SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
SPECIAL FINANCIAL REPORT FILED IN ACCORDANCE WITH RULE 15D-2
OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
CONTAINING FINANCIAL STATEMENTS
FOR FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMISSION FILE NUMBER: (NOT YET OBTAINED)
BOC FINANCIAL CORP.
(Name of Small Business Issuer in its Charter)
NORTH CAROLINA
(State of Incorporation)
56-6511744
(I.R.S. Employer Identification No.)
107 SOUTH CENTRAL AVENUE
LANDIS, NORTH CAROLINA 28088
(704) 857-7277
(Address and Telephone Number of
Principal Executive Office)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Check whether the Bank (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Bank was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this Form and no disclosure will be contained,
to the best of the Bank's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments of this Form 10-KSB. NOT APPLICABLE
Issuer's revenues for the year ended December 31, 1997, were $1,766,924.00.
The aggregate market value of the voting stock held by non-affiliates of the
Issuer as of May 11, 1998, was approximately $10,766,892.00 (assuming $12.00 per
share). As of May 11, 1998, 925,741 shares of the Issuer's common stock, $1.00
par value, were outstanding. The Issuer has no other classes of securities
outstanding.
Documents Incorporated by Reference:
NONE.
<PAGE>
LANDIS SAVINGS BANK, SSB
SPECIAL FINANCIAL REPORT/1997 ANNUAL REPORT
<PAGE>
LANDIS SAVINGS BANK, SSB
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TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITORS' REPORT....................................... 1
FINANCIAL STATEMENTS
Statements of Financial Condition............................... 2
Statements of Operations........................................ 3
Statements of Retained Earnings................................. 4
Statements of Cash Flows........................................ 5
Notes to Financial Statements................................... 7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Landis Savings Bank, SSB
Landis, North Carolina
We have audited the accompanying statements of financial condition of Landis
Savings Bank, SSB as of December 31, 1997 and 1996 and the related statements of
operations, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Landis Savings Bank, SSB at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Dixon Odom PLLC
SOUTHERN PINES, NORTH CAROLINA
FEBRUARY 18, 1998
Page 1
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------------- ------------------
<S> <C> <C>
Cash on hand and in banks $ 335,670 $ 307,474
Interest-earning balances in other banks 35,061 33,190
Federal funds sold 1,750,000 675,000
Investment securities available for sale, at fair value
(amortized cost of $2,898,728 and $2,146,388 at
December 31, 1997 and 1996, respectively) (Note B) 2,908,717 2,148,475
Loans receivable, net (Note C) 18,825,931 18,916,960
Accrued interest receivable 44,747 40,440
Premises and equipment, net (Note D) 286,812 291,100
Stock in the Federal Home Loan Bank, at cost 187,200 170,200
Other assets 223,255 78,589
----------------- ------------------
TOTAL ASSETS $ 24,597,393 $ 22,661,428
================= ==================
LIABILITIES AND RETAINED EARNINGS
Deposit accounts (Note G) $ 19,977,920 $ 18,322,484
Advance payments from borrowers for property taxes and insurance 16,835 8,794
Accrued expenses and other liabilities 178,573 17,652
----------------- ------------------
TOTAL LIABILITIES 20,173,328 18,348,930
----------------- ------------------
Commitments and contingencies (Notes C and L)
Retained earnings, substantially restricted 4,424,065 4,312,498
----------------- ------------------
TOTAL LIABILITIES AND RETAINED EARNINGS $ 24,597,393 $ 22,661,428
================= ==================
</TABLE>
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See accompanying notes. Page 2
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
INTEREST INCOME
Loans $ 1,500,983 $ 1,445,284
Investments 182,522 136,781
Deposits in other banks and federal funds sold 78,024 27,485
---------------- ---------------
TOTAL INTEREST INCOME 1,761,529 1,609,550
---------------- ---------------
INTEREST EXPENSE
Deposit accounts 986,335 840,658
---------------- ---------------
NET INTEREST INCOME 775,194 768,892
PROVISION FOR LOAN LOSSES 22,400 5,200
---------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 752,794 763,692
---------------- ---------------
OTHER INCOME
Transaction and other service fee income 2,603 3,803
Gain on sale of assets 2,792 4,008
---------------- ---------------
TOTAL OTHER INCOME 5,395 7,811
---------------- ---------------
OTHER EXPENSES
Personnel costs 420,326 294,888
Occupancy 47,102 47,077
Data processing and outside service fees 52,320 72,679
Deposit insurance premiums 11,847 27,275
