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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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Commission file number 000-23465
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CODDLE CREEK FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
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North Carolina 56-2045998
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
347 North Main Street
Mooresville, North Carolina 28115
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(Address of principal executive office) (Zip Code)
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(704) 664-4888
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(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response 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 ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant (excluding five percent owners as non-affiliates). The aggregate
market value shall be computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a specified date
within 60 days prior to the date of filing. $23,072,148 common stock, no par
value, based on the closing price of such common stock on March 3, 1999.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 699,156 shares of common
stock, no par value, outstanding at March 3, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Coddle Creek Financial Corp. for the year ended
December 31, 1999 (the "1999 Annual Report"), are incorporated by reference into
Part I, Part II and Part IV.
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders of
Coddle Creek Financial Corp. to be held on April 20, 2000, are incorporated by
reference into Part III.
Portions of the Registration Statement of Coddle Creek Financial Corp. On Form
S-1, Registration No. 333-35497, dated September 12, 1997, as amended on
November 5 and 10, 1997, are incorporated by reference into Part IV.
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PART I
ITEM 1. BUSINESS
General
Prior to December 30, 1997, Mooresville Savings Bank, Inc., S.S.B. (the
"Bank") operated as a mutual North Carolina-chartered savings bank. On December
30, 1997, the Bank converted from a North Carolina-chartered mutual savings bank
to a North Carolina-chartered stock savings bank (the "Conversion"). In
connection with the Conversion, all of the issued and outstanding capital stock
of the Bank was acquired by Coddle Creek Financial Corp., a North Carolina
corporation (the "Company") which was organized to become the holding company
for the Bank. At that time, the Company had an initial public offering of its
common stock, no par value (the "Common Stock").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's office is located at 347
North Main Street, Mooresville, North Carolina. The Company's activities
consist of investing the proceeds of its initial public offering which were
retained at the holding company level, holding the indebtedness outstanding from
the Mooresville Savings Bank, Inc., SSB Employee Stock Ownership Plan (the
"ESOP") and owning the Bank. The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP with
respect to the ESOP loan. In addition, the Company will receive any dividends
which are declared and paid by the Bank on its capital stock.
At December 31, 1999, the Company and the Bank had total assets of $143.9
million, net loans of $124.9 million, deposits of $90.6 million and
stockholders' equity of $34.4 million.
The Bank was originally chartered in 1937. It has been a member of the
Federal Home Loan Bank ("FHLB") system, and its deposits have been federally
insured since 1947. The Bank's deposits are insured by the Savings Association
Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the
"FDIC") to the maximum amount permitted by law. The Bank conducts business
through three (3) full service offices in Mooresville, Cornelius and
Huntersville, North Carolina.
The Bank is engaged primarily in the business of attracting retail deposits
from the general public and using such deposits to make mortgage loans secured
by real estate. The Bank makes one-to-four family residential real estate
loans, loans secured by multi-family residential and commercial property,
construction loans and equity line of credit loans. The Bank also makes loans
which are not secured by real property, such as loans secured by pledged deposit
accounts and various types of secured and unsecured consumer loans. The Bank's
primary source of revenue is interest income from its lending activities. The
Bank's other major sources of revenue are interest and dividend income from
investments, interest income from its interest-earning deposit balances in other
depository institutions, and transactions and fee income from its lending and
deposit activities. The major expenses of the Bank are interest on deposits and
general and administrative expenses such as employee compensation and benefits,
federal deposit insurance premiums, data processing expenses and occupancy
expenses.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the North Carolina Administrator, Savings
Institutions Division, North Carolina Department of Commerce (the
"Administrator"). Deposit flows and cost of funds are influenced by interest
rates on competing investments and general market rates of interest. Lending
activities are affected by the demand for financing of real estate and other
types of loans, which in turn are affected by the interest rates at which such
financing may be offered and other factors affecting local demand and
availability of funds.
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At December 31, 1999, the Company and the Bank had a total of 30 full-time
employees and 2 part-time employees.
The Company has no operations and conducts no business of its own other
than owning the Bank, investing its portion of the net proceeds received in the
Conversion and lending funds to the ESOP. Accordingly, the discussion of the
business which follows in the Form 10-K concerns the business conducted by the
Bank, unless otherwise indicated.
Lending Activities
General. The Bank is engaged primarily in the business of attracting
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. The Bank's primary source of revenue is interest and
fee income from its lending activities, consisting primarily of mortgage loans
for the purchase or refinancing of one-to-four family residential real property
located in its primary market area. The Bank also makes loans secured by multi-
family and nonresidential properties, construction loans, equity line loans,
savings account loans and various types of secured and unsecured consumer loans.
Approximately 97% of the Bank's gross loan portfolio is secured by real estate.
As of December 31, 1999, all of the loans in the Bank's real estate loan
portfolio were secured by properties in North Carolina. On December 31, 1999,
the Bank's largest single outstanding loan had a balance of approximately
$654,000. This loan was performing in accordance with its original terms. In
addition to interest earned on loans, the Bank receives fees in connection with
loan originations, loan servicing, loan modifications, late payments, loan
assumptions and other miscellaneous services. The Bank generally does not sell
its loans; both fixed and adjustable rate loans are originated with the
intention that they will be held in the Bank's loan portfolio.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $124.9 million at December 31, 1999 representing 86.8% of the
Bank's total assets at such date. At December 31, 1999, 80% of the Bank's gross
loan portfolio was composed of one-to-four family residential mortgage loans.
Multi-family residential and non-residential real estate loans represented 3.2%
on such date. Construction loans and equity line lines represented 7.5% and
6.3%, respectively, of the Bank's loan portfolio, before net items, on such
date. As of December 31, 1999, 23.5% of the loans in the Bank's loan portfolio,
before net items, had adjustable interest rates.
One to Four Family Residential Real Estate Lending. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate mortgage loans to enable borrowers to purchase or
refinance one-to-four family residential real property. Consistent with the
Bank's emphasis on being a community-oriented financial institution, it is and
has been the Bank's strategy to focus its lending efforts in its primary market
area. On December 31, 1999, approximately 82.4% of the Bank's real estate loan
portfolio, before net items, consisted of one-to-four family residential real
estate loans. These include both loans secured by detached single-family
residences and condominiums and loans secured by housing containing not more
than four separate dwelling units. Of such loan amounts, 11.7% had adjustable
interest rates.
Adjustable rate loans are generally considered to involve a greater degree
of credit risk than fixed rate loans because borrowers may have difficulty
meeting their payment obligations if interest rates and required payment amounts
increase substantially. Substantially all of the fixed-rate loans in the Bank's
mortgage loan portfolio have due on sale provisions allowing the Bank to declare
the unpaid balance due and payable in full upon the sale or transfer of an
interest in the property securing the loan.
Historically, the Bank has not originated its one-to-four family
residential mortgage or other loans with the intention that they will be sold in
the secondary market. Accordingly, the Bank originates fixed rate one-to-four
family residential real estate loans which satisfy the Bank's underwriting
requirements and are tailored to its local community, but do not necessarily
satisfy various technical FHLMC and FNMA underwriting requirements and purchase
requirements not related to documentation.
Although the Bank believes that many of its one to four family residential
loans could be sold in the secondary market, some of such nonconforming loans
could be sold only after the Bank incurred certain costs and/or discounted
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the purchase price. As a result, the Bank's loan portfolio is less liquid than
would be the case if it was composed entirely of loans originated in conformity
with secondary market requirements.
As of December 31, 1999, the Bank had 88 loan relationships with individual
borrowers in excess of $200,000, totaling approximately $24.6 million or 18.7%
of the Bank's total loan portfolio. The majority of these loans are secured by
residential real estate located near or on Lake Norman, North Carolina, which is
located in parts of Catawba, Iredell, Lincoln and Mecklenburg counties. While
these loans are currently performing according to the terms of their loan
documents, an economic downturn in the Bank's primary market area, in which Lake
Norman is located, could have an adverse effect on the performance of these
loans.
See also Note 3 of the "Notes to Consolidated Financial Statements" in the
1999 Annual Report.
Investment Securities
Interest and dividend income from investment securities generally provides
the second largest source of income to the Company and the Bank after interest
on loans. In addition, the Bank receives interest income from deposits in
other financial institutions.
At December 31, 1999, the Company's investment portfolio totaled
approximately $12.7 million and consisted of U.S. government and agency
securities, FHLB and municipal bonds, equity securities, interest-earning
deposits and certificates of deposit in other financial institutions and stock
of the FHLB of Atlanta.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of December 31, 1999, the Bank's investment in stock of the FHLB of Atlanta was
$1.1 million.
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities. The
Bank's current investment policy provides that investment decisions will be made
by George W. Brawley, Jr., President and Chief Executive Officer, or by Dale W.
Brawley, Executive President and Treasurer, in his absence, and reviewed monthly
by the Board of Directors. The investment policy provides that the objectives
of the investment portfolio are to: (i) establish an acceptable level of
interest rate and credit risk for all investments; (ii) generate an acceptable
rate of return on investments; (iii) provide for adequate levels of liquidity
for the Bank; and (iv) provide guidance to management by the Board of Directors
on the investments desired for the Bank.
Permitted investments include FHLB daily time deposits, insured
certificates of deposit, government securities and government agency securities.
The investment policy also permits investment in the general obligations of
municipalities primarily located within North Carolina. Such general
obligations are considered less risky since they are repaid with taxes collected
by the municipality, not with revenues from a particular project. At December
31, 1999, $2.2 million or 17.5% of the Company's investment portfolio consisted
of municipal bonds issued by municipalities located in North Carolina, all of
which had an A or above rating by Moodys Investment Service.
At December 31, 1999, the market value of the Company's investment
securities available for sale and held to maturity, excluding interest-earning
deposits, certificates of deposit and stock of the FHLB of Atlanta (all of which
had a total market value of $8.1 million) were $3.4 million and $1.2 million,
respectively.
See Note 2 of "Notes to Consolidated Financial Statements" in the 1999
Annual Report.
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Deposits and Borrowings
Deposits. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, interest
income and advances from the FHLB of Atlanta and otherwise from its operations.
Loan repayments are a relatively stable source of funds while deposit inflows
and outflows may be significantly influenced by general interest rates and money
market conditions.
The Bank attracts both short-term and long-term deposits from the general
public by offering a variety of accounts and rates. The Bank offers passbook
savings accounts, statement savings accounts, negotiable order of withdrawal
("NOW") accounts, money market demand accounts, non-interest-bearing accounts,
and fixed interest rate certificates with varying maturities. At December 31,
1999, 65.1% of the Bank's deposits consisted of certificate accounts, 11.2%
consisted of passbook savings accounts, 21.9% consisted of interest-bearing
transaction (NOW and Money Market) accounts and 1.8% consisted of noninterest-
bearing transaction accounts. Deposit flows are greatly influenced by economic
conditions, the general level of interest rates, competition, and other factors,
including the restructuring of the thrift industry. The Bank's savings deposits
traditionally have been obtained primarily from its primary market area. The
Bank utilizes traditional marketing methods to attract new customers and savings
deposits, including print, television and radio media advertising and direct
mailings. The Bank does not advertise for deposits outside of its local market
area or utilize the services of deposit brokers.
At December 31, 1999, 1998 and 1997, the Bank's deposits totaled $90.6
million, $87.6 million and $99.4 million, respectively.
See Note 5 to the "Notes to Consolidated Financial Statements" in the 1999
Annual Report.
Borrowings. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. The Bank's principal
source of long-term borrowings are advances from the FHLB of Atlanta. The FHLB
system functions in a reserve credit capacity for savings institutions. As a
member, the Bank is required to own capital stock in the FHLB of Atlanta and is
authorized to apply for advances from the FHLB of Atlanta on the security of
that stock and a floating lien on certain of its real estate secured loans and
other assets. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's net worth or on the FHLB
of Atlanta's assessment of the institution's creditworthiness. At December 31,
1999, the Bank had outstanding advances from the FHLB equal to $5,000,000.
Interest on such advances is payable at a 6.24% interest rate with the balance
due on November 30, 2000. Advances from the FHLB are collateralized by the
Bank's stock in the FHLB and qualifying first mortgage loans.
The Company has a note payable outstanding for $10,500,000 at December 31,
1999. Interest installment payments are due quarterly at the prime rate less
1.25% with the principal balance due February 28, 2001. The note is
collateralized by the Bank's common stock.
See Note 6 to the "Notes to Consolidated Financial Statements" in the 1999
Annual Report.
Subsidiaries
The Company has no subsidiaries other than the Bank. The Bank has no
subsidiaries.
Results of Operations
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting of deposits and FHLB advances. The Bank's
operations are affected to a much lesser degree by non-interest income, such as
transaction and other service fee income, and other sources of income. The
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Bank's net income is also affected by, among other things, provisions for loan
losses and operating expenses. The Bank's principal operating expenses, aside
from interest expense, consist of compensation and employee benefits, office
occupancy costs, data processing expenses and federal deposit insurance
premiums. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the attendant actions of
regulatory authorities.
Market Area
The Bank's primary market area consists of the communities in an
approximately fifteen (15) mile radius around its headquarters office in
Mooresville, North Carolina. This area includes portions of Iredell,
Mecklenburg, Lincoln, Catawba, Rowan and Cabarrus counties in North Carolina.
Mooresville is located only thirty (30) miles north of Charlotte, North Carolina
and the Bank's primary market area is and will continue to be significantly
affected by its close proximity to this major metropolitan area.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. Major employers include Lake Norman Regional Medical Center,
Panasonic, and Mashushita Compressor Corporation.
Competition
The Bank has operated in the Mooresville community for more than 60 years
and is the only financial institution headquartered in Mooresville. However,
the Bank faces strong competition both in attracting deposits and making real
estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions, brokerage
firms and commercial banks located in its primary market area, including large
financial institutions which have greater financial and marketing resources
available to them. Two national money center commercial banks are currently
headquartered in Charlotte, North Carolina, which is only 30 miles from the
Bank's primary market area. As of December 31, 1999, there were 8, 9 and 8
depository institutions with 14, 10 and 9 offices in Mooresville, Cornelius and
Huntersville, North Carolina, respectively. Based upon June 30, 1999
comparative data, the Bank had 20.2% and 7.11% of the deposits in Mooresville
and Iredell County, respectively. As a result of this intense competition, the
Bank's branch offices, excluding the Mooresville office, have lower levels of
deposits than the industry average.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. While the Bank's market share of deposits has decreased in recent
years, its deposit base has grown principally due to economic growth in the
Bank's market area. The ability of the Bank to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The
Bank competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
Supervision and Regulation
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
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Regulation of the Company
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA does not place territorial restrictions on the
activities of such non-banking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all acceptable capital standards as of the
time the institution fails to comply with such capital restoration plan. Under
a policy of the Federal Reserve with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
Bank Insurance Fund (the "BIF") as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both.
The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period unless the Company
(i) both before and after the redemption satisfies capital requirements for
"well capitalized" state member
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banks, (ii) received a one or two rating in its last examination, and (iii) is
not the subject of any unresolved supervisory issues. As a result of the
Company's ownership of the Bank, the Company is registered under the savings
bank holding company laws of North Carolina. Accordingly, the Company is also
subject to regulation and supervision by the Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
"Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-
based capital guidelines, the Federal Reserve has adopted a minimum Tier I
capital (leverage) ratio, under which a bank holding company must maintain a
minimum level of Tier I capital to average total consolidated assets of at least
3% in the case of a bank holding company which has the highest regulatory
examination rating and is not contemplating significant growth or expansion.
All other bank holding companies are expected to maintain a Tier I capital
(leverage) ratio of at least 1% to 2% above the stated minimum.
Dividend and Repurchase Limitations. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will pay any
taxable dividend or make any other taxable distribution to its stockholders in
excess of their current or retained earnings. Also, the Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain notice requirements with the Administrator in addition to
other requirements and limitations of North Carolina corporate law, except as
set forth in this paragraph, neither the Administrator nor the FDIC have
promulgated any regulations specifically limiting the right of the Company to
pay dividends and repurchase shares. However, the ability of the Company to pay
dividends or repurchase shares may be dependent upon the Company's receipt of
dividends from the Bank. The Bank's ability to pay dividends is limited. See "
- -- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
In 1999, the Company paid a return of capital dividend to its shareholders
in the amount of $17.18 per share. All appropriate notices were delivered prior
to paying the return of capital.
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act") and will not deregister the Common Stock for a period of three
years following the completion of the Conversion. As a result of such
registration, the proxy and tender offer rules, insider trading reporting
requirements, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Company.
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Regulation of the Bank
General. Federal and state legislation and regulation significantly affect
the operations of federally insured savings institutions and other federally
regulated financial institutions. The operations of regulated depository
institutions, including the Bank, is subject to changes in applicable statutes
and regulations from time to time. Such changes may or may not be favorable to
the Bank.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) establish certain collateral requirements for losses to
affiliates; (ii) limit the extent to which the Bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such the Bank's capital 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 (iii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of
<PAGE>
a savings bank, and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law 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 stockholders who own more than 10% of a savings bank, and
their respective affiliates, unless such loan is approved in advance by a
majority of the disinterested directors of the board of directors of the Bank.
Any "interested" director may not participate in the voting. The Federal Reserve
has prescribed 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 unimpaired capital and unimpaired surplus
(up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve
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 and not involve more than the normal risk of repayment or present
other unfavorable features. Section 22(h) also generally prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Deposit Insurance Assessments. The Bank is also subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by the Savings Association Insurance Fund ("SAIF") members such as the
Bank shall be as specified in a schedule required to be issued by the FDIC.
Effective January 1, 1997, the FDIC equalized the assessment rates for SAIF
members as well as those institutions with deposits insured by the Bank
Insurance Fund ("BIF"). Thus, for the semi-annual period beginning January 1,
1997, the assessments imposed on all FDIC deposits for deposit insurance have an
effective rate ranging from 0 to 27 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
However, because legislation enacted in 1996 requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation, for the quarters ended or
ending December 31, 1999, March 31, 2000 and June 30, 2000, the FDIC has
assessed or is assessing BIF-insured deposits an additional 1.184, 2.120, and
2.08 basis points per $100 of deposits, respectively, and SAIF-insured deposits
an additional 5.920, 2.120, and 2.08 basis points per $100 of deposits,
respectively, to cover those obligations. Based on the current financial
condition and capital levels of the Bank, the Bank does not expect that the FDIC
insurance assessments will have a material impact on the Bank's future earnings.
