Subgroup A to 0.27% of
deposits for undercapitalized institutions in Subgroup C. Both BIF and SAIF
members are assessed an amount for Financing Corporation bond payments. Until
December 31, 1999, BIF members were assessed approximately 1.3 basis points
while the SAIF rate was approximately 6.4 basis points. As of January 1, 2000,
BIF and SAIF members began pro rata sharing of the payment at a rate of 2.43
basis points.
Although the Bank, as a North Carolina commercial bank, would qualify for
insurance of deposits by the BIF of the FDIC, substantial entrance and exit fees
apply to conversions from SAIF to BIF insurance. Accordingly, the Bank has
remained a member of the SAIF, which insures the deposits of the Bank to a
maximum of $100,000 for each depositor.
Liquidity Requirements. FDIC policy requires that banks maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state, or federal agency
obligations) in an amount which it deems adequate to protect safety and
soundness of the bank. The FDIC currently has no specific level which it
requires. Under the FDIC's calculation method, management calculated the Bank's
liquidity ratio as 27.9% of total assets at September 30, 2000, which management
believes is adequate.
North Carolina banks must maintain a reserve fund in an amount and/or ratio
set by the Banking Commission to account for the level of liquidity necessary to
assure the safety and soundness of the State banking system. As of September 30,
2000, the Bank's liquidity ratio was in excess of the North Carolina
regulations.
Dividend Restrictions. Under FDIC regulations, the Bank is prohibited from
making any capital distributions if after making the distribution, the Bank
would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier
1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%.
Earnings of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the pre-1988
reserves for such distributions. The Bank intends to make full use of this
favorable tax treatment and does not contemplate use of any earnings in a manner
which would create federal tax liabilities.
Limits on Loans to One Borrower. The Bank generally is subject to both FDIC
regulations and North Carolina law regarding loans to any one borrower,
including related entities. Under applicable law, with certain limited
exceptions, loans and extensions of credit by a state chartered nonmember bank
to a person outstanding at one time and not fully secured by collateral having a
market value at least equal to the amount of the loan or extension of credit
shall not exceed 15% of the unimpaired capital of the bank. Loans and extensions
of credit fully secured by readily marketable collateral having a market value
may comprise shall not exceed 10% of the unimpaired capital fund of the bank.
Under these limits, the Bank's loans to one borrower were limited to $6.6
million at September 30, 2000. At that date, the Bank had no lending
relationships in excess of the loans-to-one-borrower limit. Notwithstanding the
statutory loans-to-one-borrower limitations, the Bank has a self imposed
loans-to-one-borrower limit, which currently is $4.3 million. At September 30,
2000, the Bank's largest lending relationship was a $3.4 million relationship
consisting of six commercial real estate loans and one unsecured loan. All loans
within this relationship were current and performing in accordance with their
terms at September 30, 2000.
Transactions with Related Parties. Transactions between a state nonmember
bank and any affiliate are governed by Sections 23A and 23B of the Federal
Reserve Act. An affiliate of a state nonmember bank is any company or entity
which controls, is controlled by or is under common control with the state
nonmember bank. In a holding company context, the parent holding company of a
state nonmember bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution or state nonmember bank. Generally, Sections 23A and 23B (i) limit
the extent to which an institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital
<PAGE>
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no state nonmember bank may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the state nonmember bank.
State nonmember banks also are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve's Regulation O
thereunder on loans to executive officers, directors and principal stockholders.
Under Section 22(h), loans to a director, executive officer and to a greater
than 10% stockholder of a state nonmember bank and certain affiliated interests
of such persons, may not exceed, together with all other outstanding loans to
such person and affiliated interests, the institution's loans-to-one-borrower
limit and all loans to such persons may not exceed the institution's unimpaired
capital and unimpaired surplus. Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of a savings institution,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the institution with any "interested"
director not participating in the voting. Regulation O prescribes the loan
amount (which includes all other outstanding loans to such person) as to which
such prior board of director approval is required as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h)
requires that loans to directors, executive officers and principal stockholders
be made on terms substantially the same as offered in comparable transactions to
other persons. Section 22(h) also generally prohibits a depository institution
from paying the overdrafts of any of its executive officers or directors.