SAIF special assessment (Note I) - 101,142
Other 76,942 66,805
---------------- ---------------
TOTAL OTHER EXPENSES 608,537 609,866
---------------- ---------------
INCOME BEFORE INCOME TAXES 149,652 161,637
INCOME TAX EXPENSE 43,000 49,790
---------------- ---------------
NET INCOME $ 106,652 $ 111,847
================ ===============
</TABLE>
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See accompanying notes. Page 3
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Total
Retained holding retained
earnings gains (losses) earnings
--------------- ---------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 4,199,477 $ 6,836 $ 4,206,313
Net income 111,847 - 111,847
Unrealized holding gains
(losses), net of income tax
benefit of $4,400 - (5,662) (5,662)
--------------- ---------------- ---------------
Balance at December 31, 1996 4,311,324 1,174 4,312,498
Net income 106,652 - 106,652
Unrealized holding gains
(losses), net of income
taxes of $2,987 - 4,915 4,915
--------------- ---------------- ---------------
Balance at December 31, 1997 $ 4,417,976 $ 6,089 $ 4,424,065
=============== ================ ===============
</TABLE>
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See accompanying notes. Page 4
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 106,652 $ 111,847
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 29,277 25,250
Amortization, net (32,086) (34,701)
Gain on sale of assets, net (2,792) (4,008)
Provision for loan losses 22,400 5,200
Deferred income taxes (48,000) 1,807
Deferred compensation 123,000 -
Changes in assets and liabilities:
Increase in accrued interest receivable (4,307) (5,963)
(Increase) decrease in other assets 56,530 (323)
Increase (decrease) in accrued expenses and other liabilities 37,921 (17,632)
---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 288,595 81,477
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning balances in other banks (1,871) (732)
Net increase in federal funds sold (1,075,000) (575,000)
Purchases of available for sale investment securities (3,244,262) (2,293,012)
Proceeds from maturities of:
Available for sale investment securities 650,000 1,325,000
Held to maturity investment securities - 23,151
Proceeds from sales of available for sale investment securities 1,846,109 800,868
Purchase of Federal Home Loan Bank stock (17,000) (12,700)
Proceeds from sales of loans 5,362 -
Net (increase) decrease in loans 93,958 (1,579,417)
Purchase of premises and equipment (24,989) (40,830)
---------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (1,767,693) (2,352,672)
---------------- ---------------
</TABLE>
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See accompanying notes. Page 5
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings accounts $ 1,831,692 $ 1,620,600
Net increase (decrease) in certificates of deposit (176,256) 856,338
Net increase in advance payments from borrowers
for taxes and insurance 8,041 1,708
Stock conversion costs incurred (156,183) -
---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,507,294 2,478,646
---------------- ---------------
NET INCREASE IN CASH ON HAND AND IN BANKS 28,196 207,451
CASH ON HAND AND IN BANKS, BEGINNING 307,474 100,023
---------------- ---------------
CASH ON HAND AND IN BANKS, ENDING $ 335,670 $ 307,474
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 986,335 $ 840,658
================ ===============
Income taxes $ 43,640 $ 65,933
================ ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Unrealized holding gains (losses) on available for sale
investment securities, net of deferred income taxes $ 4,915 $ 5,662
================ ===============
</TABLE>
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See accompanying notes. Page 6
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Landis Savings Bank, SSB of Landis, North Carolina ("Landis Savings" or "Bank")
is an operating mutual savings bank chartered in North Carolina. The Bank is
primarily engaged in the business of obtaining savings deposits from and
providing loans to the general public.
Nature of Business
Landis Savings maintains its offices and conducts its primary business in
Landis, North Carolina. The Bank is primarily engaged in the business of
attracting deposits from the general public and using such deposits to make
mortgage loans secured by one-to-four family residential real estate located in
its primary market area. The Bank also makes home equity line of credit loans,
multi-family residential loans, commercial loans, construction loans and loans
secured by deposit accounts. Landis Savings has been and intends to continue to
be a community-oriented financial institution offering a variety of financial
services to meet the needs of the community it serves.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.