Community Reinvestment Act. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act, as amended (the "CRA"). A purpose of
the CRA is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. Financial institutions' compliance with the CRA is regularly
evaluated by their regulatory agencies. Under recently adopted regulations,
institutions are first evaluated and rated under three categories: a lending
test, an investment test and a service test. For each of these three tests, the
institution is 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 are used to determine the overall composite CRA rating. The composite
ratings are "outstanding," "satisfactory," "needs to improve" or "substantial
non-compliance."
During the Bank's last compliance examination the Bank received a
"satisfactory" 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 and 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 could result in the denial of such applications. For further
discussion regarding the CRA, See "-- The Gram-Leach-Bliley Act."
Capital Requirements Applicable To The Bank. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any
<PAGE>
significant growth, are required to maintain a ratio of 1% or 2% above the
stated minimum, with an absolute minimum leverage ratio of not less than 4%. The
FDIC also requires the Bank to have a ratio of total capital to risk-weighted
assets, including certain off-balance sheet activities, such as standby letters
of credit, of at least 8%. At least half of the total capital is required to be
Tier I capital. The remainder ("Tier II capital") may consist of a limited
amount of subordinated debt, certain hybrid capital instruments, other debt
securities, certain types of preferred stock and a limited amount of loan loss
allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
Bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At December 31,
1999, the Bank had a leverage ratio of 22.1%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At December 31, 1999, the Bank complied with each of the capital
requirements of the FDIC and the Administrator.
Each federal banking agency is required to establish risk-based capital
standards that take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on multifamily mortgages. On
August 2, 1995, the federal banking agencies issued a joint notice of adoption
of final risk based capital rules to take account of interest rate risk. The
final regulation required an assessment of the need for additional capital on a
case-by-case basis, considering both the level of measured exposure and
qualitative risk factors. The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. Notwithstanding the limits just
described, savings institutions may make loans-to-one-borrower, for any purpose,
in an amount up to $500,000. A savings institution is also authorized to make
loans-to-one-borrower to develop domestic residential housing units, not to
exceed the lesser of $30 million or 30% of the savings institution's net worth,
provided that the aggregate amount of loans made under this authority does not
exceed 150% of net worth. These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
As of December 31, 1999, the largest aggregate amount of loans which the
Bank had to any one borrower was $721,000. These loans were performing in
accordance with their original terms as of December 31, 1999. The Bank had no
loans outstanding which management believes violate the applicable loans-to-one-
borrower limits. The Bank does not believe that the loans-to-one-borrower
limits will have a significant impact on its business, operations and earnings.
Limitations on Rates Paid for Deposits. Regulations promulgated by the
FDIC place limitations on the ability of insured depository institutions to
accept, renew or roll over deposits by offering rates of interest which are
<PAGE>
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations, "well
capitalized" depository institutions may accept, renew or roll such deposits
over without restriction, "adequately capitalized" depository institutions may
accept, renew or roll such deposits over with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The definitions
of "well capitalized," "adequately capitalized" and "undercapitalized" are the
same as the definitions adopted by the FDIC to implement the corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.
See "--Prompt Corrective Regulatory Action." As of December 31, 1999, the Bank
was considered "well capitalized" and, thus, was not subject to the limitations
on rates payable on its deposits.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1999, the Bank was in compliance with
this requirement.
Each FHLB is required to contribute a portion of its reserves and undivided
profits to fund the principal and a portion of the interest on certain bonds and
certain other obligations which are used to fund the resolution of troubled
savings association cases, and to transfer a percentage of its annual net
earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1999, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of an insured institution without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired, among other things, upon the acquisition of more than 25% of any class
of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is
not required for (i) any offer with a view toward public resale made exclusively
to the Bank or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of the Bank by a corporation whose ownership is or will
be substantially the same as the ownership of the Bank, provided that the offer
or acquisition is made more than one year following the consummation of the
Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second
<PAGE>
and third years after the Conversion, the Administrator may approve such an
acquisition upon a finding that (i) the acquisition is necessary to protect the
safety and soundness of the Company and the Bank or the Boards of Directors of
the Company and the Bank support the acquisition and (iii) the acquiror is of
good character and integrity and possesses satisfactory managerial skills, the
acquiror will be a source of financial strength to the Company and the Bank and
the public interests will not be adversely affected.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. At December 31, 1999, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 10.73%.
Prompt Corrective Regulatory Action. The Federal Deposit Insurance
Corporation Improvement Act of 1991 provided the federal banking agencies with
broad powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to the Bank, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating and which is not experiencing or anticipating significant growth). An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an
institution with the highest examination rating and which is not experiencing or
anticipating significant growth); (B) "significantly undercapitalized" if the
institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of
less than 3% and (C) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets equal to or less than 2%. The Bank is
considered to be "well capitalized" under the rules set forth above.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina
adopted nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after
<PAGE>
its conversion from mutual to stock form, must obtain the written approval from
the Administrator before declaring or paying a cash dividend on its capital
stock in an amount in excess of one-half of the greater of (i) the institution's
net income for the most recent fiscal year end, or (ii) the average of the
institution's net income after dividends for the most recent fiscal year end and
not more than two of the immediately preceding fiscal year ends, if applicable.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
In connection with the Conversion, the Bank has agreed with the FDIC that,
during the first three years after the Conversion, neither the Company nor the
Bank will pay any taxable dividend or make any other taxable distribution in
excess of their current and retained earnings. The Bank has also agreed to
notify the FDIC before making a return of capital during the first three years
following the Conversion.
See Note 8 to the "Notes to Consolidated Financial Statements" in the 1999
Annual Report.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on an alternating basis with the FDIC. In addition, the Administrator
is required to conduct an examination of any institution when he has good
<PAGE>
reason to believe that the standing and responsibility of the institution is of
doubtful character or when he otherwise deems it prudent. The Administrator is
empowered to order the revocation of the license of an institution if he finds
that it has violated or is in violation of any North Carolina law or regulation
and that revocation is necessary in order to preserve the assets of the
institution and protect the interests of its depositors. The Administrator has
the power to issue cease and desist orders if any person or institution is
engaging in, or has engaged in, any unsafe or unsound practice or unfair and
discriminatory practice in the conduct of its business or in violation of any
other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans without the prior
approval of the Administrator. In addition to such to such lending authority,
North Carolina-chartered savings banks are authorized to invest funds, in excess
of loan demand, in certain statutorily permitted investments, including but not
limited to (i) obligations of the United States, or those guaranteed by it; (ii)
obligations of the State of North Carolina; (iii) bank demand or time deposits;
(iv) stock or obligations of the federal deposit insurance fund or a FHLB; (v)
savings accounts of any savings institution as approved by the board of
directors; and (vi) stock or obligations of any agency of the State of North
Carolina or of the United States or of any corporation doing business in North
Carolina whose principal business is to make education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
<PAGE>
The Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the "GLB Act") was signed into law on November
12, 1999 to remove barriers separating banking, securities and insurance firms
and to make other reforms. Certain provisions of the GLB Act were effective
immediately upon signing; other provisions generally take effect between 120
days and 18 months following enactment.
Financial Affiliations. Title I of the GLB Act facilitates affiliations
among banks, securities firms and insurance companies. Financial organizations
may structure new financial affiliations through a holding company structure, or
a financial subsidiary (with limitations on activities and appropriate
safeguards). A bank holding company may now qualify as a financial holding
company and expand into a wide variety of services that are financial in nature,
provided that its subsidiary depository institutions are well-managed, well-
capitalized and have received a "satisfactory" rating on their last Community
Reinvestment Act ("CRA") examination. A bank holding company which does not
qualify as a financial holding company under the GLB Act is generally limited in
the types of activities in which it may engage to those that the Federal Reserve
Board had recognized as permissible for a bank holding company prior to the date
of enactment of the GLB Act.
National banks remain limited in the scope of activities they may exercise
directly within the bank, but an eligible national bank may have a financial
subsidiary that exercises many of the expanded financial services authorized for
a financial holding company. A national bank cannot engage in merchant banking
either directly or through a subsidiary, but a financial holding company is
authorized to have an affiliate company that engages in merchant banking.
State banks may have financial subsidiaries that, upon meeting eligibility
criteria, can engage in activities permitted for financial subsidiaries of
national banks.
Functional Regulation. The GLB Act designates the Federal Reserve as the
overall umbrella supervisor of the new financial services holding companies.
The GLB Act adopts a system of functional regulation where the primary regulator
is determined by the nature of activity rather than the type of institution.
Under this principle, securities activities are regulated by the SEC and other
securities regulators, insurance activities by the state insurance authorities,
and banking activities by the appropriate banking regulator.
Insurance. The GLB Act reaffirms that states are the regulators for
insurance activities of all persons, including acting as the functional
regulator for the insurance activities of federally-chartered banks. However,
states may not prevent depository institutions and their affiliates from
conducting insurance activities.
Privacy. The GLB Act imposes restrictions on the ability of financial
services firms to share customer information with nonaffiliated third parties.
The GLB Act: 1) requires financial services firms to establish privacy policies
and disclose them annually to customers, explaining how nonpublic personal
information is shared with affiliates and third parties; 2) directs regulatory
agencies to adopt standards for sharing customer information; 3) permits
customers to prohibit ("opt-out") of the disclosure of personal information to
nonaffiliated third parties; 4) prohibits the sharing with marketers of credit
card and other account numbers; and, 5) prohibits "pretext" calling. The
privacy provisions do allow, however, a community bank to share information
with third parties that sell financial products, such as insurance companies or
securities firms.
Other. (1) The GLB Act reforms the Federal Home Loan Bank System to
provide small banks with greater access to funds for making loans to small
business and small farmers. (2) The GLB Act obligates operators of automated
teller machines ("ATMs") to provide notices to customers regarding surcharge
practices. (3) The GLB Act provides that financial institutions with less than
$250 million in assets will normally be examined for compliance with the CRA
only once every five years if they maintain an "outstanding" rating and once
every four years they if have a "satisfactory" rating. CRA agreements between
financial institutions and community groups must be disclosed and reported to
the public.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The following table sets forth the location of the Bank's principal office
in Mooresville, North Carolina and its full service branch office in Cornelius
and Huntersville, North Carolina, as well as certain other information relating
to these offices as of December 31, 1999.
<TABLE>
<CAPTION>
Owned
Net Book Value or Deposits
Address of Property leased (In Thousands)
- ----------------------------------------------- -------------------- -------------------- ------------------------
<S> <C> <C> <C>
Mooresville: $215,000 Owned $76,963
347 North Main Street
Mooresville, North Carolina 28115
Cornelius: $281,000 Owned $ 7,548
20209 Highway 73 West
Cornelius, North Carolina 28031
Huntersville: $185,000 Owned $ 6,052
401 Gilead Road
Huntersville, North Carolina 28078
$681,000 $90,563
</TABLE>
In addition, the Bank owns a 1.24 acre lot located at Highway 150 West, 239
West Plaza Drive, Mooresville, North Carolina, purchased in 1988 for future
expansion purposes. The net book value of this property at December 31, 1999
was $65,000. The total net book value of the Bank's furniture, fixtures and
equipment on December 31, 1999 was $366,000. The properties are considered by
the Bank's management to be in good condition and adequately covered by
insurance.
See Note 4 to the "Notes To Consolidated Financial Statements" to the 1999
Annual Report.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on page 57 in the Company's 1999 Annual Report, which section is incorporated
herein by reference. See "Item 1. BUSINESS-Regulation of the Company --
Dividend and Repurchase Limitations, and -- Regulation of the Bank--Restrictions
on Dividends and Other
<PAGE>
Capital Distributions" above for regulatory restrictions which limit the ability
of the Company to pay dividends to its shareholders and the Bank to pay
dividends to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Consolidated Financial Data" on pages 2 and 3 of the Company's 1999
Annual Report which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
See the information set forth under Item 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis of
Financial Condition and Operating Results" on pages 4 through 17 in the
Company's 1999 Annual Report, which section is incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 6 through 8 of the Company's 1999 Annual Report are herein
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages 19 through 55 of the Company's 1999 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on pages 6 through 8 of the Proxy Statement of
the 2000 Annual Meeting of Stockholders (the "Proxy Statement") and "Proposal 1
- - Election of Directors - Executive Officers" on pages 9 and 10 of the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" on
pages 8 and 9 and " - Executive Compensation" on pages 10 through 19 of the
Proxy Statement, which sections are incorporated herein by reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 3
through 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on page 21 of the Proxy Statement,
which section is incorporated herein by reference. Also, see Note 13 to the
"Notes of Consolidated Financial Statements" of the 1999 Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in the Company's 1999
Annual Report which is attached hereto as Exhibit (13) and
incorporated herein by reference) including the following:
(a) Independent Auditors' Report;
(b) Consolidated Statements of Financial Condition as of December 31,
1999 and 1998;
(c) Consolidated Statements of Income and Comprehensive Income for
the Years Ended December 31, 1999, 1998 and 1997;
(d) Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997;
(e) Consolidated Statements of Stockholder's Equity for the Years
Ended December 31, 1999, 1998 and 1997;
(f) Notes to Consolidated Financial Statements.
14(a)2. Consolidated Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
14(a)3. Exhibits
<TABLE>
<S> <C>
Exhibit (3)(i) Certificate of Incorporation, incorporated herein by
reference to Exhibit (3)(i) to the Registration
Statement on Form S-1, Registration No. 333-35497,
dated September 12, 1997, and amended on November 5 and
10, 1997.
Exhibit (3)(ii) Bylaws, incorporated herein by reference to Exhibit
(3)(ii) to the Registration Statement on Form S-1,
Registration No. 333-35497, dated September 12, 1997,
and amended on November 5 and 10, 1997.
Exhibit (4) Specimen Stock Certificate, incorporated herein by
reference to Exhibit (4) to the Registration Statement
on Form S-1, Registration No. 333-
</TABLE>
<PAGE>
<TABLE>
<S> <C>
35497, dated September 12, 1997, and amended on
November 5 and 10, 1997.
Exhibit (10)(a) Employment Agreement between Mooresville Savings
Bank, Inc., S.S.B. and George W. Brawley, Jr. dated
December 30, 1997, as amended on December 15, 1998,
incorporated herein by reference to Exhibit 10 (a) to
the Company's Form 10-K for the year ended December 31,
1998.
Exhibit (10)(b) Employment Agreement between Mooresville Savings
Bank, Inc., S.S.B. and Dale W. Brawley dated December
30, 1997, as amended on December 15, 1998, incorporated
herein by reference to Exhibit 10 (b) to the Company's
Form 10-K for the year ended December 31, 1998.
Exhibit (10)(c) Employment Agreement between Mooresville Savings
Bank, Inc., S.S.B. and Billy R. Williams dated December
30, 1997, as amended on December 15, 1998, incorporated
herein by reference to Exhibit 10 (c) to the Company's
Form 10-K for the year ended December 31, 1998.
Exhibit (10)(d) Employee Stock Ownership Plan and Trust of
Mooresville Savings Bank, Inc., S.S.B., incorporated by
reference to Exhibit 10(d) to the Company's Form 10-K
for the year ended December 31, 1997.
Exhibit (10)(e) Mooresville Savings Bank, Inc., S.S.B. Severance
Plan, incorporated herein by reference to Exhibit 10(f)
to the Registration Statement on Form S-1, Registration
No. 333-35497, dated September 12, 1997, and as amended
on November 5 and 10, 1997.
Exhibit (10)(f) Capital Maintenance Agreement between Coddle Creek
Financial Corp. and Mooresville Savings Bank, Inc.,
S.S.B., incorporated by reference to Exhibit 10(f) to
the Company's Form 10-K for the year ended December 31,
1997.
Exhibit (10)(g) Management Recognition Plan of Mooresville Savings
Bank, Inc., S.S.B., incorporated herein by reference to
Exhibit 10(g) to the Company's Form 10-K for the year
ended December 31, 1998.
Exhibit (10)(h) Stock Option Plan of Coddle Creek Financial Corp.,
incorporated herein by reference to Exhibit 10(h) to
the Company's Form 10-K for the year ended December 31,
1998.
Exhibit (10)(i) (i) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Donald R. Belk, George W. Brawley
and Claude U. Voils, Jr. dated September 3, 1979, as
amended and restated September 8, 1997 and as amended
on December 16, 1998, incorporated herein by reference
to Exhibit 10(i)(i) to the Company's Form 10-K for the
year ended December 31, 1998.
(ii) Retirement Payment Agreement between Mooresville
Savings Bank, Inc., S.S.B. and Calvin E. Tyner dated
September 3, 1979, as amended on September 8, 1997,
incorporated herein by reference to Exhibit 10(i)(ii)
to the Company's Form 10-K for the year ended December
31, 1998.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(iii) Amended and Restated Director's Deferred
Compensation Agreements between Mooresville Savings
Bank, Inc., S.S.B. and each of Donald R. Belk, George
W. Brawley, Jr., and Claude U. Voils, Jr. dated January
1, 1985, as amended and restated on March 31, 1988 and
September 8, 1997 and as amended for Messrs. Belk,
Brawley, and Voils on December 16, 1998, incorporated
herein by reference to Exhibit 10(i)(iii) to the
Company's Form 10-K for the year ended December 31,
1998.
(iv) Amended and Restated Director's Deferred
Compensation Agreements between Mooresville Savings
Bank, Inc., S.S.B. and each of Donald R. Belk, George
W. Brawley, Jr.., Calvin E. Tyner, and Claude U. Voils,
Jr. dated December 1, 1985, as amended and restated on
September 8, 1997 and as amended for Messrs. Belk,
Brawley and Voils on December 16, 1998, incorporated
herein by reference to Exhibit 10(i)(iv) to the
Company's Form 10-K for the year ended December 31,
1998.
(v) Amended and Restated Retirement Plan Agreements
between Mooresville Savings Bank, Inc., S.S.B. and each
of George W. Brawley, Jr., Donald R. Belk, Claude U.
Voils, Jr. and Calvin E. Tyner dated November 1, 1993,
as amended and restated on September 15, 1997, and as
amended for Messrs. Brawley, Belk, and Voils on
December 16, 1998, incorporated herein by reference to
Exhibit 10(i)(v) to the Company's Form 10-K for the
year ended December 31, 1998.
(vi) Amended and Restated Retirement Payment Agreements
between Mooresville Savings Bank, S.S.B. and George W.
Brawley, Jr. dated December 1, 1990, as amended and
restated on September 8, 1997 and as amended on
December 16, 1998, incorporated herein by reference to
Exhibit 10(i)(vi) to the Company's Form 10-K for the
year ended December 31, 1998.