State nonmember banks also are subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of 12 U.S.C. ss.1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires loans to executive officers of depository institutions not
be made on terms more favorable than those afforded to other borrowers, requires
approval by the board of directors of a depository institution for extension of
credit to executive officers of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. Section 1972 (i) prohibits a depository institution
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions, and (ii) prohibits extensions of credit to
executive officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms 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.
Additionally, North Carolina statutes set forth restrictions on loans to
executive officers of state-chartered banks, which provide that no bank may
extend credit to any of its executive officers nor a firm or partnership of
which such executive officers is a member, nor a company in which such executive
officer owns a controlling interest, unless the extension of credit is made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions by the bank with persons who
are not employed by the bank, and provided further that the extension of credit
does not involve more than the normal risk of repayment.
Restrictions on Certain Activities. Under FDICIA, state-chartered nonmember
banks with deposits insured by the FDIC are generally prohibited from acquiring
or retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner.
State-chartered banks are also prohibited from engaging as principal in any type
of activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks may not engage as principal in any
type of activity that is not permissible for a subsidiary of a national bank
unless in either case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and the bank is, and
continues to be, in compliance with applicable capital standards.
<PAGE>
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. Under
the regulations, the term activity refers to the authorized conduct of business
by an insured state bank and includes acquiring or retaining any investment
other than an equity investment. An activity permissible for a national bank
includes any activity expressly authorized for national banks by statute or
recognized as permissible in regulations, official circulars or bulletins or in
any order or written interpretation issued by the Office of the Comptroller of
the Currency ("OCC"). In its regulations, the FDIC indicates that it will not
permit state banks to directly engage in commercial ventures or directly or
indirectly engage in any insurance underwriting activity other than to the
extent such activities are permissible for a national bank or a national bank
subsidiary or except for certain other limited forms of insurance underwriting
permitted under the regulations. Under the regulations, the FDIC permits state
banks that meet applicable minimum capital requirements to engage as principal
in certain activities that are not permissible to national banks including
guaranteeing obligations of others, activities which the Federal Reserve Board
has found by regulation or order to be closely related to banking and certain
securities activities conducted through subsidiaries.
REGULATION OF THE COMPANY
General. The Company, as the sole shareholder of the Bank, is a bank
holding company and is registered with the Federal Reserve Board. Bank holding
companies are subject to comprehensive regulation by the Federal Reserve Board
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and the
regulations of the Federal Reserve Board. As a bank holding company, the Company
is required to file with the Federal Reserve Board annual reports and such
additional information as the Federal Reserve Board may require, and is subject
to regular examinations by the Federal Reserve Board. The Federal Reserve Board
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 Board
approval before: (i) 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); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company, (satisfactory
financial condition, particularly with respect to capital adequacy, and a
satisfactory CRA rating generally are prerequisites to obtaining federal
regulatory approval to make acquisitions).
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 which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board 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 United States 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. The Company has no present plans to engage in
any of these activities.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See " -- Depository Institution Regulation -- Capital
Requirements."
Acquisition of Bank Holding Companies and Banks. Under the BHCA, any
company must obtain approval of the Federal Reserve Board prior to acquiring
control of the Company or the Bank. For purposes of the BHCA, "control" is
defined as ownership of more than 25% of any class of voting securities of the
Company or the Bank,
<PAGE>
the ability to control the election of a majority of the directors, or the
exercise of a controlling influence over management or policies of the Company
or the Bank. In addition, the Change in Bank Control Act and the related
regulations of the Federal Reserve Board require any person or persons acting in
concert (except for companies required to make application under the BHCA), to
file a written notice with the Federal Reserve Board before such person or
persons may acquire control of the Company or the Bank. The Change in Bank
Control Act defines "control" as the power, directly or indirectly, to vote 25%
or more of any voting securities or to direct the management or policies of a
bank holding company or an insured bank.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on
interstate banking. Effective September 29, 1995, the Act allows the Federal
Reserve Board to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Act also prohibits the Federal Reserve Board from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. The Act does not affect the
authority of states to limit the percentage of total insured deposits in the
state which may be held or controlled by a bank or bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, the Act authorizes the federal banking agencies to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
opted out of the Act by adopting a law after the date of enactment of the Act
and prior to June 1, 1997 that applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks. North
Carolina has enacted legislation permitting interstate banking transactions.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
The Act authorizes the FDIC to approve interstate branching de novo by
state banks only in states which specifically allow for such branching. Pursuant
to the Act, the appropriate federal banking agencies adopted regulations which
prohibit any out-of-state bank from using the interstate branching authority
primarily for the purpose of deposit production. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities which they serve.