A majority of the Bank's loan portfolio consists of single-family residential
loans in its market area. The regional economy is currently stable and consists
of various types of industry. Real estate prices in this market are also stable;
however, the ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
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Page 7
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities
The Bank classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading or held to
maturity securities at December 31, 1997 or 1996. All securities are classified
as available for sale.
Available for sale securities consist of investment securities not classified as
trading securities or held to maturity securities and are recorded at fair
value. Unrealized holding gains and losses, net of the related tax effect, on
securities available for sale are excluded from earnings and are reported as a
separate component of retained earnings until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer.
Unrealized holding gains or losses associated with transfers of securities from
held to maturity to available for sale are recorded as a separate component of
retained earnings.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses are included
in earnings and the costs of securities sold are derived using the specific
identification method.
Loans Receivable
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired. Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is recognized only to the extent of interest
payments received.
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Page 8
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable (Continued)
The Bank accounts for impaired loans in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure." A loan is impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement will not be collected. Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or at the loan's observable
market price, or the fair value of the collateral of the loan if the loan is
collateral dependent. Interest income from impaired loans is recognized using
the cash basis method of accounting during the time within that period in which
the loans were impaired.
Allowance for Loan Losses
The Bank provides for loan losses on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded using straight-line and
accelerated methods over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
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Page 9
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Federal Home Loan Bank Stock
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Real Estate Acquired In Settlement of Loans
Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
Income Taxes
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Bank's assets and liabilities result in
deferred tax assets, applicable accounting standards require an evaluation of
the probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note J. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
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Page 10
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Benefit Plans
The Bank has a profit sharing plan that covers substantially all of the Bank's
employees and qualifies under the provisions of ss.401(a) of the Internal
Revenue Code. The Board of Directors determines discretionary contributionS on
an annual basis. The Bank also has a non-contributory director's retirement plan
that covers all eligible directors. The expense for the plan is accrued monthly
assuming a 6% discount rate and 100% vesting of benefits. Payment of benefits is
based on age and vesting requirements outlined in the plan. In 1996, the Bank
terminated its defined benefit retirement plan.
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income as has been historically
determined, comprehensive income for the Bank would include unrealized holding
gains and losses on available for sale securities. This Statement will be
effective for the Bank's fiscal year ending December 31, 1998, and the Bank does
not intend to early adopt. Had the Bank early-adopted this Statement, it would
have reported comprehensive income of $111,567 and $106,185 for the years ended
December 31, 1997 and 1996, respectively.
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 2,898,728 $ 10,413 $ 424 $ 2,908,717
============== ============== ============== ==============
December 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 2,146,388 $ 4,196 $ 2,109 $ 2,148,475
============== ============== ============== ==============
</TABLE>
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Page 11
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair values of securities available for sale at December
31, 1997 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale
-----------------------------
Amortized Fair
Cost Value
---- -----
Due within one year $ 1,150,000 $ 1,151,450
Due after one year through five years 1,748,728 1,757,267
-------------- --------------
$ 2,898,728 $ 2,908,717
============== ==============
Proceeds from maturities and sales of investment securities available for sale
during the year ended December 31, 1997 were $650,000 and $1,846,109,
respectively. Gross gains and losses of $2,423 and $78, respectively, were
realized on those sales.
Proceeds from maturities and sales of investment securities available for sale
during the year ended December 31, 1996 were $1,325,000 and $800,868,
respectively. Gross gains of $4,008 were realized on those sales. Proceeds from
maturities of investment securities held to maturity during the year ended
December 31, 1996 were $23,151. No gains or losses were realized on those
maturities.
Securities with a carrying value of $300,000 at December 31, 1997 were pledged
to secure public monies on deposit as required by law.