(vii) Amended and Restated Retirement Payment Agreement
between Mooresville Savings Bank, S.S.B. and Dale W.
Brawley dated November 1, 1990, amended and restated on
October 21, 1993, as amended and restated on September
8, 1997, incorporated herein by reference to Exhibit
10(i)(vii) to the Company's Form 10-K for the year
ended December 31, 1998.
(viii) Amended and Restated Retirement Payment
Agreements between (a) Mooresville Savings Bank, Inc.,
S.S.B. and each of Donald R. Belk, George W. Brawley,
Jr., and Claude U. Voils, Jr. dated March 1, 1993, as
amended and restated on September 8, 1997 and as
amended for each of them on December 16, 1998 and (b)
Mooresville Savings Bank, Inc., S.S.B. and Dale W.
Brawley dated February 11, 1993, as amended and
restated on October 21, 1993 and September 8, 1997,
incorporated herein by reference to Exhibit 10(i)(viii)
to the Company's Form 10-K for the year ended December
31, 1998.
(ix) Amended and Restated Retirement Payment Agreements
between Mooresville Savings Bank, Inc., S.S.B. and each
of Dale W. Brawley and George W. Brawley, Jr. dated
August 1, 1993, amended and restated on October 23,
1993 for Dale W. Brawley, as amended and restated on
</TABLE>
<PAGE>
<TABLE>
<S> <C>
September 8, 1997, and as amended for George W. Brawley
on December 16, 1998, incorporated herein by reference
to Exhibit 10(i)(ix) to the Company's Form 10-K for the
year ended December 31, 1998.
(x) Amended and Restated Retirement Payment Agreement
between Mooresville Savings Bank, Inc., S.S.B. and Jack
G. Lawler dated June 1, 1994, as amended and restated
on September 8, 1997, incorporated herein by reference
to Exhibit 10(i)(x) to the Company's Form 10-K for the
year ended December 31, 1998.
(xi) Amended and Restated Salary Continuation
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Dale W. Brawley, George W. Brawley,
Jr., Patricia B. Clontz, and Richard E. Woods dated
September 1, 1984, as amended and restated on September
17, 1997, and as amended for George W. Brawley on
December 16, 1998, incorporated herein by reference to
Exhibit 10(i)(x) to the Company's Form 10-K for the
year ended December 31, 1998.
(xii) Amended and Restated Supplemental Income
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Dale W. Brawley, George W. Brawley,
Jr., Billy R. Williams, Donald G. Jones and Richard E.
Woods dated November 1, 1993, as amended and restated
on September 17, 1997, and as amended for George W.
Brawley on December 16, 1998, incorporated herein by
reference to Exhibit 10(i)(xii) to the Company's Form
10-K for the year ended December 31, 1998.
(xiii) Amended and Restated Salary Continuation
Agreements between Mooresville Savings Bank, S.S.B. and
each of Lucille Doster, Marie Hedrick, Carol Huffman,
Brenda Johnson, D. Glenn Jones, and Nancy Lee Petrea
dated February 1, 1988, as amended and restated on
September 17, 1997, incorporated herein by reference to
Exhibit 10(i)(xiii) to the Company's Form 10-K for the
year ended December 31, 1998.
Exhibit (10)(j) Mooresville Savings Bank, Inc., S.S.B. Non-
Qualified Excess Savings Plan, incorporated herein by
reference to Exhibit 10(i) to the Registration
Statement on Form S-1, Registration No. 333-35497,
dated September 12, 1997, as amended on November 5 and
10, 1997.
Exhibit (11) Statement regarding computation of per share earnings.
Exhibit (12) Statement regarding computation of ratios.
Exhibit (13) 1999 Annual Report to Security Holders.
Exhibit (21) See Item 1. "Business" for discussion of subsidiaries.
Exhibit (23) Consent of Independent Certified Public Accountants.
Exhibit (27) Financial Data Schedule.
14(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 1999.
</TABLE>
<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.
CODDLE CREEK FINANCIAL CORP.
Date: March 24, 2000 By: /s/ George W. Brawley, Jr.
--------------------------
George W. Brawley, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- -------------------------- --------------
<S> <C> <C>
/s/ George W. Brawley, Jr. President, Chief Executive March 24, 2000
- ---------------------------- Officer and Director
George W. Brawley, Jr.
/s/ Dale W. Brawley Executive Vice President, March 24, 2000
- ---------------------------- Treasurer and Director
Dale W. Brawley
/s/ Billy R. Williams Chief Financial Officer, March 24, 2000
- ---------------------------- Chief Accounting Officer,
Billy R. Williams Controller and Secretary
/s/ Donald R. Belk Director March 24, 2000
- ----------------------------
Donald R. Belk
Director March 24, 2000
- ----------------------------
Jack G. Lawler
/s/ Claude U. Voils, Jr. Director March 24, 2000
- ----------------------------
Claude U. Voils, Jr.
/s/ Don E. Mills, Jr. Director March 24, 2000
- ----------------------------
Don E. Mills, Jr.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
Exhibit (11) Statement regarding computation of per share earnings.
Exhibit (12) Statement regarding computation of ratios.
Exhibit (13) 1999 Annual Report to Security Holders.
Exhibit (23) Consent of Independent Certified Public Accountants.
Exhibit (27) Financial Data Schedule.
<PAGE>
EXHIBIT 11
The FASB has issued Statement No. 128, Earnings Per Share. Statement No.
128 requires the presentation of earnings per share by all entries that have
common stock or potential common stock, such as options, warrants and
convertible securities, outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to present basic
earnings per share amounts. Basic per share amounts are computed by dividing
net income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). All other entities are required to present basic
and diluted per share amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the effect
is to reduce the loss or increase the income per common share from continuing
operations. For purposes of this computation, the number of shares of common
stock purchased by the Bank's employee stock ownership plan which have been not
been allocated to participants accounts are not assumed to be outstanding. The
activity from the date of Conversion, December 30, 1997, to the end of the 1997
fiscal year is insufficient to compute a per share amount for that fiscal year.
See Note 12 in the "Notes to the Consolidated Financial Statements" in the 1999
Annual Report for further information.
Earnings per share has been calculated in accordance with FASB Statement
No. 128, Earnings Per Share. For purposes of this computation, the number of
shares of common stock purchased by the Bank's employee stock ownership plan
which have not been allocated to participant accounts are not assumed to be
outstanding. The following are reconciliations of the amounts used in the per
share calculations for 1999 and 1998, which are the years the Company was in
operation:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
Basis EPS
Income available to stockholders $1,386,000 630,442 $2.20
Effect of dilutive securities
Stock Options - 233 -
Dilutive EPS
Income available to stockholders $1,386,000 630,675 $2.20
=========== ======= =========
For the Year Ended December 31, 1998
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
Basic and Diluted EPS $2,204,000 622,839 $3.54
=========== ======= =========
</TABLE>
<PAGE>
EXHIBIT 12
Ratios other than period-end ratios are based on monthly balances.
Management does not believe the use of month-end balances has caused a material
difference in the information provided.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ---------------------------------------------------------------------------------------------
<S> <C>
Report to Stockholders 1
Selected Consolidated Financial Data 2 - 3
Management's Discussion and Analysis 4 - 17
Independent Auditor's Report 19
Consolidated Financial Statements:
Statements of financial condition at December 31, 1999 and 1998 20
Statements of income and comprehensive income for the years ended 21
December 31, 1999, 1998 and 1997
Statements of stockholders' equity for the years ended December 31, 1999, 1998 22 - 23
and 1997
Statements of cash flows for the years ended December 31, 1999, 1998 and 1997 24 - 26
Notes to Consolidated Financial Statements 27 - 55
Corporate Information 56 - 57
</TABLE>
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Coddle Creek Financial Corp. that are subject
to various factors which could cause actual results to differ materially from
those estimates. Factors which could influence the estimates include changes in
the national, regional and local market conditions, legislative and regulatory
conditions, and an adverse interest rate environment.
<PAGE>
Report to Stockholders
Dear Stockholder:
December 31, 1999 marked the end of our second complete year of operations as a
public company. On December 30, 1997, Mooresville Savings converted from a state
chartered mutual savings bank to a state chartered stock savings bank and became
a wholly-owned subsidiary of Coddle Creek Financial Corp.
The Company's consolidated total assets totaled $143.9 million at December 31,
1999 compared to $135.8 million a year earlier, representing a 5.9% increase.
Total stockholders' equity amounted to $34.4 million at December 31, 1999,
resulting in a book value per share of $49.29. The Company paid cash dividends
totaling $19.23 per share, including a return of capital in the form of a
special dividend of $17.18 per share, during 1999. A detail of financial results
and other information is contained in the accompanying 1999 Annual Report.
The Company is dedicated to providing high quality service for all of our
customers. The Board of Directors continues to study various methods of
increasing the value of your investment. In the future, the Board intends to
consider such issues as regular cash dividends, special dividends and the
Company's repurchase of outstanding common stock.
On behalf of the Board of Directors, management and staff, we would like to
thank you for your loyalty and confidence as demonstrated by your investment in
Coddle Creek Financial Corp.
Sincerely,
/s/ George W. Brawley, Jr.
George W. Brawley, Jr.
President and CEO
1
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $143,867 $135,811 $149,585 $112,552 $108,033
Investments securities (1) 12,667 20,495 43,441 10,889 13,903
Loans receivable, net (4) 123,486 118,057 102,198 97,951 90,555
Deposits 90,563 87,569 99,382 93,785 92,103
Stockholders' equity (2) 34,445 45,119 46,993 14,412 13,726
Book value per share (2) 49.29 66.89 69.67 - -
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
Operating Data: (Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 10,188 $ 10,316 $ 8,997 $ 8,679 $ 7,946
Interest expense 4,195 4,096 4,820 4,658 4,416
-------------------------------------------------------------------------
Net interest income 5,993 6,220 4,177 4,021 3,530
Provision for loan losses - 205 335 - 12
Noninterest income 217 185 192 200 190
Noninterest expense 4,007 2,957 2,993 3,146 2,624
-------------------------------------------------------------------------
Income before income taxes 2,203 3,243 1,041 1,075 1,084
Income tax expense 817 1,039 374 354 304
-------------------------------------------------------------------------
Net income 1,386 2,204 667 721 780
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities, net of tax (67) 21 (3) (35) 63
-------------------------------------------------------------------------
Comprehensive income $ 1,319 $ 2,225 $ 664 $ 686 $ 843
=========================================================================
Basic earnings per share (2) $ 2.20 $ 3.54 $ - $ - $ -
Diluted earnings per share (2) 2.20 3.54 - - -
Dividends per share (2) 2.05 1.00 - - -
Return of capital dividends per share 17.18 - - - -
Dividend payout ratio (6) 874.09% 28.25% - - -
</TABLE>
(Continued)
2
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended
December 31,
-----------------------------------------------------------------------------
1999(5) 1998(5) 1997(5) 1996(5) 1995(5)
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Other Data:
Number of outstanding loans 2,474 2,397 2,482 2,476 2,432
Number of deposit accounts 6,880 7,109 7,957 7,752 7,730
Number of full-service offices 3 3 3 3 3
Return on average assets 1.00% 1.62% 0.58% 0.66% 0.75%
Return on average equity 3.40% 4.98% 4.55% 5.37% 6.05%
Average equity to average assets 29.25% 32.59% 12.87% 12.27% 12.37%
Interest rate spread 2.89% 3.11% 2.87% 3.08% 2.85%
Net yield on average interest-earning
assets 4.38% 4.70% 3.68% 3.74% 3.49%
Average interest-earning assets to
average interest-earning liabilities 148.65% 151.32% 119.06% 115.21% 114.59%
Ratio of noninterest expense to
average total assets 2.88% 2.18% 2.62% 2.88% 2.52%
Nonperforming assets to total assets (3) 1.01% 1.02% 1.02% 1.11% 1.11%
Nonperforming loans to total loans (3) 1.06% 1.20% 1.36% 1.23% 1.25%
Allowance for loan losses to
nonperforming loans (3) 64.98% 64.57% 47.83% 31.11% 32.95%
Allowance for loan losses to total loans
receivable 0.69% 0.78% 0.65% 0.38% 0.41%
Provision for loan losses to total
loans receivable, net 0.00% 0.19% 0.33% 0.00% 0.01%
Net charge-offs to average loans
outstanding 0.00% 0.00% 0.03% 0.01% 0.01%
Stockholders' equity to total assets 23.94% 33.22% 31.42% 12.80% 12.71%
</TABLE>
(1) Includes interest-earning deposits, federal funds sold, certificates of
deposit, FHLB stock and investment securities.
(2) On December 30, 1997, Mooresville Savings converted from a state chartered
mutual savings bank to a state chartered stock savings bank and became a
wholly-owned subsidiary of Coddle Creek Financial Corp. Earnings per share
has been calculated in accordance with Statement of Financial Accounting
Standards No. 128, Earnings Per Share, and is based on net income for the
year, divided by the weighted average number of shares outstanding for the
year. In accordance with the AICPA's SOP 93-6, unallocated ESOP shares were
deducted from outstanding shares used in the computation of earnings per
share. Diluted earnings per share includes the effect of dilutive common
stock equivalents in the weighted average number of shares outstanding.
(3) Nonperforming assets include mortgage loans and consumer loans 90 days or
more delinquent and real estate acquired in settlement of loans. Non
performing loans include nonaccrual loans and accruing loans past due 90
days or more.
(4) "Loans receivable, net," represents gross loans less net deferred loan
fees, undisbursed loan funds and allowance for loan losses.
(5) Ratios other than period-end ratios are based on monthly balances.
Management does not believe the use of month-end balances has caused a
material difference in the information provided.
(6) The dividend payout ratio represents dividends per share, including the
return of capital dividend, as a percent of basic earnings per share.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
The following discussion and analysis of financial condition and the
results of operations is intended to assist in understanding the financial
condition and changes therein and results of operations of the Company. This
discussion and analysis is intended to compliment, and should be read in
conjunction with, the audited financial statements of the Company and related
notes appearing elsewhere in this annual report to stockholders.
Description of Business
Coddle Creek Financial Corp. (the "Company") was incorporated under laws of
the State of North Carolina for the purpose of becoming the bank holding company
of Mooresville Savings Bank, Inc. S.S.B. (the "Bank," or "Mooresville Savings")
in connection with the Bank's conversion from a state chartered mutual savings
bank to a state chartered stock savings bank (the "Conversion"), pursuant to the
Plan of Holding Company Conversion of Moorseville Savings Bank, Inc. S.S.B. (the
"Plan of Conversion"). The Company was organized to acquire all of the common
stock of Mooresville Savings upon its conversion to stock form. A subscription
and community offering of the Company's shares closed on December 30, 1997, at
which time the Company acquired all of the shares of the Bank and commenced
operations.
In accordance with the Plan of Conversion, the Company issued 674,475
shares of common stock at the price of $50 per share which resulted in proceeds
of $32,494,000, net of conversion costs. The Company transferred $14,134,000 of
the net proceeds to Mooresville Savings for the purchase of all of the capital
stock of the Bank.
The Company has no operations and conducts no business of its own other
than owning Mooresville Savings, investing its portion of the net proceeds
received in the Conversion, and lending funds to the Employee Stock Ownership
Plan (the "ESOP") which was formed in connection with the Conversion. The
principal business of the Bank is accepting deposits from the general public and
using those deposits and other sources of funds to make loans secured by real
estate and other forms of collateral located in the Bank's primary market area
of northern Mecklenburg and southern Iredell counties of North Carolina.
Mooresville Savings' results of operations depend primarily on its net
interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
The Bank's operations are also affected by noninterest income, such as
miscellaneous income from loans, customer deposit account service charges, and
other sources of revenue. The Bank's principal operating expenses, aside from
interest expense, consist of compensation and associated benefits, federal
deposit insurance premiums, occupancy costs, and other general and
administrative expenses.
The Company did not commence operations until December 30, 1997; therefore,
the consolidated entity did not have any operations for the year ended December
31, 1997. The following discussion and analysis contains consolidated financial
results for the years ended December 31, 1999 and 1998 and the financial results
for Mooresville Savings for the year ended December 31, 1997. Because the
Company had no operations and conducted no business other than as described
above prior to December 31, 1997, the "Management's Discussion and Analysis"
concerns primarily the business of the Bank for 1997. However, for ease of
reading and because the financial statements are presented on a consolidated
basis, the Company and the Bank are collectively referred to herein as the
"Company" unless otherwise noted.
4
<PAGE>
Comparison of Financial Condition at December 31, 1999, 1998 and 1997
Total assets of the Company amounted to $143.9 million, $135.8 million, and
$149.6 million at December 31, 1999, 1998 and 1997 respectively. The increase
during 1999 is attributable increased loan demand, which was funded by
short-term borrowings and an increase in deposits. The decrease from December
31, 1997 to December 31, 1998 was primarily due to the Company returning cash
deposits to potential investors who did not receive stock in the Conversion due
to an oversubscription of the shares offered.
The principal category of earnings assets is loans receivable, which
amounted to $124.9 million $110.6 million, and $102.0 million at December 31,
1999, 1998 and 1997, respectively. The Bank was able to increase the size of its
loan portfolio during 1999 and 1998 primarily through its marketing efforts in
the origination of permanent residential 1-4 family mortgages, residential
construction and home equity loans. All other categories of the Bank's loan
portfolio have remained fairly constant from 1997 to 1999. Loan originations for
the year ended December 31, 1999 totaled $44.3 million, other net changes
totaled $0.2 million, while loan principal repayments totaled $30.2 million as
the loan portfolio increased by $14.3 million. Loan originations for the year
ended December 31, 1998 totaled $51.3 million, other net changes totaled $0.1
million, while principal repayments totaled $42.8 million for a net increase in
the loan portfolio of $8.6 million over 1997. Management believes that its
marketing efforts, competitive rates and contacts within its community
contributed to the increased loan demand. The Bank maintains underwriting and
credit standards designed to maintain the quality of the loan portfolio.
Nonperforming loans at December 31, 1999, 1998 and 1997 totaled $1,382,000,
$1,386,000, and $1,449,000, respectively, and were 1.06%, 1.20%, and 1.36% of
total loans, respectively.
In addition to loans, the Company invests in U. S. Treasury, Government and
federal agency, municipal and equity securities. Management does not engage in
the practice of trading securities, rather, the Company's investment portfolio
consists of securities designated as available for sale or held to maturity.
