U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 1998
-----------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______ to ______
Commission file number 0-24245
BOC FINANCIAL CORP.
107 SOUTH CENTRAL AVENUE
LANDIS, NORTH CAROLINA 28088
NORTH CAROLINA 56-6511744
(State of Incorporation) (IRS Employer Identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
The Registrant has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and has been
subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not
contained herein, and will not be contained, to the best of the Registrant's
knowledge, in the definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
The Registrant's revenues for the year ended December 31, 1998 were $2,117,798.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the sale price of the common stock in recent transactions
was $7,863,058. Shares of common stock held by each executive officer and
director have been excluded in that such persons are deemed to be affiliates.
As of March 25, 1999, the Registrant had 879,741 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated
by reference into Part II of this report. Portions of the Registrant's
definitive Proxy Statement dated April 8, 1999, are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (check one) Yes ( ) No ( X )
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FORM 10-KSB CROSS REFERENCE INDEX
As indicated below, portions of (i) the Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1998, and (ii) the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
May 4, 1999, filed with the Securities and Exchange Commission via EDGAR are
incorporated by reference into Parts II and III of this Report.
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KEY
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<S> <C> <C> <C>
AR Annual Report to Shareholders for the fiscal year ended December 31, 1998.
Proxy Proxy Statement for the Annual Meeting of Shareholders to be held
May 4, 1999.
10-KSB 10-KSB for the year ended December 31, 1998.
PART I DOCUMENT
Item 1. Business Page 3 10-KSB
Item 2. Properties Page 8 10-KSB
Item 3. Legal Proceedings Page 8 10-KSB
Item 4. Submission of Matters to a Vote of Security Holders Page 8 10-KSB
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters Page 9 AR
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 9 AR
Item 7. Financial Statements and Supplementary Data Page 9 AR
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Page 9 10-KSB
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of Exchange Act Page 9 Proxy
Item 10. Executive Compensation Page 9 Proxy
Item 11. Security Ownership of Certain Beneficial Owners and
Management Page 9 Proxy
Item 12. Certain Relationships and Related Transactions Page 9 Proxy
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Index to Exhibits Page 9 10-KSB
(b) Reports on Form 8-K filed during the
three months ended December 31, 1998 Page 10 10-KSB
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BOC Financial Corp. (the "Registrant") was incorporated under the laws of the
State of North Carolina on December 1997, at the direction of the Board of
Directors of Landis Savings Bank, SSB (the "Savings Bank"), for the purpose of
serving as the bank holding company of Bank of the Carolinas, the Savings Bank's
successor by conversion of its charter from a mutual state savings bank to a
North Carolina chartered commercial bank. Pursuant to a Plan of Conversion dated
September 29, 1997, and ultimately approved by the members of the Savings Bank
at a special meeting held on March 17, 1998, the Registrant was formed and the
Savings Bank converted from a mutual savings bank to a stock savings bank (the
"Converted Savings Bank"). The Converted Savings Bank issued all of its capital
stock to the Registrant, thereby making the Registrant its sole shareholder and
bank holding company, in exchange for 50% of the aggregate net proceeds realized
from the sale of shares of the Registrant's common stock. The Converted Savings
Bank simultaneously converted to a North Carolina commercial bank, Bank of the
Carolinas (the "Bank").
The Bank is a North Carolina chartered commercial bank which was officially
formed by charter conversion effective April 28, 1998. It has a main banking
office at 107 South Central Avenue, Landis, North Carolina, and is acquiring a
parcel of land in a new business park in Concord, North Carolina on which it
intends to construct its first branch office.
At December 31, 1998, the Registrant and its only subsidiary, the Bank, had 6
full-time employees.
BUSINESS OF THE BANK
The Bank engages in a general banking business in parts of Cabarrus, Iredell and
Rowan Counties, North Carolina. Its operations are primarily retail oriented and
directed to individuals and small to medium-sized businesses located in its
market area and its deposits and loans are derived primarily from customers in
its geographical market. The Bank provides most traditional commercial and
consumer banking services, including personal and commercial checking and
savings accounts, money market accounts, certificates of deposit, individual
retirement accounts and related business and individual banking services. The
Bank's lending activities include commercial loans to small-to-medium sized
businesses located primarily in its market area for various purposes, and
various consumer-type loans to individuals, including installment loans,
mortgage loans, equity lines of credit and overdraft checking credit. The Bank
issues an electronic banking card, which functions as a point-of-sale card and
allows its customers to access their deposit accounts at one branch of the Bank
and at the automated teller machines of other banks linked to the HONOR or
CIRRUS networks, and offers Visa or MasterCard credit cards on any agency basis.