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Page 12
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential
Fixed $ 11,506,221 $ 11,611,870
Adjustable 5,165,129 5,313,349
Multi-family residential
Adjustable 198,277 224,531
Commercial
Fixed 65,000 -
Adjustable 245,516 248,245
Construction
Adjustable - 413,000
Home equity lines of credit
Adjustable 1,302,954 1,174,895
Home improvement loans
Fixed 353,754 263,577
--------------- ---------------
Total real estate loans 18,836,851 19,249,467
--------------- ---------------
Other loans:
Loans secured by deposits
Fixed 104,388 58,524
--------------- ---------------
Total loans 18,941,239 19,307,991
Less:
Construction loans in process - (289,044)
Allowance for loan losses (30,000) (7,600)
Deferred loan origination fees, net of costs (85,308) (94,387)
--------------- ---------------
$ 18,825,931 $ 18,916,960
=============== ===============
</TABLE>
At December 31, 1997 and 1996, the Bank had no loans in nonaccrual status.
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Page 13
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (CONTINUED)
The allowance for loan losses is summarized as follows:
1997 1996
--------------- ---------------
Balance at beginning of year $ 7,600 $ 2,400
--------------- ---------------
Loans charged off:
Real estate - -
Other - -
--------------- ---------------
Total loans charged off - -
--------------- ---------------
Recoveries:
Real estate - -
Other - -
--------------- ---------------
Total loan recoveries - -
--------------- ---------------
Provision for loan losses 22,400 5,200
--------------- ---------------
Balance at end of year $ 30,000 $ 7,600
=============== ===============
At December 31, 1997, the Bank had mortgage loan commitments outstanding of
$149,200 and pre-approved but unused lines of credit totaling $1,743,950. In
management's opinion, these commitments, and undisbursed proceeds on
construction loans in process reflected above, represent no more than normal
lending risk to the Bank and will be funded from normal sources of liquidity.
The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and on substantially the
same terms and collateral as those for comparable transactions prevailing at the
time and did not involve more than the normal risk of collectibility or present
other unfavorable features. A summary of related party loan transactions is as
follows:
1997 1996
-------------- ---------------
Balance at beginning of year $ 190,160 $ 239,646
Additional borrowings 179,544 115,456
Loan repayments (41,517) (164,942)
-------------- ---------------
Balance at end of year $ 328,187 $ 190,160
============== ===============
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Page 14
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1997 1996
-------------- ---------------
Land $ 16,000 $ 16,000
Building and improvements 390,007 371,236
Furniture and equipment 153,721 147,503
-------------- ---------------
559,728 534,739
Accumulated depreciation (272,916) (243,639)
-------------- ---------------
$ 286,812 $ 291,100
============== ===============
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank has a $2,000,000 line of credit from the Federal Home Loan Bank, which
is secured by a blanket floating lien on the Bank's one-to-four family
residential mortgage loans. As of December 31, 1997, there were no advances on
this line of credit.
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Savings deposits:
Regular passbook $ 4,069,228 3.20% $ 4,333,767 3.05%
Money market 4,761,984 5.23% 2,665,753 5.58%
--------------- ---------------
8,831,212 4.29% 6,999,520 4.01%
Certificates of deposit 11,146,708 5.68% 11,322,964 5.74%
--------------- ---------------
Total deposit accounts $ 19,977,920 5.07% $ 18,322,484 5.08%
=============== ===============
</TABLE>
The weighted average cost of deposit accounts was 5.07% and 5.08% at December
31, 1997 and 1996, respectively.
- -------------------------------------------------------------------------------
Page 15
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE G - DEPOSIT ACCOUNTS (CONTINUED)
A summary of certificate accounts by maturity as of December 31, 1997 follows:
<TABLE>
<CAPTION>
Less than $100,000
$100,000 or More Total
-------- ------- -----
<S> <C> <C> <C>
Three months or less $ 2,298,106 $ 332,153 $ 2,630,259
Over three months through twelve months 3,926,181 1,977,120 5,903,301
Over one year through three years 2,008,091 605,057 2,613,148
Over three years - - -
------------- ---------------- --------------
Total certificate accounts $ 8,232,378 $ 2,914,330 $ 11,146,708
============= ================ ==============
</TABLE>
Interest expense on deposits for the years ended December 31, 1997 and 1996 is
summarized as follows:
1997 1996
-------------- ---------------
Regular passbook savings $ 128,714 $ 144,488
Money market savings 209,328 74,822
Certificates of deposit 650,264 622,362
-------------- ---------------
988,306 841,672
Penalties for early withdrawal 1,971 1,014
-------------- ---------------
$ 986,335 $ 840,658
============== ===============
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Pension Plan
The Bank terminated its qualified, noncontributory defined benefit retirement
plan during 1996. The pension expense incurred during the years ended December
31, 1997 and 1996 was $-0- and $7,510, respectively.