Investment securities, including interest-bearing deposits, at December 31,
1999, 1998 and 1997 totaled $12.7 million, $20.5 million, and $43.4 million,
respectively. The securities portfolio decreased by $7.8 million for the year
ended December 31, 1999 from December 31, 1998 as maturing securities were used
to fund loan growth. The securities portfolio decreased by $22.9 million for the
year ended December 31, 1998 from December 31, 1997 as cash held in
interest-bearing deposits was returned to investors due to the oversubscription
in connection with the Conversion.
Savings deposits amounted to $90.6 million at December 31, 1999, an
increase of $3.0 million from $87.6 million at December 31, 1998, due to an
increase in transaction accounts with competitive interest rates. At December
31, 1998, deposits decreased by $11.8 million from $99.4 million at December 31,
1997, which was attributed to the return of deposits by the Bank in 1998 due to
the oversubscription of the stock offering. The Bank has focused its marketing
efforts on building depositor relationships and setting its deposit rates in the
local market to compete favorably with rates offered by competitors.
5
<PAGE>
Stockholders' equity decreased by $10.7 million during 1999 due to paying a
special return of capital dividend totaling $11.7 million and the adoption of
the Management Recognition Plan ("MRP"), offset by net income of $1.4 million.
Stockholders' equity decreased by $1.9 million during 1998 due to the full
funding of the $4.2 million note receivable to the ESOP, offset by net income of
$2.2 million. The unrealized gain (loss) on securities available for sale, net
of tax, amounted to $(21,000), $46,000 and $25,000 at December 31, 1999, 1998
and 1997, respectively.
Market Risk
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management meets on a
regular basis to review the Company's interest rate risk position and
profitability and to recommend adjustments for consideration by the Board of
Directors. Management also reviews the Company's securities portfolio,
formulates investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have adverse effect on net income.
When adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long and short term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to increases in interest rates and to fluctuations in
the difference between long-and short-term interest rates.
Consistent with the asset/liability management philosophy set forth above,
the Company has taken several steps to manage its market rate risk. In order to
mitigate and manage interest rate risk, the Company has adopted the following
policies: (i) investing its excess liquidity in shorter term or adjustable rate
instruments with maturities or repricing periods of three years or less; (ii)
promoting mortgage loans with ten-year balloons, or 15 year amortizations; (iii)
promoting adjustable rate equity line of credit loans; (iv) promoting longer
term certificates of deposit; (v) increasing the level of interest-earning
assets relative to interest-bearing liabilities; and (vi) maintaining a
relatively low level of operating expenses and non-earning assets.
The following tables provide further information about the Company's
financial instruments that are sensitive to changes in interest rates.
6
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
Loans Receivable (A)
Expected Maturity Date
Years Ending December 31,
---------------------------------------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ 4,150 $4,106 $3,990 $4,089 $3,689 $78,884 $98,908 $97,756
Average interest rate 9.25 % 10.47 % 10.14 % 8.41 % 7.92 % 7.48 %
Variable Rate $26,853 $ - $ - $ - $ - $ - $26,853 $26,853
Average interest rate 8.88 % - % - % - % - % - %
<CAPTION>
Investment Securities (B)
Expected Maturity Date
Years Ending December 31,
---------------------------------------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing cash $ 6,912 $ - $ - $ - $ - $ - $ 6,912 $ 6,912
Average interest rate 4.25 % - % - % - % - % - %
Certificates of deposit $ 100 $ - $ - $ - $ - $ - $ 100 $ 100
Average interest rate 5.31 % - % - % - % - % - %
Securities available for sale $ 873 $ 509 $ 843 $ 876 $ - $ 313 $ 3,414 $ 3,414
Average interest rate 4.29 % 7.75 % 5.34 % 6.02 % - % 6.25 %
Securities held to maturity $ - $ - $ 150 $ - $ - $ 1,031 $ 1,181 $ 1,157
Average interest rate - % - % 4.80 % - % - % 4.62 %
Nonmarketable equity securities $ - $ - $ - $ - $ - $ 1,060 $ 1,060 $ 1,060
Average interest rate - % - % - % - % - % 7.75 %
<CAPTION>
Expected Maturity Date (C)
Years Ending December 31,
---------------------------------------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits $74,291 $10,382 $1,504 $1,101 $1,303 $ - $88,581 $85,698
Average interest rate 4.43 % 5.32 % 5.27 % 5.30 % 5.11 % - %
Note payable and FHLB advances $ 5,000 $10,500 $ - $ - $ - $ - $15,500 $15,500
Average interest rate 6.24 % 7.25 % - % - % - % - %
</TABLE>
(A) For loans receivable the table presents expected principal cash flows by
fixed and adjustable rate. The table includes contractual maturities including
scheduled principal repayments but excluding estimated prepayments for fixed
rate loans. Loans which have adjustable rates are shown as being due in the
period during which rates are next subject to change. The table presents fair
values at December 31, 1999 and weighted average interest rates by maturity
dates.
(B) For investment securities, including securities available for sale,
securities held to maturity, and nonmarketable equity securities, the table
presents contractual maturities. Interest-bearing cash is a due on demand
financial instrument and is presented as due in the one year category.
Nonmarketable equity securities have no contractual maturity and are placed in
the longest expected maturity date. The table presents fair values for
securities available for sale and amortized costs for all other investment
securities at December 31, 1999 and weighted average interest rates by maturity
dates.
(C) For deposits the table presents principal cash flows and weighted average
interest rates by contractual maturity dates.
7
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
Loans Receivable (A)
Expected Maturity Date
Years Ending December 31,
---------------------------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ 2,129 $ 3,768 $3,770 $3,893 $3,791 $66,416 $83,767 $88,540
Average interest rate 9.28 % 9.84 % 10.51 % 8.87 % 8.30 % 7.60 %
Variable Rate $27,706 $ - $ - $ - $ - $ - $27,706 $27,706
Average interest rate 8.17 % - % - % - % - % - %
<CAPTION>
Investment Securities (B)
Expected Maturity Date
Year Ending December 31,
---------------------------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing cash $ 7,806 $ - $ - $ - $ - $ - $ 7,806 $ 7,806
Average interest rate 4.90 % - % - % - % - % - %
Certificates of deposit $ 100 $ - $ - $ - $ - $ - $ 100 $ 100
Average interest rate 5.85 % - % - % - % - % - %
Securities available for sale $ 5,689 $ 750 $1,390 $1,056 $1,036 $ 323 $10,244 $10,244
Average interest rate 5.55 % 5.73 % 6.79 % 5.71 % 5.80 % 6.25 %
Securities held to maturity $ 202 $ - $ - $ 150 $ - $ 1,029 $ 1,381 $ 1,430
Average interest rate 5.99 % - % - % 4.80 % - % 4.62 %
Nonmarketable equity securities $ - $ - $ - $ - $ - $ 964 $ 964 $ 964
Average interest rate - % - % - % - % - % 7.50 %
<CAPTION>
Expected Maturity Date (C)
Years Ending December 31,
---------------------------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits $62,336 $18,211 $2,206 $ 773 $1,236 $ 18 $84,780 $82,499
Average interest rate 4.23 % 6.00 % 5.37 % 5.48 % 5.31 % 6.66 %
</TABLE>
(A) For loans receivable the table presents expected principal cash flows by
fixed and adjustable rate. The table includes contractual maturities including
scheduled principal repayments but excluding estimated prepayments for fixed
rate loans. Loans which have adjustable rates are shown as being due in the
period during which rates are next subject to change. The table presents fair
values at December 31, 1998 and weighted average interest rates by maturity
dates.
(B) For investment securities, including securities available for sale,
securities held to maturity, and nonmarketable equity securities, the table
presents contractual maturities. Interest-bearing cash is a due on demand
financial instrument and is presented as due in the one year category.
Nonmarketable equity securities have no contractual maturity and are placed in
the longest expected maturity date. The table presents fair values for
securities available for sale and amortized costs for all other investment
securities at December 31, 1998 and weighted average interest rates by maturity
dates.
(C) For deposits the table presents principal cash flows and weighted average
interest rates by contractual maturity dates.
8
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1999, 1998, and
1997
Net Income. Net income for the years ended December 31, 1999, 1998, and
1997 amounted to $1.4 million, $2.2 million, and $667,000, respectively. Net
income decreased in 1999 primarily due to expenses associated with the adoption
of the MRP, as discussed below. Net income increased in 1998 primarily due to an
increase in interest income as proceeds received in the Conversion were invested
in securities and funded loan growth.
Net Interest Income. Net interest income amounted to $6.0 million, $6.2
million, and $4.2 million during the years ended December 31, 1999, 1998, and
1997, respectively. The average outstanding balance of interest-earning assets
in excess of interest-bearing liabilities amounted to $44.7 million, $44.8
million, and $18.2 million during 1999, 1998 and 1997, respectively. The Bank's
interest rate spread increased from 2.87% in 1997 to 3.11% in 1998, but
decreased to 2.89% in 1999. The decrease in the interest rate spread in 1999 was
due to a decrease in the average yield on interest-earning assets, offset by a
lesser decrease in the cost of funds. The average balances of interest-earning
assets over interest-bearing liabilities remained constant from 1998 to 1999.
The increase in the interest rate spread in 1998 was due to the decrease in the
Bank's cost of funds. The average yield on interest-bearing liabilities dropped
from 5.06% in 1997 to 4.69% in 1998. The 24 basis point increase in interest
rate spread in 1998, coupled with a $26.6 million increase in net average
balances of interest-earning assets over interest-bearing liabilities, increased
net interest income by $2.0 million.
Interest Income. Interest income amounted to $10.2 million, $10.3 million,
and $9.0 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company's average yield on interest-earning assets decreased
from 7.93% in 1997 to 7.80% in 1998 and 7.45% in 1999. The primary
interest-earning asset is loans receivable, which experienced a decrease in
average yield of 51 and 6 basis points during 1999 and 1998, respectively.
However, the average outstanding loan balance increased from $100.5 million in
1997 to $108.3 million in 1998, and to $120.9 million in 1999. The other
significant interest-earning asset is investment securities, for which the
average outstanding balance increased from $7.9 million in 1997 to $14.3 million
in 1998, and then decreased to $6.8 million in 1999. The increase in loan
volume, offset by a decrease in investment securities volume, resulted in a
stable total interest income in 1999 and 1998.
Interest Expense. Interest expense amounted to $4.2 million, $4.1 million,
and $4.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The modest increase in interest expense in 1999 is due to
increases in the average outstanding balances of interest-bearing liabilities,
including short-term borrowings, offset by a 13 basis point decrease in the cost
of funds. The $7.9 million decrease in the average outstanding balance of
interest-bearing liabilities, coupled with the 37 basis point decrease in the
Bank's cost of funds from 5.06% in 1997 to 4.69% in 1998, is the primary reason
for the $724,000 decrease in interest expense in 1998.
9
<PAGE>
Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Company's assets and liabilities for the years ended
December 31, 1999, 1998 and 1997. For the periods indicated, the table reflects
the average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing income or expense by the
monthly average balance of interest-earning assets or interest-bearing
liabilities, respectively) as well as the net yield on interest-earning assets
(which reflects the impact of the net earnings balance). Management does not
believe the use of month-end balances has caused a material difference in the
information provided.
<TABLE>
<CAPTION>
At December 31, For the Year Ended December 31,
1999 1999 1998
--------------------------------------------------------------------------------
Average Yield/ Average Average Average Average
Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
--------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 4.25% $ 9,007 $ 430 4.77% $ 9,646 $ 476 4.93%
Investments (1) 4.96% 6,756 389 5.76% 14,310 896 6.26%
Loans receivable, net (4) 7.71% 120,908 9,369 7.75% 108,255 8,944 8.26%
-------- -------- -------- --------
Total interest-earning assets 7.35% 136,671 10,188 7.45% 132,211 10,316 7.80%
-------- --------
Other assets 2,622 3,487
-------- --------
Total assets $139,293 $135,698
======== ========
Interest-bearing liabilities:
NOW and Money market 3.41% $ 18,840 $ 544 2.89% $ 13,858 $ 329 2.37%
Passbook accounts 2.47% 10,495 251 2.47% 11,192 298 2.66%
Certificates of deposit 5.31% 59,440 3,192 5.37% 6,232 3,469 5.56%
Note payable and FHLB advances 6.92% 3,167 208 6.57% - - -
-------- -------- -------- --------
Total interest-bearing liabilities 4.65% 91,942 4,195 4.56% 87,372 4,096 4.69%
-------- --------
Other liabilities 6,607 4,097
Stockholders' equity 40,744 44,229
-------- --------
Total liabilities and stockholders' equity $139,293 $135,698
======== ========
Net interest income and interest rate spread (2) 2.69% $ 5,993 2.89% $ 6,220 3.11%
======== ========
Net yield on interest-earning assets (3) 4.38% 4.70%
Ratio of average interest-earning assets to average
interest-earning liabilities interest-bearing
liabilities 148.65% 151.32%
</TABLE>
(1) Includes investment securities and FHLB stock.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income divided
by average interest-earning assets.
(4) Loans placed on nonaccruing status have been included in the computation of
average balances.
10
<PAGE>
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rates (changes in rate multiplied by the
prior period's volume), and (iii) changes in rate/volume (change in rate
multiplied the change in volume).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- ------ -------- ----- -------- ------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits $ (31) $ (15) $ - $ (46) $ 137 $ 99 $ 92 $ 328
Investments (473) (72) 38 (507) 394 11 9 414
Loans receivable 1,045 (553) (67) 425 645 (60) (8) 577
------------------------------------------------------------------------------------
Total interest income $ 541 $ (640) $ (29) $ (128) $ 1,176 $ 50 $ 93 $ 1,319
------------------------------------------------------------------------------------
Interest expense:
NOW and money market
accounts $ 118 $ 72 $ 25 $ 215 $ 44 $ 38 $ 6 $ 88
Passbook accounts (19) (30) 2 (47) (16) (91) 4 (103)
Certificates of deposit (160) (119) 2 (277) (482) (148) 18 (612)
Note payable and FHLB advances 208 - - 208 (97) - - (97)
------------------------------------------------------------------------------------
Total interest income $ 147 $ (77) $ 29 $ 99 $ (551) $ (201) $ 28 $ (724)
------------------------------------------------------------------------------------
Net Interest Income $ 394 $ (563) $ (58) $ (227) $ 1,727 $ 251 $ 65 $ 2,043
====================================================================================
</TABLE>
11
<PAGE>
Provision for Loan Losses and Asset Quality. The Bank's provision for loan
losses amounted to $-0-, $205,000, and $335,000 in 1999, 1998 and 1997. The
provision, which is charged to operations, and the resulting loan loss
allowances are amounts Mooresville Savings' management believes will be adequate
to absorb potential losses on existing loans that may become uncollectible.
Loans are charged off against the allowance when management believes that
collectibility is unlikely. The evaluation to increase or decrease the provision
and resulting allowances is based on prior loan loss experience and other
factors, such as changes in the nature and volume of the loan portfolio, overall
portfolio quality, and current economic conditions. During the years ended
December 31, 1998 and 1997, management determined that its allowance for loan
losses should be increased to more closely reflect the credit risk inherent in
the loan portfolio resulting from the increase in the number of mortgage loans
collateralized by lakefront properties. These loans are inherently riskier,
because they are often the borrower's second residence. The Bank has adopted
policies to monitor, and increase when necessary, levels of loan loss
allowances. At December 31, 1999, the Bank's level of general valuation
allowances for loan losses amounted to $898,000 which management believes is
adequate to absorb potential losses in its loan portfolio.
The Bank's level of nonperforming loans, defined as nonaccrual loans and
accruing loans past due 90 days or more, has historically been low as a
percentage of total loans outstanding. Loans outstanding which were delinquent
more than 90 days were approximately $1.4 million at December 31, 1999 and
December 31, 1998. Real estate acquired in settlement of loans amounted to
$65,000 and $-0- at December 31, 1999 and 1998, respectively.
Noninterest Income. Noninterest income amounted to $217,000, $185,000, and
$192,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Noninterest income consists primarily of service charges and fees associated
with the Bank's checking accounts.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and employee benefits, occupancy, federal deposit
insurance premiums, data processing charges and other operating expenses.
Noninterest expense amounted to $4.0 million for the year ended December 31,
1999, and $3.0 million for each of the years ended December 31, 1998 and 1997.
Compensation and employee benefits increased by $1.0 million in 1999 due to the
adoption and vesting of the MRP. The MRP reserved for issuance 26,979 shares of
common stock to certain officers, directors, and employees. The Company issued
shares to fund the MRP on January 26, 1999, and the restricted common stock
under the MRP vests at the rate of 25% annually beginning at the date of grant.
The expense related to the vesting of the MRP totaled $1.1 million for the year
ended December 31, 1999. Compensation and employee benefits decreased by
$158,000 during 1998, primarily due to recording a $275,000 charge to
compensation expense in 1997 as a result of the termination of the Bank's
defined benefit pension plan. All other expenses changed nominally during the
years ended December 31, 1999, 1998 and 1997.
Income Taxes. The Company's effective income tax rate was 37.1%, 32.0%, and
35.9% for the years ended December 31, 1999, 1998 and 1997, respectively. The
lower effective income rates for 1998 was due to permanent differences of
nontaxable interest income. The effective rates for 1999 and 1997 reflects
normal expected rates on taxable income.
12
<PAGE>
Capital Resources and Liquidity
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all of its financial commitments.
Liquidity management addresses the Bank's ability to meet deposit withdrawals
either on demand or at contractual maturity, to repay borrowings, if any, as
they mature and to originate new loans and make investments as opportunities
arise.
Significant liquidity sources for the Bank are proceeds from the sale of
stock, cash provided by new savings deposits, operating activities, sale or
maturity of investments, principal and interest payments on loans receivable and
advances from the Federal Home Loan Bank ("FHLB"). Advances from the FHLB have
not historically been a primary source of liquidity for the Bank.
Operating activities provided $2.0 million, $1.9 million, and $819,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. Historically, in
addition to cash provided by operating activities, financing activities have
provided the Bank with sources of funds for asset growth and liquidity.
Financing activities provided $5.4 million and $36.1 million for the years ended
December 31, 1999 and 1997, respectively. The large increase in 1997 was due to
$32.5 million in net proceeds received from the issuance of common stock in
connection with the Conversion. For the year ended December 31, 1998, $12.2
million was used in financing activities, primarily due to the return of excess
deposits from the Conversion and cash dividends paid.