Customers of the Bank are also provided access to a financial services company
that provides investment advice and agency services regarding mutual funds,
fixed and variable annuities, and several forms of insurance products (life,
health, home, auto). The Bank does not provide the services of a trust
department.
COMPETITION
The Bank's primary service area is a seven-mile radius around its main office,
which includes portions of Cabarrus, Iredell and Rowan Counties (the "PSA").
Commercial banking in the PSA and in North Carolina as a whole is extremely
competitive with state laws permitting state-wide branching. The Bank competes
directly for deposits in the PSA with other commercial banks, savings banks,
credit unions, agencies issuing United States government securities and all
other organizations and institutions engaged in money market transactions. In
its lending activities, the Bank competes with all other financial institutions
as well as consumer finance companies, mortgage companies and other lenders
engaged in the business of extending credit. In Cabarrus, Iredell and Rowan
Counties, some of the largest banks in North Carolina operate full service
offices as well as numerous community financial institutions.
Interest rates, both on loans and deposits, and prices of services are
significant competitive factors among financial institutions generally. Office
location, office hours, customer service, community reputation and continuity of
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personnel are also important competitive factors. Many of the Bank's competitors
have greater resources, broader geographic markets and higher lending limits,
and can offer more products and better afford and make more effective use of
media advertising, support services and electronic technology than the Bank. The
Bank depends on its reputation as a community bank in its local market, direct
customer contact, its ability to make credit and other business decisions
locally, and personalized service to counter these competitive disadvantages.
INTERSTATE BANKING AND BRANCHING
Federal law permits adequately capitalized and managed bank holding companies to
acquire control of the assets of banks in any state (the "Interstate Banking
Law"). Acquisitions are subject to anti-trust provisions that cap at 10% the
portions of the total deposits of insured depository institutions in the United
States that a single bank holding company may control, and generally cap at 30%
the portion of the total deposits in any state that a single bank holding
company may control. Under certain circumstances, states have the authority to
increase or decrease the 30% cap, and states may set minimum age requirements of
up to five years on target banks within their borders.
Effective June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permitted interstate branching by allowing a bank to merge with
a bank located in a different state. A state could have accelerated the
effective date for interstate mergers by adopting a law authorizing such
transactions prior to June 1, 1997, or it could have "opted out" and thereby
prohibited interstate branching by enacting legislation to that effect prior to
that date. The Interstate Banking Law also permits banks to establish branches
in other states by opening new branches or acquiring existing branches of other
banks if the laws of those other states specifically permit that form of
interstate branching. North Carolina has adopted statutes which, subject to
conditions contained therein, specifically authorize out-of-state bank holding
companies and banks to acquire or merge with North Carolina banks and to
establish or acquire branches in North Carolina. South Carolina, Tennessee and
Virginia have similar laws and interstate mergers or branching has occurred or
has been applied for among these three states and North Carolina.
SUPERVISION AND REGULATION
The business and operations of the Registrant and its Subsidiary Bank are
subject to extensive federal and state governmental regulation and supervision.
Registrant 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 is subject to supervision and
examinations by and the regulations and reporting requirements of the Federal
Reserve. Under the BHCA, the activities of the Registrant and the Bank are
limited to banking, managing or controlling banks, furnishing services to or
performing services for their 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 Registrant from acquiring direct or indirect control of
more than 5% of the outstanding voting stock or substantially all of the assets
of any financial institution, 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 Registrant from engaging
in, or acquiring ownership or control of more than 5% of the outstanding voting
stock of any company engaged in a non-banking activity unless such activity is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. In approving an application by the Registrant to
engage in a non-banking activity, the Federal Reserve must consider whether that
activity can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices.
There are a number of obligations and restrictions imposed by law on a bank
holding company and its insured depository institution subsidiaries that are
designed to minimize potential loss to depositors and the FDIC insurance funds.
For example, if a bank holding company's insured depository institution
subsidiary becomes
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"undercapitalized", the bank holding company is required to guarantee (subject
to certain limits) the subsidiary's compliance with the terms of any capital
restoration plan filed with its appropriate federal banking agency.
Also, a bank holding company is required to serve as a source of financial
strength to its depository institution subsidiaries and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. Under the BHCA, the Federal Reserve has the authority to require a bank
holding company to terminate any activity or to relinquish control of a nonbank
subsidiary upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness and stability of a
depository institution subsidiary of the bank holding company.
As a result of its ownership of a North Carolina-chartered commercial bank, the
Registrant also is registered with and subject to regulation by the North
Carolina Commissioner of Banks (the "Commissioner") under the state's bank
holding company laws. The Commissioner has asserted authority to examine North
Carolina bank holding companies and their affiliates.