Profit Sharing Plan
On June 26, 1996, the Bank adopted a profit sharing plan under the provisions of
ss.401(a) of the Internal Revenue Code. Under the plan, the directors of the
Bank contribute a discretionary amount to the plan at the end of each plan year.
Participation in the plan is available to any employee of the Bank who has at
least one year of service of 1,000 hours or more with the Bank. Also, a
participant's share of the employer contributions begins vesting at a rate of
20% per year after three years of service and is considered fully vested after 7
years of service. Plan benefits are paid out at retirement age (65) or other
times as described in the plan. For each of the plan years ended December 31,
1997 and 1996, the Bank incurred $18,000 of expense in the form of contributions
to the plan.
- -------------------------------------------------------------------------------
Page 16
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Directors' Retirement Plan
A directors' retirement plan, effective June 1, 1997, was adopted for the
purpose of providing retirement benefits to members of the Board of Directors
who provide expertise in direction of the Bank's growth and to ensure that the
Bank will have their continued assistance in the future. All directors are
eligible to participate in the plan. Retirement benefits, to the extent earned,
will be payable to a participant who has attained the age of 70 years and has
retired from service on the Board. For participants who have attained the age of
65 as of June 1, 1997, benefits are earned over a five-year period beginning on
the first anniversary of the plan at a rate of 20% per year. For all other
participants, benefits are at a rate of 10% per year commencing on the first
anniversary following the participant's tenth year of service as a member of the
Board of Directors. Full retirement benefits are provided in the event of death
or permanent disability. Expenses for this plan were $105,000 for the year ended
December 31, 1997.
NOTE I - SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into
law. The legislation included a special assessment to recapitalize the SAIF
insurance fund up to its statutory goal of 1.25% of insured deposits. The
assessment required the Bank to pay an amount equal to 65.7 basis points of its
SAIF-assessable deposit base as of March 31, 1995, which resulted in a charge to
income during the year ended December 31, 1996 of $101,142.
- -------------------------------------------------------------------------------
Page 17
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE J - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Current tax expense $ 91,000 $ 43,583
Net deferred expense (benefit) included in operations (48,000) 6,207
-------------- ---------------
$ 43,000 $ 49,790
============== ===============
</TABLE>
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Income tax at federal statutory rate $ 50,882 $ 54,957
State income tax, net of federal tax benefit 614 1,913
Effect of graduated rate brackets (9,267) (9,346)
Other 771 2,266
-------------- ---------------
$ 43,000 $ 49,790
============== ===============
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Deferred tax assets relating to:
Allowance for loan losses $ 11,454 $ 2,973
Deferred compensation 41,234 -
Loan fees and costs 31,446 33,585
-------------- ---------------
Gross deferred tax assets 84,134 36,558
Valuation allowance - -
-------------- ---------------
Net deferred tax assets 84,130 36,558
-------------- ---------------
Deferred tax liabilities relating to:
FHLB stock dividends 26,842 26,842
Unrealized gains on investment securities
available for sale 3,900 913
-------------- ---------------
Total deferred tax liabilities 30,742 27,755
-------------- ---------------
Net deferred tax assets $ 53,388 $ 8,803
============== ===============
</TABLE>
- -------------------------------------------------------------------------------
Page 18
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE J - INCOME TAXES (CONTINUED)
Retained earnings at December 31, 1997 include approximately $748,000 for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts.
NOTE K - REGULATORY RESTRICTIONS
Capital Requirements
The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC") and
the Administrator, Savings Institutions Division, North Carolina Department of
Commerce (the "Administrator").