Cash provided by operating and financing activities is used by the Bank to
originate new loans to customers, to maintain investment portfolios and to meet
liquidity requirements. During 1999, 1998 and 1997, loans outstanding increased
$14.3 million, $8.6 million and $4.0 million, respectively.
As a state chartered savings bank, Mooresville Savings must meet certain
liquidity requirements which are established by the Administrator of the North
Carolina Savings Institutions Division. The Bank's liquidity ratio at December
31, 1999, as computed under such regulations, was in excess of such
requirements. Given its excess liquidity and its ability to borrow from the
FHLB, the Bank believes that it will have sufficient funds available to meet
anticipated future loan commitments, unexpected deposit withdrawals, or other
cash requirements.
Asset/Liability Management
The Bank's asset/liability management, or interest rate risk management, is
focused primarily on evaluating and managing the Bank's net interest income
given various risk criteria. Factors beyond the Bank's control, such as the
effects of changes in market interest rates and competition, may also have an
impact on the management of interest rate risk.
In the absence of other factors, the Bank's overall yield on
interest-earning assets will increase as will its cost of funds on its
interest-bearing liabilities when market rates increase over an extended period
of time. Inversely, the Bank's yields and cost of funds will decrease when
market rates decline. The Bank is able to manage these swings to some extent by
attempting to control the maturity or rate adjustments of its interest-earning
assets and interest-bearing liabilities over given periods of time.
13
<PAGE>
The Bank's "gap" is typically described as the difference between the
amounts of such assets and liabilities which reprice within a period of time. In
a declining interest rate environment, a negative gap, or a situation where the
Bank's interest-bearing liabilities subject to repricing exceed the level of
interest-earning assets which will mature or reprice during the same period,
will have a favorable impact on the Bank's net interest income. Conversely, an
increase in general market rates over a sustained period of time will tend to
affect the Bank's net interest income adversely under circumstances when the
Bank has a negative gap. At December 31, 1999, the Bank had a negative gap
position of 29.19% as it reinvested its large interest-bearing cash balances
into long-term investments and loans which will be adversely impacted during
prolonged periods of rising interest rates and positively affected during
prolonged periods of interest rate declines. The Bank's asset/liability
management program has generally helped to decrease the exposure of its earnings
to interest rate increases
In order to minimize the potential effects of adverse material and
prolonged increases or decreases in market interest rates on the Bank's
operations, management has implemented an asset/liability program designed to
stabilize the Bank's interest rate gap. The program emphasizes the investment of
excess cash in (i) short or intermediate term interest-earning assets, (ii) the
solicitation of transaction deposit accounts which are less sensitive to changes
in interest rates and can be repriced rapidly, and (iii) to a lesser extent, the
origination of adjustable rate mortgage loans.
In addition to shortening the average repricing period of its assets, the
Bank has sought to be price rate competitive in the marketplace on its maturing
certificates of deposit to encourage depositors to reinvest in certificates with
the Bank. The Bank has approximately $44.5 million in certificates maturing in
2000 and management believes that substantially all of the maturing certificates
will be renewed.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using assumptions for loan prepayments or deposit
decline. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature within a given period were determined in accordance with
contractual terms of the assets or liabilities. In making the computations, all
adjustable rate loans were considered to be due at the end of the next upcoming
adjustment period. Fixed rate loans are reflected at their contractual
maturities with consideration given to scheduled payments. Marketable equity
securities and savings accounts with no stated maturities are subject to
immediate repricing and availability and have been classified in the earliest
category. FHLB stock must be maintained at certain regulatory levels and is
classified in the more than ten years category. The interest rate sensitivity of
the Bank's assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
14
<PAGE>
<TABLE>
<CAPTION>
Terms to Repricing at December 31, 1999
------------------------------------------------------------------
More than More than
1 Year 1 Year to 3 Years to More than
or Less 3 Years 5 Years 5 Years Total
------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans Receivable (2):
Adjustable rate residential 1-4 family $ 12,194 $ - $ - $ - $ 12,194
Fixed rate residential 1-4 family 2,580 7,680 7,379 74,835 92,474
Other real estate loans - adjustable 8,633 - - - 8,633
Other real estate loans fixed 48 144 138 1,404 1,734
Construction 6,026 - - - 6,026
Other loans 1,522 272 261 2,645 4,700
---------------------------------------------------------------
Total loans 31,003 8,096 7,778 78,884 125,761
Interest-bearing deposits 6,912 - - - 6,912
Investments 973 1,502 876 1,344 4,695
FHLB Stock - - - 1,060 1,060
---------------------------------------------------------------
Total interest-earning assets $ 38,888 $ 9,598 $ 8,654 $ 81,288 $138,428
===============================================================
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 44,473 $ 11,886 $ 2,404 $ - $ 58,763
Money market deposit accounts 13,332 - - - 13,332
NOW accounts 6,424 - - - 6,424
Passbook savings 10,062 - - - 10,062
---------------------------------------------------------------
Total deposits 74,291 11,886 2,404 - 88,581
---------------------------------------------------------------
Note payable and FHLB advances 5,000 10,500 - - 15,500
---------------------------------------------------------------
Total interest-bearing liabilities $ 79,291 $ 22,386 $ 2,404 $ - $104,081
===============================================================
Interest sensitivity gap per report $(40,403) $(12,788) $ 6,250 $ 81,288 $ 34,347
Cumulative interest sensitivity gap
Cumulative gap as a percentage of (40,403) (53,191) (46,941) 34,347 34,347
total interest-earning assets (29.19)% (38.43)% (33.91)% 24.81% 24.81%
Cumulative interest-earning assets
as a percentage of interest-bearing liabilities 49.04% 47.69% 54.90% 133.00% 133.00%
</TABLE>
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Based upon amortization schedules of loan maturities using a weighted
average interest rate for the entire loan portfolio.
15
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles ("GAAP"), which require
the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature and changes in market interest rates
have a greater impact on its performance than the effects of inflation, which
has not had a significant impact on the Company during the years ended December
31, 1999, 1998 and 1997.
Impact of New Accounting Standards
The FASB has issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which the Company has not been required to adopt as of
December 31, 1999. This Statement, which is effective for fiscal years beginning
after June 15, 2000, establishes accounting and reporting standards for
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency- denominated forecasted
transaction. This Statement is not expected to have a significant impact on the
Company.
Recapture of Tax Bad Debt Reserves
Prior to the enactment of the Small Business Job Protection Act of 1996
(the "1996 Act") on August 20, 1996, thrift institutions which met certain
definitional tests were permitted to establish tax reserves for bad debts and to
deduct annual additions to such reserves in arriving at taxable income. The Bank
was permitted to compute the annual bad debt deduction based upon an experience
method or a percentage equal to 8.0% of the Bank's taxable income before such
bad debt deduction (the "PTI Method"), subject to certain limitations. Under the
1996 Act, the PTI Method was repealed and the Bank is required to use the
experience method for computing its annual bad debt deduction for taxable years
beginning on or after December 31, 1995.
The Bank will also have to recapture its excess tax bad debt reserves which
have accumulated since 1988, amounting to approximately $67,000, over a six year
period. The tax associated with the recaptured reserves is approximately
$26,000. The recapture was scheduled to begin with the Bank's 1996 year, but was
delayed two years because the Bank originated a required minimum level of
residential mortgage loans during 1996 and 1997. Deferred income taxes have been
previously established for the taxes associated with the recaptured reserves,
and the ultimate payment of the related taxes will not result in a charge to
earnings. The amount of reserves recaptured and associated tax were $11,000 and
$4,000, respectively, for each of the years ended December 31, 1999 and 1998.
16
<PAGE>
Impact of the Year 2000
The Company's most critical external exposure to year 2000 system problems is
with its data processing provider, Fiserv, which has certified its systems as
year 2000 compliant. In addition, the Company has contacted its major customers
and vendors to inquire about their progress in addressing the year 2000 problem
and has noted no significant problems.
The year 2000 problems can affect the Company's operation in a number of ways
but the mission critical issue is maintaining customers' account information
including tracking deposits, interest accruals and loan payments. The Company is
dependent upon electricity, telephone lines, computer hardware and Fiserv's data
processing capability.
The Company is pleased to report that no significant year 2000 difficulties have
been encountered during the first part of 2000.
17
<PAGE>
(This page intentionally left blank)
18
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Coddle Creek Financial Corp.
Mooresville, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Coddle Creek Financial Corp. and subsidiary as of December 31, 1999 and 1998,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coddle Creek
Financial Corp. and subsidiary as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ McGladry & Pullen, LLP
Charlotte, North Carolina
January 20, 2000
19
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED Statements of Financial Condition
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash
Interest-bearing deposits (Note 2) $ 6,912,000 $ 7,806,000
Noninterest-bearing deposits 1,502,000 439,000
Certificates of deposit (Note 2) 100,000 100,000
Securities available for sale (Note 2) 3,414,000 10,244,000
Securities held to maturity (Fair value 1999 $1,157000;
1998 $1,430,000) (Note 2) 1,181,000 1,381,000
Federal Home Loan Bank stock (Notes 2 and 6) 1,060,000 964,000
Loans receivable, net (Note 3) 124,863,000 110,578,000
Office properties and equipment, net (Note 4) 1,112,000 999,000
Accrued interest receivable:
Investment securities 85,000 216,000
Loans receivable 740,000 692,000
Cash value of life insurance (Note 7) 1,176,000 1,075,000
Real estate owned 65,000 -
Deferred income taxes (Note 9) 1,219,000 1,193,000
Income tax refund claim receivable 386,000 36,000
Prepaid expenses and other assets 52,000 88,000
-------------------------------
Total assets $ 143,867,000 $ 135,811,000
===============================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Deposits (Note 5) $ 90,563,000 $ 87,569,000
Note payable (Note 6) 10,500,000 -
Federal Home Loan Bank advances (Note 6) 5,000,000 -
Advances from borrowers for taxes and insurance 76,000 110,000
Accounts payable and other liabilities 807,000 522,000
Deferred compensation (Note 7) 2,476,000 2,491,000
-------------------------------
Total liabilities 109,422,000 90,692,000
-------------------------------
Commitments (Notes 7 and 13)
Stockholders' Equity: (Notes 6 and 8)
Preferred stock, authorized 5,000,000 shares; none issued - -
Common stock, no par value, authorized 20,000,000 shares;
issued 698,756 shares in 1999 and 674,475 shares in 1998 - -
Additional paid-in capital 23,057,000 32,461,000
Accumulated other comprehensive income (loss) (Note 2) (21,000) 46,000
Unearned ESOP shares (Note 10) (3,725,000) (4,021,000)
Management recognition plan (Note 11) (728,000) -
Unearned compensation (Note 10) (839,000) -
Retained earnings, substantially restricted (Notes 8 and 9) 16,701,000 16,633,000
-------------------------------
Total stockholders' equity 34,445,000 45,119,000
-------------------------------
Total liabilities and stockholders' equity $ 143,867,000 $ 135,811,000
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 9,369,000 $ 8,944,000 $ 8,367,000
Investment securities 389,000 896,000 482,000
Other 430,000 476,000 148,000
---------------------------------------------------
10,188,000 10,316,000 8,997,000
---------------------------------------------------
Interest expense:
Deposits (Note 5) 3,987,000 4,096,000 4,723,000
Federal Home Loan Bank advances and
note payable (Note 6) 208,000 - 97,000
---------------------------------------------------
4,195,000 4,096,000 4,820,000
---------------------------------------------------
Net interest income 5,993,000 6,220,000 4,177,000
Provision for loan losses (Note 3) - 205,000 335,000
---------------------------------------------------
Net interest income after
provision for loan losses 5,993,000 6,015,000 3,842,000
---------------------------------------------------
Noninterest income 217,000 185,000 192,000
---------------------------------------------------
Other expenses:
Compensation and employee benefits (Note 7) 2,992,000 1,973,000 2,131,000
Net occupancy 146,000 318,000 191,000
Deposit insurance premiums 56,000 59,000 45,000
Data processing 202,000 186,000 168,000
Other 611,000 421,000 458,000
---------------------------------------------------
4,007,000 2,957,000 2,993,000
---------------------------------------------------
Income before income taxes 2,203,000 3,243,000 1,041,000
Income taxes (Note 9) 817,000 1,039,000 374,000
---------------------------------------------------
Net income 1,386,000 2,204,000 667,000
Other comprehensive income (loss), net of tax:
Unrealized gains (loss) on securities, net
of tax 1999 ($32,000); 1998 $10,000;
1997 ($2,000) (Note 2) (67,000) 21,000 (3,000)
---------------------------------------------------
Comprehensive income $ 1,319,000 $ 2,225,000 $ 664,000
===================================================
Basic earnings per share (Note 12) $ 2.20 $ 3.54 $ -
===================================================
Diluted earnings per share (Note 12) $ 2.20 $ 3.54 $ -
===================================================
Regular dividends per share $ 2.05 $ 1.00 $ -
===================================================
Return of capital dividend per share $ 17.18 $ - $ -
===================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional Other Unearned
Paid-in Comprehensive ESOP
Capital Income (Loss) Shares
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ - $ 28,000 $ -
Net proceeds from issuance of
common stock 32,494,000
Purchase of common stock by the ESOP - - (577,000)
Net income - - -
Net change in unrealized gain on
securities available for sale, net - (3,000) -
--------------------------------------------------------
Balance, December 31, 1997 32,494,000 25,000 (577,000)
Purchase of common stock by the ESOP - - (3,639,000)
Principal payment received on note
receivable from ESOP - - 195,000
Cash dividends
Net income
ESOP contribution (33,000) - -
Net change in unrealized gain on
securities available for sale, net - 21,000 -
--------------------------------------------------------
Balance, December 31, 1998 32,461,000 46,000 (4,021,000)
Adoption of management recognition plan 1,542,000 - -
Vesting of management recognition plan
Principal payment received on note
receivable from ESOP - - 296,000
Cash dividends
Return of capital dividend (10,849,000) - -
Amortization of unearned compensation
Net income
ESOP contribution (144,000) - -
Tax benefit of ESOP contribution 47,000 - -
Net change in unrealized gain (loss) on
securities available for sale, net - (67,000) -
--------------------------------------------------------
Balance, December 31, 1999 $ 23,057,000 $ (21,000) $ (3,725,000)
========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
Retained
Management Earnings, Total
Recognition Unearned Substantially Stockholders'
Plan Compensation Restricted Equity
- --------------------------------------------------------------------------
<S> <C> <C> <C>
$ - $ - $ 14,384,000 $ 14,412,000
- - - 32,494,000
- - - (577,000)
- - 667,000 667,000
- - - (3,000)
- --------------------------------------------------------------------------
- - 15,051,000 46,993,000
- - - (3,639,000)
- - - 195,000
- - (622,000) (622,000)
- - 2,204,000 2,204,000
- - - (33,000)
- - - 21,000
- --------------------------------------------------------------------------
- - 16,633,000 45,119,000
(1,542,000) - - -
814,000 - - 814,000
- - - 296,000
- - (1,318,000) (1,318,000)
- (860,000) - (11,709,000)
- 21,000 - 21,000
- - 1,386,000 1,386,000
- - - (144,000)
- - - 47,000
- - - (67,000)
- --------------------------------------------------------------------------
$ (728,000) $ (839,000) $ 16,701,000 $ 34,445,000
==========================================================================
</TABLE>
23
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,386,000 $ 2,204,000 $ 667,000
Adjustments to reconcile net income to net
cash provided by operating
activities:
Provision for loan losses - 205,000 335,000
Provision for depreciation 102,000 64,000 72,000
Provision for deferred income taxes 6,000 (195,000) (293,000)
ESOP contribution (97,000) (33,000) -
Amortization of deferred loan fees (202,000) (232,000) (162,000)
Loss on sale of real estate owned - 10,000 -
Vesting of management recognition plan 814,000 - -
Amortization of unearned compensation 21,000 - -
Dividends on unvested management
recognition plan shares 295,000 - -
Changes in assets and liabilities:
(Increase) decrease in:
Interest receivable 83,000 (153,000) (41,000)
Cash value of life insurance (101,000) (104,000) (133,000)
Income tax refund claim receivable (350,000) (35,000) 41,000
Prepaid expenses and other assets 36,000 (55,000) 28,000
Increase (decrease) in:
Interest payable (19,000) (91,000) 27,000
Accounts payable and other liabilities 7,000 95,000 13,000
Deferred compensation (15,000) 221,000 265,000
---------------------------------------------------
Net cash provided by
operating activities $ 1,966,000 $ 1,901,000 $ 819,000
===================================================
</TABLE>
(Continued)
24
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Investing Activities
Proceeds from maturities of
certificates of deposit $ 100,000 $ 100,000 $ 100,000
Purchases of certificates of deposit (100,000) (100,000) (100,000)
Purchases of securities available for sale (500,000) (16,013,000) -
Proceeds from maturities of securities
available for sale 723,100 8,854,000 900,000
Proceeds from maturities of securities
held to maturity 200,000 1,327,000 1,000,000
Purchase of Federal Home Loan Bank stock (96,000) (34,000) (61,000)
Originations and principal payments on
loans receivable, net (14,148,000) (8,501,000) (4,303,000)
Loan to ESOP for purchase of common stock - (4,216,000) -
Principal payment received on note receivable
from ESOP 296,000 195,000 -
Purchases of office properties and equipment (215,000) (172,000) (41,000)
Proceeds from the sale of real estate owned - 3,000 18,000
--------------------------------------------------
Net cash used in
investing activities (7,232,000) (18,557,000) (2,487,000)
--------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 3,013,000 (11,722,000) 5,570,000
Proceeds from Federal Home
Loan Bank advances 5,000,000 - 4,000,000
Payments on Federal Home
Loan Bank advances - - (6,000,000)
Proceeds from note payable 12,000,000 - -
Payments on note payable (1,500,000) - -
Increase (decrease) in advances from
borrowers for taxes and insurance (34,000) (5,000) -
Cash dividends paid (13,044,000) (453,000) -
Net proceeds from issuance of common stock - - 32,494,000
--------------------------------------------------
Net cash provided by (used in)
financing activities 5,435,000 (12,170,000) 36,064,000
--------------------------------------------------
Increase (decrease) in cash equivalents
and cash equivalents 169,000 (28,826,000) 34,396,000
Cash and cash equivalents:
Beginning 8,245,000 37,071,000 2,675,000
--------------------------------------------------
Ending $ 8,414,000 $ (8,245,000) $ 37,071,000
==================================================
</TABLE>
(Continued)
25
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Schedule of Cash and
Cash Equivalents
Interest-bearing $ 6,912,000 $ 7,806,000 $ 36,649,000
Noninterest-bearing 1,502,000 439,000 422,000
-------------------------------------------------
$ 8,414,000 $ 8,245,000 $ 37,071,000
=================================================
Supplemental Schedule of
Cash Flow Information
Cash payments for:
Interest $ 4,214,000 $ 4,187,000 $ 4,793,000
Income taxes 1,161,000 1,269,000 624,000
Supplemental Disclosures of Noncash
Transactions
Change in unrealized gain (loss) on
available for sale securities, net of
deferred taxes (67,000) 21,000 (3,000)
Real estate acquired in the settlement of loans 65,000 12,000 99,000
Loan to ESOP for purchase of stock - - 577,000
Account payable to ESOP - - (577,000)
Loans originated to finance the sale of real
estate acquired in the settlement of loans - 80,000 -
Change in dividends accrued 278,000 169,000 -
Adoption of management recognition plan 1,542,000 - -
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Conversion and organization of holding company: On December 30, 1997, pursuant
- ----------------------------------------------
to a Plan of Conversion which was approved by its members and regulators,
Mooresville Savings Bank, S.S.B. ("Mooresville Savings" or the "Bank") converted
from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion"), and became a
wholly-owned subsidiary of Coddle Creek Financial Corp. (the "Company"). The
Company was formed to acquire all of the common stock of the Bank upon its
conversion to stock form. The Company has no operations and conducts no business
of its own other than owning the Bank, investing its portion of the net proceeds
received in the Conversion, and lending funds to the Employee Stock Ownership
Plan (the "ESOP") which was formed in connection with the Conversion.