Dividends. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is consistent
with the company's capital needs, asset quality and overall financial condition.
The Federal Reserve Board 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 Board pursuant to FDICIA, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized". See "--
Depository Institution Regulation -- Prompt Corrective Regulatory Action."
Bank holding companies are required to give the Federal Reserve Board 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 the their
consolidated retained earnings. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would constitute an
unsafe or unsound practice or would violate any law, regulation, Federal Reserve
Board order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.
<PAGE>
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "-- Depository Institution Regulation -- Capital
Requirements."
TAXATION - GENERAL
The Bank files a federal income tax return based on a fiscal year ending
September 30.
FEDERAL INCOME TAXATION
The Bank is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code") in the same general manner as other
corporations. In its form as a savings bank until April 1997, through tax years
beginning before December 31, 1995, institutions such as the Bank which met
certain definitional tests and other conditions prescribed by the Internal
Revenue Code benefited from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans secured by interests
in certain real property, and "nonqualifying loans", which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans must be based
on actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method"). Under the experience method, the bad debt deduction for an addition to
the reserve for qualifying real property loans was an amount determined under a
formula based generally on the bad debts actually sustained by a savings
institution over a period of years. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real property loans was
computed as 8% of a savings institution's taxable income, with certain
adjustments. The Bank generally elected to use the method which has resulted in
the greatest deductions for federal income tax purposes in any given year.
Legislation that became effective for tax years beginning after December
31, 1995 requiring the Bank to recapture into taxable income over a six taxable
year period the portion of the tax loan reserve that exceeds the pre-1988 tax
loan loss reserve. The Bank will no longer be allowed to use the reserve method
for tax loan loss provisions, but would be allowed to use the experience method
of accounting for bad debts. There will be no future effect on net income from
the recapture because the taxes on these bad debts reserves has already been
accrued as a deferred tax liability.
The Bank's federal income tax returns have been audited through the year
ended September 30, 1992.
STATE INCOME TAXATION
Under North Carolina law, the corporate income tax currently is 7.25% of
federal taxable income as computed under the Internal Revenue Code, subject to
certain prescribed adjustments. For the tax years beginning in 1998, 1999 and
2000, this rate will be reduced to 7.25%, 7.00% and 6.90%, respectively. An
annual state franchise tax is imposed at a rate of .15% applied to the greatest
of the institutions (i) capital stock, surplus and undivided profits, (ii)
investment in tangible property in North Carolina or (iii) appraised valuation
of property in North Carolina.
For additional information regarding taxation, see Notes 1 and 11 of Notes
to Consolidated Financial Statements in the Annual Report.
<PAGE>
ITEM 2. PROPERTIES
------------------
The following table sets forth the location and certain additional
information regarding the Bank's offices at September 30, 2000.
Book Value at
Year Owned or September 30, Approximate
Opened Leased 2000 Square Footage
------ ------ ------ --------------
(Dollars in thousands)
MAIN OFFICE:
1311 Carolina Avenue
Washington, NC 1986 Owned $ 734 10,200
BRANCH OFFICES:
300 North Market Street
Washington, NC 1959 Owned 201 4,680
301 E. Arlington Blvd.
Greenville, NC 1993 Owned 375 2,600
604 E. Ehringhaus Street
Elizabeth City, NC 1980 Owned 393 2,500
827 Hardee Road
Kinston, NC 1996 Leased 53 2,000
1725 Glenburnie Road
New Bern, NC 1990 Owned 392 2,600
202 Craven Street
New Bern, NC 1995 Leased 41 2,500
300 Sunset Avenue
Rocky Mount, NC 1994 Owned 372 4,948
241 Green Street
Fayetteville, NC 1999 Owned 633 10,000
3107 Raeford Road
Fayetteville, NC 1999 Owned 440 2,400
600 N. Chestnut Street
Lumberton, NC 1999 Owned 393 6,100
2999 Hwy. 17S.
Chocowinity, NC 1999 ** 347 2,530
3635 North Halifax Road
Dortches, NC 2000 Leased 67 396
1378 Benvenue Road
Rocky Mount, NC 2000 ** 441 5,376
2901 Sunset Avenue
Rocky Mount, NC 2000 Owned 1,215 5,635
<PAGE>
Book Value at
Year Owned or September 30, Approximate
Opened Leased 2000 Square Footage
------ ------ ------ --------------
(Dollars in thousands)
450 North Winstead Avenue
Rocky Mount, NC 2000 Leased 5 2,845
100 East Hope Lodge Street
Tarboro, NC 2000 Leased 48 1,350
OPERATIONS CENTER:
239 West Main Street
Washington, NC 27889 1994 Owned 460 7,600
FUTURE EXPANSION SITES:
Creekside Drive
Washington, NC Owned 113
Cypress Landing
Chocowinity, NC Owned 126
Taberna
New Bern, NC Owned 176
-----------
** Lease land, own building.
The book value of the Bank's investment in premises and equipment was $7.0
million at September 30, 2000. See Note 6 to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
-------------------------
From time to time, the Company and/or the Bank is a party to various legal
proceedings incident to their business. At September 30, 2000, there were no
legal proceedings to which the Company or the Bank was a party, or to which any
of their property was subject, which were expected by management to result in a
material loss to the Company or the Bank. There are no pending regulatory
proceedings to which the Company or the Bank is a party or to which either of
their properties is subject which are currently expected to result in a material
loss.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
----------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
--------------------------------------------------------------------------------
MATTERS
-------
The information contained in the section captioned "Market Information" in
the Company's Annual Report to Stockholders for the Fiscal Year Ended September
30, 2000 (the "Annual Report") filed as Exhibit 13 hereto is incorporated herein
by reference.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" on page 2 in the Annual Report is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 3
through 13 in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The information contained in the section captioned "Market Risk" on page 5
in the Annual Report is incorporated herein be reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
The Independent Auditors' Report, Consolidated Financial Statements, Notes
to Consolidated Financial Statements and Selected Financial Data contained on
pages 14 through 38 in the Annual Report, which are listed under Item 14 herein,
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the Company's 2001
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
ITEM 11. MANAGEMENT REMUNERATION
--------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors," "-- Compensation Committee Report on Executive
Compensation," " -- Comparative Stock Performance Graph," " -- Executive
Compensation" and "-- Director Compensation" " in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners. Information required
by this item is incorporated herein by reference to the section
captioned "Voting Securities and Security Ownership" in the Proxy
Statement.
(b) Security Ownership of Management. Information required by this item is
incorporated herein by reference to the sections captioned "Voting
Securities and Security Ownership" and "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Changes in Control. Management of the Company knows of no
arrangements, including any pledge by any person of securities of the
Company, the operation of which may at a subsequent date result in a
change in control of the registrant.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
-------------------------------------------------------------------------
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
---------------------------------------------------
(1) Financial Statements. The following consolidated financial statements
are incorporated by reference from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition as of September 30, 2000 and
1999
Consolidated Statements of Operations for the Years Ended September 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders Equity for the Years Ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K and is also the Exhibit Index.
No. Description
--- -----------
3.1 Certificate of Incorporation of First South Bancorp, Inc.
(Incorporated herein by reference from Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No.
333-16335))
3.2 Bylaws of First South Bancorp, Inc.
4 Form of Common Stock Certificate of First South Bancorp, Inc.
(Incorporated herein by reference from Exhibit 1 to the Company's
Registration Statement on Form 8-A))
10.1(a) Employment Agreement between First South Bancorp, Inc. and
Thomas A. Vann (Incorporated herein by reference from Exhibit
10.3(a) to the Company's Registration Statement on Form S-1 (File
No. 333-16335))
10.1(b) Employment Agreement between Home Savings Bank, SSB and Thomas
A. Vann (Incorporated herein by reference from Exhibit 10.3(b) to
the Company's Registration Statement on Form S-1 (File No.