The Bank is subject to the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier 1
capital to risk-weighted assets and total capital to risk-weighted assets of 4%
and 8%, respectively. Tier 1 capital consists of total retained earnings
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier 1 capital plus certain
adjustments, the only one of which applies to the Bank is the allowance for
possible loan losses. Risk-weighted assets refer to the on- and off-balance
sheet exposures of the Bank adjusted for their relative risk levels using
formulas set forth in FDIC regulations. The Bank is also subject to an FDIC
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly average total assets of 3% to 5%, depending on
the institution's composite ratings as determined by its regulators. The
Administrator requires a net worth equal to at least 5% of total assets.
- -------------------------------------------------------------------------------
Page 19
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE K - REGULATORY RESTRICTIONS (CONTINUED)
Capital Requirements (Continued)
At December 31, 1997, the Bank was in compliance with all of the aforementioned
capital requirements as shown below:
<TABLE>
<CAPTION>
Leverage Tier 1 Risk
Ratio Adjusted Risk Based N.C. Savings
Tier 1 Capital Capital Capital Bank Capital
-------------- ------- ------- ------------
<S> <C> <C> <C> <C>
Retained earnings $ 4,424,065 $ 4,424,065 $ 4,424,065 $ 4,424,065
Unrealized gain on securities (6,089) (6,089) (6,089) (6,089)
Loan loss allowance - - 30,000 30,000
----------------- ---------------- ---------------- ----------------
Regulatory capital 4,417,976 4,417,976 4,447,976 4,447,976
Minimum capital requirement 732,000 412,000 824,000 1,230,000
----------------- ---------------- ---------------- ----------------
Excess regulatory capital $ 3,685,976 $ 4,005,976 $ 3,623,976 $ 3,217,976
================= ================ ================ ================
</TABLE>
NOTE L - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Landis, North Carolina. The Bank's underwriting policies require
such loans to be made at no greater than 80% loan-to-value based upon appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit on mortgage loans and
equity lines of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
statements of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of December 31, 1997 is as follows:
Financial instruments whose contract amounts represent credit
risk:
Commitments to extend credit, mortgage loans $ 149,200
Undisbursed lines of credit 1,743,950
- -------------------------------------------------------------------------------
Page 20
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE M - OTHER COMMITMENTS
On December 17, 1997, the Bank signed a letter of intent to purchase land for a
new branch location for $557,377
NOTE N - SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Bank committed to purchase, without
recourse, a participating interest in a loan to be made by another bank. The
total loan will be for $1,071,000, with Landis Savings Bank's participation
being $500,000.
NOTE O - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Bank has implemented Statement of Financial Accounting Standards No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ("SFAS 107"), which
requires disclosure of the estimated fair values of the Bank's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash,
interest-earning balances, federal funds sold, investment securities, loans,
stock in the Federal Home Loan Bank of Atlanta, deposit accounts, and
commitments. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no active market readily exists for a portion of
the Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH ON HAND AND IN BANKS, INTEREST BEARING BALANCES IN OTHER BANKS,
AND FEDERAL FUNDS SOLD
The carrying amounts for these approximate fair value because of the
short maturities of those instruments.
INVESTMENT SECURITIES
Fair value for investment securities equals quoted market price if
such information is available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
- -------------------------------------------------------------------------------
Page 21
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE O - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
STOCK IN FEDERAL HOME LOAN BANK OF ATLANTA
The fair value for FHLB stock is its carrying value, since this is
the amount for which it could be redeemed. There is no active market
for this stock and the Bank is required to maintain a minimum
balance based on the unpaid principal of home mortgage loans.
DEPOSIT LIABILITIES
The fair value of savings deposits is the amount payable on demand
at the reporting date. The fair value of fixed maturity certificates
of deposit is estimated using rates currently offered for deposits
of similar remaining maturities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
With regard to financial instruments with off-balance sheet risk
discussed in Note L, it is not practicable to estimate the fair
value of future financing commitments.