Nature of business: The Bank is primarily engaged in the business of obtaining
- ------------------
savings deposits and originating single-family residential loans within its
primary lending area of Northern Mecklenburg and Southern Iredell Counties. The
Bank's underwriting policies require such loans to be made at 80% loan to value
based upon appraised values unless private mortgage insurance is obtained. These
loans are secured by the underlying properties. The Bank's primary regulators
are the Federal Deposit Insurance Company ("FDIC") and the Administrator of the
North Carolina Savings Institutions Division (the "NC Administrator"). The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the FDIC.
The following is a description of the significant accounting policies used in
the preparation of the accompanying financial statements.
Principles of consolidation: The consolidated financial statements include the
- ---------------------------
accounts of Coddle Creek Financial Corp. and its wholly-owned subsidiary,
Mooresville Savings Bank, S.S.B., for the year ended December 31, 1999 and 1998.
The Company was capitalized on December 30, 1997, therefore, the consolidated
financial statements for the year ended December 31, 1997 include the operations
of the Bank only. All significant intercompany transactions and balances have
been eliminated in consolidation.
Basis of financial statement presentation: The accounting and reporting policies
- -----------------------------------------
of the Company conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. Actual results could differ from those
estimates.
Cash and cash equivalents: For purposes of reporting the statements of cash
- -------------------------
flows, the Company includes all interest and noninterest-bearing cash accounts,
which are not subject to withdrawal restrictions or penalties, as cash
equivalent and considers all highly liquid debt instruments with original
maturities when purchased of three months or less to be cash equivalents. The
Company also maintains deposits with financial institutions which are in excess
of the federally-insured amounts. Cash flows from loans and deposits are
reported on a net basis.
27
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Investment in debt securities: The Company and the Bank have investments in debt
- -----------------------------
securities, which consist of obligations of the U. S. Government and federal
agencies and municipal obligations.
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
requires that management classify all securities as trading, available for sale,
or held to maturity as individual investment securities are acquired, and that
the appropriateness of such classification be reassessed at each statement of
financial condition date.
Since the Company and the Bank do not buy investment securities in anticipation
of short-term fluctuations in market prices, none of the investment securities
are classified as trading in accordance with Statement No. 115. All investment
securities have been classified as either held to maturity or available for
sale.
Securities available for sale: Securities classified as available for sale are
- -----------------------------
those securities that the Company and the Bank intend to hold for an indefinite
period of time but not necessarily to maturity. Any decision to sell a security
classified as available for sale could be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company and the Bank's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities available for sale
are carried at their fair (market) value. Premium and discounts are amortized
using a method that approximates the interest method over the contractual lives.
Unrealized gains or losses are reported as increases or decreases in equity, net
of the related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in income.
Securities held to maturity: Securities classified as held to maturity are those
securities the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by a method that
approximates the interest method over their contractual lives. Based on the
Company and the Bank's financial position and liquidity, management believes the
Company and the Bank have the ability to hold these securities to maturity.
Declines in the fair value of individual securities classified as either held to
maturity or available for sale below their amortized cost that are determined to
be other than temporary result in write-downs of the individual securities to
their fair value with the resulting write-downs included in current earnings as
realized losses.
Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
Home Loan Bank ("FHLB") system, is required to maintain an investment in capital
stock of the FHLB in an amount equal to the greater of 1% of its outstanding
home loans or 5% of advances from the FHLB. No ready market exists for the FHLB
stock, and it has no quoted market value.
28
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Loans receivable: Loans receivable are stated at unpaid principal balances, less
- ----------------
undisbursed loan funds, the allowance for loan losses, and net deferred
loan-origination fees and discounts. The Bank's loan portfolio consists
principally of long-term conventional loans collateralized by first deeds of
trust on single-family residences, other residential property, nonresidential
property and land. Interest income is accrued and credited to interest income as
it is earned, using the interest method.
Allowance for loan losses: The allowance for loan losses is increased by charges
- -------------------------
to income and decreased by charge-offs (net of recoveries). The allowance is an
amount that management believes will be adequate to absorb estimated losses on
existing loans. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to pay, the estimated value of any underlying collateral, and current
economic conditions. The loan portfolio is further analyzed by each loan type
and delinquency status to determine the risk category for each loan that is used
in calculating the allowance for loan losses. Loans delinquent greater than 90
days are evaluated individually for loss exposure, while other loans are
evaluated aggregately by type. Allocated and unallocated portions are determined
in the same manner. While management uses the best information to make
evaluations, future adjustments may be necessary, if economic or other
conditions differ substantially from the assumptions used.
Impaired loans: The Bank assesses loans delinquent greater than 90 days for
- --------------
impairment. SFAS No. 114 requires that the Bank establish specific loan loss
allowances on impaired loans if it is doubtful that all principal and interest
due, according to the loan terms, will be collected. An allowance on an impaired
loan is required if the present value of the future cash flows discounted using
the loan's effective interest rate is less than the carrying value of the loan.
An impaired loan can also be valued based upon its fair value in the market
place or on the basis of its underlying collateral if the loan is collateral
dependent. If foreclosure is imminent, and the loan is collateral dependent, the
loan must be valued based upon the fair value of the underlying collateral.
Real estate owned: Real estate owned is initially recorded at the estimated fair
- -----------------
value at the date of foreclosure, establishing a new cost basis. Based on
periodic evaluations by management, the carrying values are reduced where they
exceed fair value minus estimated costs to sell. Costs relating to the
development and improvement of the property are capitalized, while holding costs
of the property are charged to expense in the period incurred.
29
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Interest Income: The Bank continues to accrue interest on loans, including loans
- ---------------
delinquent 90 days or more, when collectibility of interest is not in doubt. At
the time a loan becomes nonperforming and collectibility of principal is in
doubt, the loan is placed on nonaccrual status by establishing an allowance for
uncollected interest. When a loan is on nonaccrual status interest income is
recognized only to the extent cash payments are received. If and when management
determines that the collectibility of principal and interest is no longer in
doubt, the loan is returned to performing status and the reserve for uncollected
interest is reversed. The Bank anticipates that it will account for interest on
impaired loans in a similar fashion in the future if and when it has impaired
loans.
Loan-origination fees and related costs: Loan fees and certain direct loan
- ---------------------------------------
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for actual prepayments.
Office properties and equipment: Office properties and equipment are stated at
- -------------------------------
cost less accumulated depreciation, which is computed principally by the
straight-line method.
Benefit plans: The Bank had a noncontributory defined benefit pension plan
- -------------
covering all employees who met the eligibility requirements, which was
terminated during 1997. To have been eligible, an employee must have been 21
years of age and have completed one year of continuous service. The plan
provided benefits based on the career earnings of each participant which were
subject to certain reductions if the employee retires before reaching age 62.
The Bank's funding policy was to make the maximum annual contribution that was
deductible for income tax purposes.
The Bank has a 401(k) plan covering substantially all of its employees. The Bank
matches 50% of the qualified employees contributions, limited to 6% of the
employee's salary.
The Bank has deferred compensation and retirement agreements for the benefit of
the Board of Directors and several key employees. The plans are unfunded and the
liabilities are being accrued over the term of active service of the
participants. The Bank has also purchased life insurance policies in amounts
sufficient to discharge its obligation under the agreements in the event of
death.
The Bank has an ESOP which covers substantially all of its employees.
Contributions to the plan are based upon the amortization requirement of the
ESOP's debt to the Company, subject to compensation limitations, and are
expensed in accordance with the AICPA's Statement of Position 93-6, Employer's
Accounting for Employee Stock Ownership Plans.
30
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Income taxes: Deferred taxes are provided on a liability method whereby deferred
- ------------
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per share: SFAS No. 128, Earnings Per Share, requires the presentation
- ------------------
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per share amounts. Basic per share
amounts are computed by dividing net income (the numerator) by the
weighted-average number of common shares outstanding (the denominator). All
other entities are required to present basic and diluted per share amounts.
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations. For purposes of
this computation, the number of shares of common stock purchased by the Bank's
employee stock ownership plan which have not been allocated to participant
accounts are not assumed to be outstanding. The activity from the date of
Conversion, December 30, 1997, to the end of the 1997 fiscal year is
insufficient to compute a per share amount for the that fiscal year. See Note 12
for further information.
Fair value of financial instruments: The estimated fair values required under
- -----------------------------------
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required to develop
the estimates of fair value. Accordingly, the estimates presented for the fair
value of the Company's financial instruments are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair market value amounts.
The fair value estimates presented are based on pertinent information available
to management as of December 31, 1999 and 1998. Although management is not aware
of any factors that would significantly affect the estimated fair value amount,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date and therefore, current estimates of fair
value may differ significantly from the amounts presented here.
Off-statement of financial condition risk: The Company is a party to financial
- -----------------------------------------
instruments with off-statement of financial condition risk such as commitments
to extend credit and lines of credit. Management assesses the risk related to
these instruments for potential losses on an ongoing basis.
31
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Notes 2. Securities
The amortized cost and fair values of securities as of December 31, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and federal
agencies obligations $ 1,903,000 $ - $ (21,000) $ 1,882,000
Municipal Obligations 1,038,000 - (6,000) 1,032,000
Equity securities 500,000 - - 500,000
------------------------------------------------------------------------
$ 3,441,000 $ - $ (27,000) $ 3,414,000
========================================================================
Securities held to maturity:
Municipal obligations $ 1,181,000 $ - $ (24,000) $ 1,157,000
========================================================================
Other investments:
Interest-earning deposits $ 6,912,000 $ - $ - $ 6,912,000
Certificates of deposit 100,000 - - 100,000
Federal Home Loan Bank stock 1,060,000 - - 1,060,000
------------------------------------------------------------------------
$ 8,072,000 $ - $ - $ 8,072,000
========================================================================
<CAPTION>
1998
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and federal
agencies obligations $ 9,130,000 $ 56,000 $ - $ 9,186,000
Municipal Obligations 1,042,000 16,000 - 1,058,000
------------------------------------------------------------------------
$ 10,172,000 $ 72,000 $ - $ 10,244,000
========================================================================
Securities held to maturity:
U.S. Government and federal
agencies obligations $ 100,000 $ 1,000 $ - $ 101,000
Municipal obligations 1,281,000 48,000 - 1,329,000
------------------------------------------------------------------------
$ 1,381,000 $ 49,000 $ - $ 1,430,000
========================================================================
Other investments:
Interest-earning deposits $ 7,806,000 $ - $ - $ 7,806,000
Certificates of deposit 100,000 - - 100,000
Federal Home Loan Bank stock 964,000 - - 964,000
------------------------------------------------------------------------
$ 8,870,000 $ - $ - $ 8,870,000
========================================================================
</TABLE>
32
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities (Continued)
The amortized cost and fair value of securities at December 31, 1999 by
contractual maturity are shown below:
Amortized Fair
Cost Value
----------------------------
Securities available for sale:
Due in one year or less $ 368,000 $ 373,000
Due after one year through five years 2,252,000 2,228,000
Due after five years through ten years 321,000 313,000
Due after ten years - -
Equity securities 500,000 500,000
----------------------------
$3,441,000 $3,414,000
============================
Securities held to maturity:
Due in one year or less $ - $ -
Due after one year through five years 150,000 151,000
Due after five years through ten years 1,021,000 996,000
Due after ten years 10,000 10,000
----------------------------
$1,181,000 $1,157,000
============================
There were no sales of investment securities for the years ended December 31,
1999, 1998 and 1997.
The change in accumulated comprehensive income, which consists of unrealized
gains (losses) on securities available for sale, for the years ended December
31, 1999, 1998 and 1997 is as shown below:
1999 1998 1997
---------------------------------
Balance, beginning $ 46,000 $ 25,000 $ 28,000
Change in unrealized holding gains (losses) (99,000) 31,000 (5,000)
Change in deferred income taxes 32,000 (10,000) 2,000
---------------------------------
Balance, ending $(21,000) $ 46,000 $ 25,000
=================================
33
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities (Continued)
The following table sets forth certain information regarding the carrying value
and contractual maturities of the Company's investment portfolio at December 31,
1999:
<TABLE>
<CAPTION>
Carrying Value
----------------------------------------------------------------------
After One After Five
Year Years
Through Through After
One Year Five Years Ten Years Ten Years Total
----------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C> <C>
U.S. government and
agency securities $ - $ 509,000 $ - $ - $ 509,000
Federal Home Loan
Bank bonds 1,373,000 - 1,373,000
Municipal bonds 373,000 346,000 313,000 - 1,032,000
Equity securities 500,000 - - - 500,000
Securities held to maturity:
Municipal bonds 150,000 1,021,000 10,000 1,181,000
Other investments:
Interest-earning deposits 6,912,000 - - - 6,912,000
Certificates of deposit 100,000 - - - 100,000
Federal Home Loan
Bank stock - - 1,060,000 1,060,000
----------------------------------------------------------------------
$ 7,885,000 $ 2,378,000 $ 1,334,000 $ 1,070,000 $12,667,000
======================================================================
</TABLE>
The following table sets forth the weighted average yield by maturity (tax
exempt obligations have not been computed on a tax equivalent basis) of the
Company's investment portfolio at December 31, 1999:
<TABLE>
<CAPTION>
Carrying Value
----------------------------------------------------------------------
After One After Five
Year Years
Through Through After
One Year Five Years Ten Years Ten Years Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and
agency securities - 7.75% - - 7.75%
Federal Home Loan
Bank bonds - 5.99% - - 5.99%
Municipal bonds 4.29% 4.50% 6.25% - 4.96%
Equity securities - - - - -
Securities held to maturity:
Municipal bonds - 4.80% 4.62% 4.80% 4.65%
Other investments:
Interest-earning deposits 4.65% - - - 4.25%
Certificates of deposit 4.31% - - - 5.31%
Federal Home Loan
Bank stock - - - 7.75% 7.75%
----------------------------------------------------------------------
4.00% 5.77% 5.55% 7.75% 4.81%
======================================================================
</TABLE>
34
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable
Loans receivable at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------
Percentage Percentage
Amount of Total Amount of Total
--------------------------------------------------------------------------
Real estate loans:
<S> <C> <C> <C> <C>
One-to-four family residential $ 104,331,000 83.55% $ 93,063,000 84.16%
Multi-family residential 850,000 0.68 894,000 0.81
Nonresidential 3,391,000 2.72 3,980,000 3.60
Construction 9,849,000 7.89 7,356,000 6.65
Equity line 8,195,000 6.56 7,567,000 6.84
--------------------------------------------------------------------------
Total real estate loans 126,616,000 101.40 112,860,000 102.06
--------------------------------------------------------------------------
Consumer Loans:
Installment loans 2,491,000 1.99 1,618,000 1.46
Other 1,416,000 1.13 735,000 0.67
--------------------------------------------------------------------------
Total consumer loans 3,907,000 3.12 2,353,000 2.13
--------------------------------------------------------------------------
Total gross loans 130,523,000 104.52 11,521,300 104.19
--------------------------------------------------------------------------
Less:
Construction loans in process (3,823,000) (3.05) (2,960,000) (2.68)
Net deferred loan fees (939,000) (0.75) (780,000) (0.70)
Allowance for loan losses (898,000) (0.72) (895,000) (0.81)
--------------------------------------------------------------------------
(5,660,000) (4.52) (4,635,000) (4.19)
--------------------------------------------------------------------------
$ 124,863,000 100.00% $ 11,057,800 100.00%
==========================================================================
</TABLE>
The following is an analysis of the allowance for loan losses for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 895,000 $ 693,000 $ 388,000
--------------------------------------------------------
Loans charged off:
Real Estate - (5,000) (32,000)
Consumer - - -
--------------------------------------------------------
Total loans charged off - (5,000) (32,000)
--------------------------------------------------------
Recoveries:
Real Estate 3,000 2,000 2,000
Consumer - - -
--------------------------------------------------------
Total recoveries 3,000 2,000 2,000
--------------------------------------------------------
Provision for loan losses - 205,000 335,000
--------------------------------------------------------
Balance at end of year $ 898,000 $ 895,000 $ 693,000
========================================================
Ratio of net charge-offs to average loans
outstanding 0.00% 0.00% 0.03%
========================================================
</TABLE>
35
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
The allocation of the allowance for loan losses applicable to each category of
loans at December 31, 1999 and 1998 is as follows:
1999
-------------------------------------------------
Percent of
Allowance Percent of
Amount of to Total Loans to
Allowance Allowance Gross Loans
-------------------------------------------------
Real estate loans:
One-to-four family residential $ 334,000 37.19% 79.93%
Multi-family residential - - 0.65
Nonresidential - - 2.60
Construction - - 7.55
Equity line 26,000 2.90 6.28
-------------------------------------------------
Total real estate loans 360,000 40.09 97.01
-------------------------------------------------
Consumer loans:
Installment loans 17,000 1.89 1.91
Other 5,000 0.56 1.08
-------------------------------------------------
Total consumer loans 22,000 2.45 2.99
-------------------------------------------------
Unallocated 516,000 57.46 -
-------------------------------------------------
$ 898,000 100.00% 100.00%
=================================================
1998
-----------------------------------------------
Percent of
Allowance Percent of
Amount of to Total Loans to
Allowance Allowance Gross Loans
-----------------------------------------------
Real estate loans:
One-to-four family residential $ 297,000 33.18% 80.78%
Multi-family residential - - 0.78
Nonresidential - - 3.45
Construction - - 6.38
Equity line 21,000 2.35 6.57
-----------------------------------------------
Total real estate loans 318,000 35.53 97.96
-----------------------------------------------
Consumer loans:
Installment loans 9,000 1.01 1.40
Other 3,000 0.33 0.64
-----------------------------------------------
Total consumer loans 12,000 1.34 2.04
-----------------------------------------------
Unallocated 565,000 63.13
-----------------------------------------------
$ 895,000 100.00% 100.00%
===============================================
36
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
The Bank assesses loans delinquent more than 90 days for impairment. Such loans
amounted to approximately $1,382,000 and $1,386,000 at December 31, 1999 and
1998, respectively, and had an average outstanding balance of approximately
$1,992,000 and $1,489,000 for the years ended December 31, 1999 and 1998,
respectively. These loans are primarily collateral dependent and management has
determined that the underlying collateral value is in excess of the carrying
amounts. As a result, the Bank has determined that specific allowances on these
loans are not required.