333-16335))
10.2 Change in Control Protective Agreements between Home Savings
Bank, SSB, First South Bancorp, Inc. and Mary R. Boyd, Sherry L.
Correll, Kristie W. Hawkins, Walter P. House and William R.
Outland (Incorporated herein by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (File No.
333-16335))
10.3 Supplemental Income Agreements as Amended and Restated December
14, 1995 between Home Savings Bank, SSB and Sherry L. Correll,
William R. Outland and Thomas A. Vann and the 1996 Amendment
Thereto (Incorporated herein by reference from Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (File No.
333-16335))
10.4 Supplemental Income Plan Agreements as Amended and Restated
December 14, 1995 between Home Savings Bank, SSB and James F.
Buckman, Walter P. House, Thomas A. Vann and
<PAGE>
William L. Wall and the 1996 Amendment Thereto (Incorporated
herein by reference from Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-16335))
10.5 Home Savings Bank, SSB Director's Deferred Compensation Plan
Agreements as Amended and Restated December 14, 1995 with Edmund
T. Buckman, Jr., Linley H. Gibbs, Jr., Frederick N. Holscher,
Frederick H. Howdy, Charles E. Parker, Jr., Marshall T. Singleton
and Thomas A. Vann and the 1996 Amendment Thereto (Incorporated
herein by reference from Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-16335))
10.6 Home Savings Bank, SSB Director's Retirement Plan Agreements as
Amended and Restated December 14, 1995 with Edmund T. Buckman,
Jr., Linley H. Gibbs, Jr., Frederick N. Holscher, Frederick H.
Howdy, Charles E. Parker, Jr. and Thomas A. Vann and the 1996
Amendment Thereto (Incorporated herein by reference from Exhibit
10.8 to the Company's Registration Statement on Form S-1 (File
No. 333-16335))
10.7 Home Savings Bank, SSB Director's Retirement Payment Agreements
as Amended and Restated December 14, 1995 with Edmund T. Buckman,
Jr., Linley H. Gibbs, Jr., Frederick N. Holscher, Frederick H.
Howdy, Charles E. Parker, Jr., and Thomas A. Vann and the 1996
Amendment Thereto (Incorporated herein by reference from Exhibit
10.9 to the Company's Registration Statement on Form S-1 (File
No. 333-16335))
10.8 Home Savings Bank, SSB Directors Retirement Plan Agreement with
Marshall Singleton (Incorporated herein by reference from Exhibit
10.10 to the Company's Registration Statement on Form S-1 (File
No. 333-16335))
10.9 First South Bancorp, Inc. 1997 Stock Option Plan, as amended
(Incorporated herein by reference from Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the Year Ended September
30, 1999 (File No. 0-22219).
10.10 Employment Agreement between NewSouth Bank and H.D. Reaves, Jr.
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers, LLP
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. There were no Current Reports on Form 8-K filed
by the Company during the fourth quarter of fiscal year 2000.
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-K or incorporated by
reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT. There
are no other financial statements and financial statement schedules which were
excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which
are required to be included herein.
<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.
FIRST SOUTH BANCORP, INC.
December 20, 2000
By: /s/ Thomas A. Vann
-----------------------------------
Thomas A. Vann
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Thomas A. Vann December 20, 2000
--------------------------------------------
Thomas A. Vann
President and Director
(Principal Executive Officer)
/s/ William L. Wall December 20, 2000
--------------------------------------------
William L. Wall
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ Edmund T. Buckman, Jr. December 20, 2000
--------------------------------------------
Edmund T. Buckman, Jr.
Director
/s/ Linley H. Gibbs, Jr. December 20, 2000
--------------------------------------------
Linley H. Gibbs, Jr.
Director
/s/ Frederick N. Holscher December 20, 2000
--------------------------------------------
Frederick N. Holscher
Director
/s/ Frederick H. Howdy December 20, 2000
--------------------------------------------
Frederick H. Howdy
Director
/s/ Charles E. Parker, Jr. December 20, 2000
--------------------------------------------
Charles E. Parker, Jr.
Director
/s/ Marshall T. Singleton December 20, 2000
--------------------------------------------
Marshall T. Singleton
Director
/s/ H. D. Reaves, Jr. December 20, 2000
--------------------------------------------
H. D. Reaves, Jr.
Director