The carrying amounts and estimated fair values of the Bank's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Financial assets:
Cash, interest bearing balances, federal funds sold $ 2,120,731 $ 2,120,731
Investment securities 2,908,717 2,908,717
Loans 18,825,931 19,052,931
Stock in Federal Home Loan Bank of Atlanta 187,200 187,200
Financial liabilities - Deposits 19,977,920 19,840,920
</TABLE>
NOTE P - PLAN OF CONVERSION
On September 29, 1997, the Board of Directors of the Bank unanimously adopted a
Plan of Holding Company Conversion whereby the Bank will convert from a North
Carolina-charted mutual savings bank to a North Carolina-chartered stock
commercial bank and will become a wholly-owned subsidiary of a holding company
formed in connection with the Conversion. The holding company will issue common
stock to be sold in the Conversion and will use that portion of the net proceeds
thereof which it does not retain to purchase the capital stock of the Bank. The
Plan is subject to approval by regulatory authorities and the members of the
Bank at a special meeting.
- -------------------------------------------------------------------------------
Page 22
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE P - PLAN OF CONVERSION (CONTINUED)
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed management recognition plan at a meeting of the
stockholders after the Conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common stock or
they may be purchased in the open market. In the event that options or shares
are issued under these plans, such issuances will be included in the earnings
per share calculation; thus, the interests of existing stockholders will be
diluted.
At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its net worth as reflected in its latest statement of financial
condition used in its final conversion prospectus. The liquidation account will
be maintained for the benefit of eligible deposit account holders who continue
to maintain their deposit accounts in the Bank after conversion. Only in the
event of a complete liquidation will each eligible deposit account holder be
entitled to receive a subaccount balance for deposit accounts then held before
any liquidation distribution may be made with respect to common stock. Dividends
paid by the Bank subsequent to the Conversion cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
As of December 31, 1997, $156,183 of conversion costs had been incurred. If the
Conversion is ultimately successful, Conversion costs will be accounted for as a
reduction of the stock proceeds. If the Conversion is unsuccessful, Conversion
costs will be charged to the Bank's operations.
NOTE Q - THE YEAR 2000
As is the case with substantially all financial institutions, the Bank relies
upon computers for the daily conduct of its business. There is concern that on
January 1, 2000 many computers will be unable to "read" the new year. Thus, at
the turn of the century, computer-based information systems will be faced with
the problems potentially affecting hardware, software, networks and processing
platforms, as well as customer and vendor interdependencies. The Bank has
established a committee and is in the process of assessing the effect of Year
2000 on its operating plans and systems. The Bank is developing a plan for
identifying, renovating, testing and implementing its systems for Year 2000
processing and internal control requirements. The Bank's third party data
processor, a significant provider of data processing services to the financial
services industry, has given assurances that it will be Year 2000 compliant.
Because of the nature of the Bank's operations and customer base, and relying
upon assurances from the major Year 2000 party who could have an impact on the
Bank (the Bank's third party data processor), the Bank does not believe that any
cost to be incurred in achieving full Year 2000 compliance will have a material
effect upon the Bank's financial condition or results of operations. In its
conversion to a commercial bank, the Bank, in implementing and adopting new
products and services, will assure itself that any support services required by
third parties will be Year 2000 compliant before becoming obligated for any such
support services.
- -------------------------------------------------------------------------------
Page 23
<PAGE>
In accordance with the Securities Exchange Act of 1934, as amended, and Rule
15d-2(b) promulgated thereunder, this Special Financial Report has been signed
below by the following persons on behalf of the Issuer and in the capacity and
on the dates indicated.
DATE: May 12, 1998 /s/ Stephen R. Talbert
------------ ----------------------
Stephen R. Talbert
President and Chief Executive Officer
Director
DATE: May 12, 1998 /s/ Lisa Blalock Ashley
------------ -----------------------
Lisa Blalock Ashley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
and Rule 15d-2(b) promulgated thereunder, this Special Financial Report has been
signed below by the following persons on behalf of the Issuer and in the
capacity and on the dates indicated.
/s/ Thomas P. Corriher May 12, 1998
- ---------------------------- ------------
Thomas P. Corriher, Director Date
/s/ Henry H. Land May 12, 1998
- --------------------------- ------------
Henry H. Land, Director Date
/s/ John A. Drye May 12, 1998
- --------------------------- ------------
John A. Drye, Director Date
/s/ Susan Linn Norvell May 12, 1998
- ------------------------------ ------------
Susan Linn Norvell, Director Date
/s/ Lynne Scott Safrit May 12, 1998
- ----------------------------- -------------
Lynne Scott Safrit, Director Date