Nonperforming loans for which interest has been reduced totaled approximately
$1,237,000 and $996,000 at December 31, 1999 and 1998, respectively. The
differences between interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized totaled
$44,000, $30,000 and $58,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
The following table sets forth information with respect to nonperforming assets
identified by the Bank, including nonaccrual loans and accruing loans past due
90 days or more at the date indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 1,237,000 $ 996,000 $ 1,076,000
Accruing loans past due 90 days or more 145,000 390,000 373,000
Troubled debt restructuring - - -
Foreclosed real estate 65,000 - 81,000
-------------------------------------------------------
Total nonperforming assets $ 1,447,000 $ 1,386,000 $ 1,530,000
=======================================================
Nonperforming loans to total gross loans 1.06% 1.20% 1.36%
=======================================================
Nonperforming assets to total assets 1.01% 1.02% 1.02%
=======================================================
Total assets $ 143,867,000 $ 135,811,000 $ 149,585,000
Total gross loans $ 130,523,000 $ 115,213,000 $ 106,538,000
</TABLE>
37
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Office Properties and Equipment
Office properties and equipment at December 31, 1999 and 1998 consist of the
following:
1999 1998
--------------------------------------
Cost:
Land $ 364,000 $ 364,000
Buildings 879,000 879,000
Building improvements 175,000 175,000
Furniture and fixtures 747,000 743,000
Automobiles 47,000 47,000
--------------------------------------
2,212,000 2,208,000
Less accumulated depreciation 1,100,000 1,209,000
--------------------------------------
$ 1,112,000 $ 999,000
======================================
Note 5. Deposits
Deposits at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Percent Amount Rate Percent
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 1,652,000 1.8 % $ 2,440,000 2.8 %
NOW accounts 6,424,000 0.89% 7.1 6,000,000 0.89% 6.9
Money market 13,332,000 4.63% 14.8 7,715,000 4.40% 8.9
Passbook savings 10,062,000 2.47% 11.2 1,022,200 2.47% 11.7
------------------------------------------------------------------------------------
31,470,000 34.9 2,637,700 30.3
------------------------------------------------------------------------------------
Certificates of deposit:
2.00% to 3.99% 646,000 0.7 634,000 0.7
4.00% to 5.99% 46,887,000 52.0 4,595,900 52.7
6.00% to 7.99% 11,230,000 12.4 1,425,000 16.3
------------------------------------------------------------------------------------
58,763,000 5.31% 65.1 6,084,300 5.46% 69.7
------------------------------------------------------------------------------------
90,233,000 100.0 % 8,722,000 100.0 %
======= =======
Accrued interest payable 330,000 349,000
------------------------------- ----------------------------
$ 90,563,000 4.49% $ 8,756,900 4.55%
=============================== ============================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $11,196,000 and $11,500,000 at December 31, 1999 and
December 31, 1998, respectively.
38
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits (Continued)
The aggregate amount of certificates of deposit by maturity with a minimum
denomination of $100,000 at December 31, 1999 is as follows:
Maturity Period:
Within 3 months or less $ 4,693,000
Over 3 months through 6 months 1,281,000
Over 6 months through 12 months 2,827,000
Over 12 months 2,395,000
-----------------
$ 11,196,000
=================
At December 31, 1999, the scheduled maturities of certificates of deposits are
as follows:
Year Ending December 31, Amount
- ------------------------ -------------------
2000 $ 44,473,000
2001 10,382,000
2002 1,504,000
2003 1,101,000
2004 1,303,000
-------------------
$ 58,763,000
===================
Interest expense on deposits for the years ended December 31, 1999, 1998 and
1997 is summarized as follows:
1999 1998 1997
-------------------------------------------------
NOW and money market $ 544,000 $ 329,000 $ 241,000
Passbook savings 251,000 298,000 401,000
Certificates of deposit 3,192,000 3,469,000 4,081,000
-------------------------------------------------
$ 3,987,000 $ 4,096,000 $ 4,723,000
=================================================
Eligible savings accounts are insured up to $100,000 by the SAIF which is
administered by the FDIC.
The Bank has $100,000 of U. S. Government and federal agency obligations pledged
as security for public deposits at December 31, 1999.
39
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Note Payable and Federal Home Loan Bank Advances
The Company has a note payable outstanding for $10,500,000 and $-0- at December
31, 1999 and 1998, respectively. The note is due in quarterly interest only
installments at the prime rate (8.5% at December 31, 1999) less 1.25%, with the
principal balance due February 28, 2001. The note is collateralized by the
Bank's common stock.
The Bank has advances from the FHLB outstanding for $5,000,000 and $-0- at
December 31, 1999 and 1998, respectively. Interest is payable at 6.24% and the
balance is due on November 30, 2000. Advances are collateralized by the Bank's
stock in the FHLB and qualifying first mortgage loans.
Interest expense on the note payable and FHLB advances totaled $208,000, $-0-
and $97,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Note 7. Employee Benefit Plans
The Bank had a defined benefit pension plan covering substantially all of its
employees, which was terminated during 1997. Upon termination, the Bank made
contributions to the plan so that it was fully funded, and the participants were
then paid out of the plan assets. All participants were paid by December 31,
1997. Pension expense was $-0-, $-0-, and $378,000 for the years ended December
31, 1999, 1998 and 1997, respectively. The expense for 1997 is net of a
curtailment gain of $297,000. The Company adopted SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, during 1998. The
Statement revises employers' disclosures about pensions, but does not change the
measurement or recognition criteria.
The components of net periodic benefit cost for the years ended December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Service cost $ - $ - $ 61,000
Interest cost - - 139,000
Expected return on plan assets - - (109,000)
Amortization of prior service cost - - 12,000
Additional cost to fully fund the plan upon
termination - - 275,000
----------------------------------------------
Net periodic benefit cost $ - $ - $ 378,000
==============================================
</TABLE>
Weighted-average assumptions used to develop the net periodic pension cost as of
December 31, 1997 were:
Discount rate 7.0 %
Expected rate of return on plan assets 7.0
Rate of compensation increase 5.0
40
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Employee Benefit Plans (Continued)
The Bank has adopted a savings plan under Section 401(k) of the Internal Revenue
Code. This plan allows employees, who meet certain service and age requirements,
to defer a percentage of their income through contributions to the plan. In
accordance with provisions of the plan, the Bank matches 50% of the employee's
contribution, limited to 6.0% of the employee's salary. The expense for the plan
was $72,000, $72,000 and $79,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
The Bank has also entered into unfunded deferred compensation agreements and a
salary continuation agreement providing retirement and death benefits for the
directors and several key employees. Vested benefits under the agreements are
payable in installments upon death or retirement. The retirement age for these
plans was changed from 65 to 70 years old during the year ended December 31,
1999. The Bank has insured the lives of the directors and employees for amounts
sufficient to discharge its obligation under such agreements in the event of
death. The cash surrender value of these policies is $1,176,000 and $1,075,000
at December 31, 1999 and 1998, respectively. The present value of the liability
for the benefits is being accrued over the expected term of active service of
the directors and employees. The amount accrued is $2,476,000 and $2,491,000 at
December 31, 1999 and 1998, respectively. The expense related to the agreements
for the years ended December 31, 1999, 1998 and 1997 amounted to $44,000,
$391,000 and $350,000, respectively. The discount rate of 7% was used in
determining the present value of the future obligation at December 31, 1999 and
1998, respectively.
Note 8. Stockholders' Equity
On December 30, 1997, the Company completed and closed its stock offering. Gross
proceeds from the sale of 674,475 shares amounted to $33,724,000 and were
reduced by conversion costs of $1,230,000. $4,216,000 of these net proceeds were
loaned to the ESOP to purchase 53,958 shares in the open market. The Company
transferred $14,134,000 of the net proceeds to the Bank for the purchase of its
common stock and retained the remaining net proceeds.
Concurrent with the Conversion, the Bank established a liquidation account in an
amount equal to its net worth as reflected in its latest statement of financial
condition contained in the definitive prospectus used in connection with the
Company's initial public offering. The liquidation account will be maintained
for the benefit of eligible deposit account holders and supplemental eligible
deposit account holders who continue to maintain their deposit accounts in the
Bank after the Conversion. Only in the event of a complete liquidation will
eligible deposit account holders and supplemental eligible deposit account
holders be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted sub-account balance for
deposit accounts then held before any liquidation distribution may be made with
respect to common stockholders. Dividends paid by the Bank subsequent to the
Conversion cannot be paid from this liquidation account.
41
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Stockholders' Equity (Continued)
Subject to applicable law, the Board of Directors of the Company or the Bank may
each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Company may depend upon dividend payments by the Bank
to the Company. Subject to regulations promulgated by the NC Administrator, the
Bank will not be permitted to pay dividends on its common stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account or its capital requirement. The Company has declared regular
dividends of $2.05 and $1.00 per share for the years ended December 31, 1999 and
December 31, 1998, respectively. The Company also paid a return of capital
dividend of $17.18 per share in 1999.
For a period of five years after its conversion from mutual to stock form, the
Bank must obtain the written approval from the NC Administrator before declaring
or paying a cash dividend to the Company on its capital stock in an amount in
excess of one-half of the greater of (i) the Bank's net income for the most
recent fiscal year end or (ii) the average of the Bank's net income after
dividends for the most recent fiscal year end and not more than two of the
immediately preceding fiscal year ends. During 1999 and 1998, the Bank
upstreamed $1,295,000 and $675,000, respectively, in regular dividends to the
Company.
In connection with the Conversion, the Bank has agreed with the FDIC that,
within the first three years after completion of the Conversion, neither the
Company nor the Bank will pay any taxable dividend or make any taxable
distribution in excess of their current earnings and retained earnings. The
Company and the Bank have agreed to notify the FDIC before making a return of
capital during the first three years following the Conversion.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and any other common stockholders'
equity, less any intangible assets) to all assets of at least 3%, provided that
it receives the highest rating during the examination process. For institutions
that receive less than the highest rating, the Tier I capital requirement is 1%
to 2% above the stated minimum. The FDIC also requires the Bank to have a ratio
of total capital to risk-weighted assets of 8%, of which at least 4% must be in
the form of Tier I capital. The NC Administrator requires a net worth equal to
at least 5% of total assets. The Bank complied with all of the capital
requirements at December 31, 1999 and 1998.
42
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Stockholders' Equity (Continued)
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the components of regulatory
capital at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1999 - Bank Only
-------------------------------------------------------------------------
Leverage Tier I N.C.
Ratio of Risk-Adjusted Risk-Based Savings Bank
Tier I Capital Capital Capital Capital
-------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Equity (GAAP) $ 31,353 $ 31,353 $ 31,353 $ 31,353
Unrealized loss on securities
available for sale 10 10 10 10
Supplemental capital items:
General valuation allowance - - 898 898
-------------------------------------------------------------------------
Regulatory capital 31,363 31,363 32,261 32,261
Minimum capital requirement 4,257 2,340 6,240 7,094
-------------------------------------------------------------------------
Excess regulatory capital $ 27,106 $ 29,023 $ 26,021 $ 25,167
=========================================================================
Average assets $ 141,884 $ 141,884
================ ================
Risk-weighted assets $ 77,996 $ 77,996
===================================
Capital as a percentage of assets:
Actual 22.10 % 40.21 % 41.36 % 22.74 %
Required 3.00 3.00 8.00 5.00
---------------------------------------------------------------------------
Excess 19.10 % 37.21 % 33.36 % 17.74 %
===========================================================================
</TABLE>
43
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1998 - Bank Only
------------------------------------------------------------------------
Leverage Tier I N.C.
Ratio of Risk-Adjusted Risk-Based Savings Bank
Tier I Capital Capital Capital Capital
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Equity (GAAP) $ 30,305 $ 30,305 $ 30,305 $ 30,305
Unrealized gain on securities
available for sale (33) (33) (33) (33)
Supplemental capital items:
General valuation allowance - - 895 895
-------------------------------------------------------------------------
Regulatory capital 30,272 30,272 31,167 31,167
Minimum capital requirement 3,924 2,089 5,570 6,540
-------------------------------------------------------------------------
Excess regulatory capital $ 26,348 $ 28,183 $ 25,597 $ 24,627
=========================================================================
Average assets $ 130,808 $ 130,808
================ ===============
Risk-weighted assets $ 69,623 $ 69,623
=============== ==============
Capital as a percentage of assets:
Actual 23.14 % 43.48 % 44.77 % 23.83 %
Required 3.00 3.00 8.00 5.00
---------------------------------------------------------------------------
Excess 20.14 % 40.48 % 36.77 % 18.83 %
===========================================================================
</TABLE>
A ratio of 4% of total assets was used for purposes of computing the minimum
required leverage ratio of Tier I Capital.
As of December 31, 1999, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
total capital to risk weighted assets of 10%, Tier I Capital to risk weighted
assets of 6% and Tier I Capital to total assets of 5% or $7,800,000, $4,680,000
and $7,094,000 respectively. There are no conditions or events since the
notification that management believes have changed the Bank's category.
44
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Income Tax Matters
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to the tax bad debt reserve established for the
purpose of absorbing losses. The Bank is required to compute such deductions
using an experience method. The Bank's tax bad debt deduction was $-0-, $3,000
and $30,000 in 1999, 1998 and 1997, respectively.
In conjunction with the change in computing the tax bad debt deduction, the Bank
will also have to recapture its excess tax bad debt reserves which have
accumulated since 1988, amounting to approximately $67,000, over a six year
period. The tax associated with the recaptured reserve is approximately $26,000.
The recapture was scheduled to begin with the Bank's 1996 year, but was delayed
two years because the Bank originated a required minimum level of residential
mortgage loans during 1996 and 1997. Deferred income taxes have been previously
established for the taxes associated with the recaptured reserves and the
ultimate payment of the related taxes will not result in a charge to earnings.
The amount of reserve recaptured and associated tax were $11,000 and $4,000,
respectively, for each of the years ended December 31, 1999 and 1998.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987 which are in excess of recorded book loan loss
allowances. At December 31, 1999 and 1998, retained earnings contain certain
historical additions to the bad debt reserve for income tax purposes of
approximately $3,816,000, the balance prior to 1988, for which no deferred taxes
have been provided because the Bank does not intend to use these reserves for
purposes other than to absorb losses. If this pre-1988 reserve is used for
purposes other than to absorb losses or adjustments arising from the carryback
of net operating losses, income taxes may be imposed at the then existing rates.
The unrecorded deferred income tax liability on the above amount was
approximately $1,493,000 as of December 31, 1999 and 1998.
45
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Income Tax Matters (Continued)
The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax asset in the statement of financial condition were as
follows at December 31, 1999 and 1998:
1999 1998
------------------------------
Deferred tax assets:
Unrealized loss on securities $ 6,000 $ -
Interest income on non performing assets 19,000 15,000
Deferred compensation 956,000 966,000
Allowance for loan losses 347,000 347,000
Pension plan contribution 147,000 158,000
Accrued expenses - 42,000
Management recognition plan 67,000 -
------------------------------
1,542,000 1,528,000
------------------------------
Deferred tax liabilities:
Property and equipment 115,000 109,000
FHLB stock dividends 136,000 136,000
Deferred loan fees 47,000 35,000
Tax bad debt reserves 18,000 22,000
Unrealized gains on securities - 26,000
FHLB accrued dividend 7,000 7,000
------------------------------
323,000 335,000
------------------------------
Net deferred tax asset $ 1,219,000 $ 1,193,000
==============================
At December 31, 1999 and 1998, no valuation allowance was recorded for deferred
tax assets.
Income tax expense (credits) for the year ended December 31, 1999, 1998 and 1997
consists of the following:
1999 1998 1997
----------------------------------------
Current $ 811,000 $ 1,234,000 $ 667,000
Deferred 6,000 (195,000) (293,000)
----------------------------------------
$ 817,000 $ 1,039,000 $ 374,000
========================================
46
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Income Tax Matters (Continued)
A reconciliation of the federal income tax rate to the effective tax rate for
the year ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
Increases (decreases) in taxes resulting from:
Nontaxable income (3.3) (4.5) (2.1)
Nondeductible expense 3.0 1.2
State income tax, net of federal benefit 2.6 2.3 1.6
Other 0.8 0.2 1.2
-------------------------------------------------------
Effective tax rate 37.1 % 32.0 % 35.9 %
=======================================================
</TABLE>
Note 10. Employee Stock Ownership Plan
The Bank has established an ESOP to benefit all qualified employees. The ESOP
purchased 53,958 shares of common stock in the open market subsequent to the
Conversion with proceeds received from a loan from the Company. The ESOP
purchased 21,240 additional shares with proceeds from the return of capital
dividend paid by the Company in 1999.
The Company's note receivable is to be repaid based upon 15 annual installments
of principal and interest on December 31 of each year through December 31, 2012.
Interest is based upon the prime rate, which will be adjusted and paid annually.
The note may be prepaid without penalty. The unallocated shares of stock held by
the ESOP are pledged as collateral for the debt. The ESOP is funded by
contributions made by the Bank in amounts sufficient to retire the debt. The
note receivable is presented as a reduction of stockholders' equity and had an
outstanding balance of $3,725,000 and $4,021,000 at December 31, 1999 and
December 31, 1998, respectively.
Shares are released as the debt is repaid and earnings from the common stock
held by the ESOP are allocated among participants on the basis of compensation
in the year of allocation. Benefits become 100% vested after five years of
credited service. Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.
Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Company and are not reported as dividends but as additional compensation expense
in the financial statements. Dividends on allocated or committed to be allocated
shares may also be used to repay the debt to the Company and are reported as
dividends in the financial statements. Special return of capital dividends paid
in 1999 on 50,071 unallocated ESOP shares totaled $860,000 and are being
amortized as compensation expense as ESOP shares are released to the
participants. During the year ended December 31, 1999, $21,000 was amortized as
compensation expense.
47
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Employee Stock Ownership Plan (Continued)
Expenses of $173,000, $162,000 and $-0- have been incurred during 1999, 1998,
and 1997, respectively, in connection with the ESOP. The expenses include, in
addition to the cash contribution necessary to fund the ESOP, $(144,000),
$(33,000) and $-0- for 1999, 1998, and 1997, respectively, which represents the
difference between the fair value of the shares which have been released or
committed to be released to participants, and the cost of these shares to the
ESOP. The Bank has debited this amount to paid-in capital and reduced the
expense in accordance with the provisions of AICPA Statement of Position 93-6.
The related income tax benefit of $47,000 and $-0- for 1999, 1998 and 1997,
respectively have been credited to paid-in capital.
The ESOP has a put option which requires the Company to repurchase its common
stock from participants in the ESOP who are eligible to receive benefits under
the terms of the plan and elect to receive cash in exchange for their common
stock. The potential commitment for the put option is $272,000 at December 31,
1999 based on the fair value of the 9,135 shares released of $29.75 per share.
The fair value of the unallocated shares is $1,965,000 at December 31, 1999.
This commitment will fluctuate based on the fair value of the shares.
Note 11. Management Recognition Plan and Stock Option Plan
The Company's stockholders approved the Company's Stock Option Plan and the
Bank's Management Recognition Plan and Trust (the "MRP") on January 26, 1999.
The Stock Option Plan reserves for issuance up to 67,447 stock options to
certain officers, directors, and employees either in the form of incentive stock
options or non-incentive stock options. The exercise price of the stock options
may not be less than the fair value of the Company's common stock at date of
grant. The options granted to employees, which vest at the rate of 25% annually
beginning at the date of grant, were all granted in 1999 and expire in 2009.
Options granted to non-employee directors vested immediately on the date of
grant. The weighted average fair value of the options on the grant date was
$31.00 per share. As permitted under the generally accepted accounting
principles, grants under the plan will be accounted for following the provisions
of APB Opinion No. 25 and its related interpretations. Accordingly, no
compensation cost has been recognized for grants made to date. Had compensation
cost been determined based on the fair value method prescribed in FASB Statement
No. 123, the pro forma effect on reported net income would be as follows for the
year ended December 31:
1999
-------------------
Net income
As reported $ 1,386,000
Pro forma 1,179,000
Earnings per share
As reported
Basic $ 2.20
Diluted 2.20
Pro forma
Basic 1.86
Diluted 1.86
48
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Management Recognition Plan and Stock Option Plan (Continued)
In determining the fair value of the option grant as prescribed in Statement No.
123, the Black-Scholes option pricing model was used with the following
assumptions: a risk-free interest rate of 6.65%, expected lives of 10 years,
expected volatility of 54.56% and expected dividends of $2.00 per year.
At December 31, 1999, 58,136 options have been granted at an exercise price of
$31.00, of which 22,120 options are currently exercisable. No options have been
exercised to date and all options granted are outstanding at December 31, 1999.
The MRP reserved for issuance 26,979 shares of common stock to certain officers,
directors, and employees at the time of the adoption. The Company issued 24,281
shares to fund the MRP on January 26, 1999. The restricted common stock under
the MRP vests at the rate of 25% annually beginning at the date of grant. The
expense related to the vesting of the MRP totaled $1,109,000 for the year ended
December 31, 1999, which includes $295,000 for dividends paid in cash on
unvested MRP shares.
Note 12. Earnings Per Share
Earnings per share has been calculated in accordance with FASB Statement No.
128, Earnings Per Share. For purposes of this computation, the number of shares
of common stock purchased by the Bank's employee stock ownership plan which have
not been allocated to participant accounts are not assumed to be outstanding.
The following are reconciliations of the amounts used in the per share
calculations for 1999 and 1998, which are the years the Company was in
operation:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------------------------------
<S> <C> <C> <C>
Basis EPS
Income available to stockholders $ 1,386,000 630,442 $ 2.20
===================
Effect of dilutive securities
Stock options -- 233
----------------------------------------------
Dilutive EPS
Income available to stockholders $ 1,386,000 630,675 $ 2.20
======================================================================
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------------------------------
<S> <C> <C> <C>
Basic and Diluted EPS $ 2,204,000 622,839 $ 3.54
======================================================================
</TABLE>
49
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Commitments, Contingencies and Related Party Transactions
In addition to undisbursed loan funds outstanding, the Bank has mortgage loan
commitments and unused home equity loans and lines of credit outstanding at
December 31, 1999. Commitments, which are disbursed subject to certain
limitations, extend over varying periods of time with the majority subject to
disbursement over a 6-month period. A summary of these commitments, except for
undisbursed loan funds is as follows:
<TABLE>
<CAPTION>
Fixed Rate Variable Rate Total
------------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit, mortgage loans $ 1,835,000 $ - $ 1,835,000
Unused home equity loans and lines of credit - 6,096,000 6,096,000
</TABLE>
The Bank has made loans to its officers and directors in the normal course of
business. The following is an analysis of the loans to officers and directors
for the year ended December 31, 1999:
<TABLE>
<S> <C>
Balance, beginning $ 1,930,000
Originations 184,000
Payments (667,000)
-------------------
Balance, ending $ 1,447,000
===================
</TABLE>
Additionally, officers and directors maintain deposits with the Bank in the
normal course of business. Such deposits amounted to approximately $1,286,000 at
December 31, 1999.
The Bank has entered into employment agreements with certain key employees in
order to establish their duties and compensation and to provide for their
continued employment with the Bank. The agreements will provide for an initial
term of employment of three years. Commencing on the first anniversary date and
continuing on each anniversary date thereafter, following a performance
evaluation of the employee, each agreement may be extended for an additional
year so that the remaining term shall be three years, unless written notice of
non-renewal is given by the Board of Directors. In the event of a change in
control of the Company, the employees are to receive a minimum 6% salary
increase plus an amount equal to the average bonus from the two previous years.
50
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Fair Value of Financial Instruments
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash
Interest-bearing deposits $ 6,912,000 $ 6,912,000 $ 7,806,000 $ 7,806,000
Noninterest-bearing deposits 1,502,000 1,502,000 439,000 439,000
Certificates of deposit 100,000 100,000 100,000 100,000
Investments 4,595,000 4,571,000 11,625,000 11,674,000
Loans receivable 124,863,000 123,714,000 110,578,000 115,351,000
Accrued interest receivable 825,000 825,000 908,000 908,000
FHLB stock 1,060,000 1,060,000 964,000 964,000
Financial liabilities:
Deposits 90,563,000 87,680,000 87,569,000 85,238,000
Advances from borrowers for
taxes and insurance 76,000 76,000 110,000 110,000
Note payable 10,500,000 10,500,000 - -
FHLB advances 5,000,000 5,000,000 - -
Accounts payable and other
liabilities 807,000 807,000 522,000 522,000
Deferred compensation 2,476,000 2,476,000 2,491,000 2,491,000
</TABLE>
The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that the
fair values disclosed in this table do not represent market values of all assets
and liabilities of the Company and, thus, should not be interpreted to represent
the market or liquidation value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and certificates of deposits: The carrying amounts for cash and short-term
- ---------------------------------
instruments approximate their fair values.
Investment securities: Fair values for securities are based on quoted market
- ---------------------
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of similar securities.
51
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Fair Value of Financial Instruments (Continued)
Loans receivable: The fair value of fixed rate loans is estimated by discounting
- ----------------
the future cash flows, adjusted for prepayments, using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. For variable rate loans that reprice
frequently and with no significant change in credit risk, fair values are equal
to carrying amounts. Management believes that the allowance for loan losses is
an appropriate indication of the applicable credit risk associated with
determining the fair value of its loan portfolio and has been deducted from the
estimated fair value of loans.
Accrued interest receivable, advances from borrowers for taxes and insurance,
- -----------------------------------------------------------------------------
accounts payable and other liabilities and deferred compensation: The fair value
- -----------------------------------------------------------------
is the amount receivable on demand at the statement of financial condition date.
Deposits: The fair value of demand deposits, savings accounts, and certain money
- ---------
market deposits is the amount payable on demand at the statement of financial
condition. The fair value of fixed maturity certificates of deposit are
estimated based upon the discounted value of contractual cash flows using rates
currently offered for deposits with similar remaining maturities.
Note payable and FHLB advances: The fair values of the note payable and FHLB
- -------------------------------
advances are equal to their recorded book values due to the market rates of
interest and short-term nature.
Off-statement of financial condition instruments: Fair values for the Bank's
- -------------------------------------------------
off-statement of financial condition instruments (loan commitments) are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standings. The
fair value for such commitments is nominal.
52
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Data
The following are condensed financial statements for Coddle Creek Financial
Corp. as of and for the years ended December 31, 1999 and 1998. The Company had
no operations during the period from December 30, 1997 through December 31,
1997.
Condensed Statements of Financial Condition
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Assets:
Cash $ 12,113,000 $ 9,976,000
Investment in Mooresville Savings Bank, S.S.B. 31,353,000 30,305,000
Securities available for sale 1,772,000 4,929,000
Other assets 154,000 101,000
--------------------------------------
Total assets $ 45,392,000 $ 45,311,000
======================================
Note payable $ 10,500,000 $
Accounts payable and other liabilities 447,000 192,000
--------------------------------------
Total liabilities 10,947,000 192,000
--------------------------------------
Stockholders' Equity:
Additional paid-in capital 23,057,000 32,461,000
Accumulated other comprehensive income (loss) (21,000) 46,000
Unearned ESOP shares (3,725,000) (4,021,000)
Management recognition plan (728,000) -
Unearned compensation (839,000) -
Retained earnings 16,701,000 16,633,000
--------------------------------------
Total stockholders' equity 34,445,000 45,119,000
--------------------------------------
Total liabilities and stockholders' equity $ 45,392,000 $ 45,311,000
======================================
<CAPTION>
Condensed Statements of Income
For the Years Ended December 31, 1999 and 1998
<S> <C> <C>
Equity in earnings of Mooresville Savings Bank, S.S.B. $ 1,352,000 $ 1,790,000
Interest income 427,000 657,000
Interest expense (208,000) (66,000)
Other expense (185,000) (177,000)
--------------------------------------
Net income $ 1,386,000 $ 2,204,000
======================================
</TABLE>
53
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Data (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,386,000 $ 2,204,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in earnings of Mooresville Savings Bank, S.S.B. (1,352,000) (1,790,000)
Changes in assets and liabilities:
Increase in other assets (50,000) (101,000)
Increase (decrease) in accounts payable and other liabilities (17,000) 11,000
--------------------------------------
Net cash provided by (used in) operating activities (33,000) 324,000
--------------------------------------
Cash Flows from Investing Activities:
Due from Mooresville Savings Bank, S.S.B. - 8,989,000
Upstream dividend from Mooresville Savings Bank, S.S.B. 1,295,000 675,000
Purchases of securities available for sale (500,000) (9,459,000)
Proceeds from maturities of securities available for sale 3,623,000 4,550,000
Loan to ESOP for purchase of common stock - (4,216,000)
Principal payment received on note receivable from ESOP 296,000 195,000
--------------------------------------
Net cash provided by investing activities 4,714,000 734,000
--------------------------------------
Cash Flows from Financing Activities:
Proceeds from note payable 12,000,000 -
Payments on note payable (1,500,000) -
Cash dividends paid (13,044,000) (453,000)
--------------------------------------
Net cash used in financing activities (2,544,000) (453,000)
--------------------------------------
Net increase in cash 2,137,000 605,000
Cash - beginning 9,976,000 9,371,000
--------------------------------------
Cash - ending $ 12,113,000 $ 9,976,000
======================================
Supplemental Disclosures of Noncash Transactions
Changes in dividends accrued $ 278,000 $ 169,000
</TABLE>
54
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16. Future Reporting Requirements
The FASB has issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which the Company has not been required to adopt as of
December 31, 1999. This Statement, which is effective for fiscal years beginning
after June 15, 2000, establishes accounting and reporting standards for
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This Statement is not expected to have a significant impact on the
Company.
55
<PAGE>
CORPORATE INFORMATION
EXECUTIVE OFFICERS:
George W. Brawley, Jr.
President and CEO
Dale W. Brawley
Executive Vice President
Billy R. Williams
Secretary/Controller
DIRECTORS:
George W. Brawley, Jr.
Chairman of the Board, President
and CEO of Moorseville Savings
Bank
Dale W. Brawley
Executive Vice President of
Moorseville Savings Bank
Claude U. Voils, Jr.
Retired Chemist
of National Starch
Jack G. Lawler
Retired President of
Taltronics
Don E. Mills
Optometrist
Optometric Eye Care Center
Donald R. Belk
President of E.F. Belk & Son
Electrical Contractors
Stock Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Special Legal Counsel
Brooks, Pierce, McLendon,
Humphrey & Leonard, LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27420
Independent Auditors
McGladrey & Pullen, LLP
One Morrocroft Centre
6805 Morrison Boulevard, Suite 200
Charlotte, NC 28211
Annual Meeting
The 1999 annual meeting of stockholders of
Coddle Creek Financial Corp. will be held at
11:00 A.M. on April 20, 2000 at the Company's
corporate office at 347 North Main Street,
Mooresville, NC.
Form 10-K
A copy of Form 10-K, including the financial statements
for the year ended December 31, 1999, as filed with
the Securities and Exchange Commission will be
furnished without charge to the Company's stockholders
upon written request to Coddle Creek Financial Corp., 347
Main Street, P.O. Box 117, Mooresville, NC 28115
Attn: George Brawley, President
Corporate Office
347 North Main Street
P.O. Box 117
Mooresville, NC 28115
56
<PAGE>
Common Stock Information
The Company had 699,156 shares of common stock outstanding at March 1, 2000,
which are held by 443 shareholders of record, not including the number of
persons or entities where stock is held in nominee or "street" name through
various brokerage firms or banks. The Company's common stock began trading on
December 31, 1997 and is traded on the over the counter market with quotations
available through the OTC Bulletin Board under the symbol "CDLC". Payment of
dividends by the Bank to the Company is subject to various restrictions. Under
applicable banking regulations, the Bank may not declare or pay a cash dividend
if the effect thereof would be to reduce its net worth to an amount less than
the minimum amount required by applicable federal and state regulations. In
addition, for the five year period following the consummation of the Bank's
stock conversion, which occurred on December 30, 1997, the Bank must obtain
written approval from the Administrator of the Savings Institution Division,
North Carolina Department of Commerce, before it can declare a cash dividend in
an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year or (ii) the average of its net income for the most
recent fiscal year and not more than two of the immediately preceding fiscal
years, as applicable. Also, the Bank is not permitted to declare a cash dividend
of the effect thereof would be to cause its net worth to be reduced below the
amount required for the liquidation account established in connection with the
Bank's conversion from mutual to stock form. In connection with such conversion,
the Bank agreed with the FDIC that, during the first three years following the
conversion, neither the Company nor the Bank will pay any taxable dividend in
excess of current and retained earnings.
The following table reflects the stock trading and dividend payment frequency of
the Company for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Dividends Stock Price
------------------------------------------------------------------------------
Regular Special High Low
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
First Quarter $ 0.25 $ - $ 69.00 $ 58.00
Second Quarter 0.53 - 64.00 56.00
Third Quarter 0.63 17.18 60.50 38.50
Fourth Quarter 0.64 - 41.00 29.00
1998
First Quarter $ 0.25 $ - $ 82.75 $ 70.00
Second Quarter 0.25 - 89.00 74.25
Third Quarter 0.25 - 73.25 42.00
Fourth Quarter 0.25 - 62.00 52.00
</TABLE>
57
<PAGE>
[McGladrey & Pullen, LLP Letterhead]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into all Registration
Statements on Form 10-K of Coddle Creek Financial Corp. of our report dated
January 20, 2000, relating to the consolidated statements of financial
conditions of Coddle Creek Financial Corp. and subsidiary as of December 31,
1999 and 1998, and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for each of the years
in the three year period then ended, which report appears in the Company's 1999
annual report on Form 10-K.
s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,502 439
<INT-BEARING-DEPOSITS> 6,912 7,806
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 3,414 10,244
<INVESTMENTS-CARRYING> 2,341 2,445
<INVESTMENTS-MARKET> 2,317 2,494
<LOANS> 125,761 111,473
<ALLOWANCE> 898 895
<TOTAL-ASSETS> 143,867 135,811
<DEPOSITS> 90,563 87,569
<SHORT-TERM> 5,000 0
<LIABILITIES-OTHER> 3,359 3,123
<LONG-TERM> 10,500 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 34,445 45,119
<TOTAL-LIABILITIES-AND-EQUITY> 143,867 135,811
<INTEREST-LOAN> 9,369 8,944
<INTEREST-INVEST> 389 896
<INTEREST-OTHER> 430 476
<INTEREST-TOTAL> 10,188 10,316
<INTEREST-DEPOSIT> 3,987 4,096
<INTEREST-EXPENSE> 4,195 4,096
<INTEREST-INCOME-NET> 5,993 6,220
<LOAN-LOSSES> 0 205
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 4,007 2,957
<INCOME-PRETAX> 2,203 3,243
<INCOME-PRE-EXTRAORDINARY> 2,203 3,243
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,386 2,204
<EPS-BASIC> 2.20 3.54
<EPS-DILUTED> 2.20 3.54
<YIELD-ACTUAL> 7.45 7.80
<LOANS-NON> 1,237 996
<LOANS-PAST> 145 390
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 895 693
<CHARGE-OFFS> 0 5
<RECOVERIES> 3 2
<ALLOWANCE-CLOSE> 898 895
<ALLOWANCE-DOMESTIC> 382 330
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 516 565
</TABLE>