The Bank is a North Carolina commercial bank and its deposits are insured by
Savings Association Insurance Fund ("SAIF") of the FDIC. The Bank is subject to
supervision and examination by and the regulations and reporting requirements of
the Commissioner and the FDIC. The Bank also is a member of the Federal Home
Loan Bank System (the "FHLB System").
The Bank is subject to legal limitations on the amounts of dividends it is
permitted to pay. Prior approval of the Commissioner is required if the total of
all dividends declared by the Bank in any calendar year exceeds its net profits
(as defined by statute) for the preceding two calendar years, less any required
transfers to surplus. As an insured depository institution, the Bank also is
prohibited from making capital distributions, including the payment of
dividends, if after making such distribution, it would become "undercapitalized"
(as such term is defined in the Federal Deposit Insurance Act).
Under current federal laws, certain transactions between a depository
institution and its affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a depository institution is any company or
entity that controls, is controlled by or is under common control with the
institution, and in a holding company context, the parent holding company of a
depository institution and any companies which are controlled by such parent
holding company are affiliates of the depository institution. Generally,
Sections 23A and 23B (i) limit the extent to which a depository institution or
its subsidiaries may engage in covered transactions with any one affiliate, and
(ii) require that such transactions be on terms and under circumstances
substantially the same, or at least as favorable, to the institution or the
subsidiary as those provided to a nonaffiliate.
The Bank is subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
equal credit, fair reporting laws and laws relating to branch banking. As an
insured institution, the Bank is prohibited from engaging as a principal in
activities that are not permitted for national banks unless (i) the FDIC
determines that the activity would pose no significant risk to the appropriate
deposit insurance fund and (ii) the institution is and continues to be in
compliance with all applicable capital standards. Insured institutions also are
prohibited from directly acquiring or retaining any equity investment of a type
or in an amount not permitted for national banks.
The Federal Reserve, the FDIC and the Commissioner all have broad powers to
enforce laws and regulations applicable to the Registrant and the Bank and to
require corrective action of conditions affecting the safety and soundness of
the Bank. Among others, these powers include cease and desist orders, the
imposition of civil penalties and the removal of officers and directors.
Registrant and the Bank in the past have not had, and do not foresee in the
future, any significant regulatory compliance problems.
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CAPITAL REQUIREMENTS
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets of 8%. At least half of the total capital is required to be
composed of common equity, retained earnings and a limited amount of qualifying
perpetual preferred stock, less certain intangibles ("Tier I capital"). In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum leverage capital ratio under which a bank holding company must maintain
a 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 leverage capital ratio of at least
1% to 2% above the stated minimum.
The Bank also is subject to capital requirements imposed by the FDIC. Under the
FDIC's regulations, insured institutions that receive the highest rating during
the examination process and are not anticipating or experiencing any significant
growth are required to maintain a minimum leverage ratio of 3% of Tier I capital
to average total consolidated assets. All other insured institutions are
required to maintain a minimum ratio of 1% or 2% above the stated minimum, with
a 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 of at least 8%.
FDIC INSURANCE ASSESSMENTS
The Bank is subject to insurance assessments imposed by the FDIC. Effective
January 1, 1997, the FDIC adopted a risk-based assessment schedule providing for
annual assessment rates ranging from 0% to .27% of an institution's average
assessment base, applicable to institutions insured by both the Bank Insurance
Fund ("BIF") and the SAIF. The actual assessment to be paid by each insured
institution is based on the institution's assessment risk classification, which
is determined based on whether the institution is considered "well capitalized",
"adequately capitalized", or "under capitalized", as such terms have been
defined in applicable federal regulations, and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. The FDIC also is authorized to impose one or more special
assessments in any amount deemed necessary to enable repayment of amounts
borrowed by the FDIC from the United States Treasury Department.
SAFETY AND SOUNDNESS STANDARDS
The Federal Deposit Insurance Act, as amended by the Federal Deposit Insurance
Corporation Improvements Act and the Riegle Community Development and Regulatory
Improvement Act of 1995, requires the federal bank regulatory agencies to
prescribe standards, by regulations or guidelines, relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest risk exposure, asset growth, asset quality,
earnings, stock valuation and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The
federal bank regulatory agencies have adopted a set of guidelines prescribing
safety and soundness standards pursuant to FDICIA, as amended.
The guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to be implemented so as to identify and manage the risk
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholder. The federal banking agencies determined that stock valuation
standards were not appropriate. In addition, the agencies adopted regulations
that authorize, but do not require, an agency to order an institution that has
been given notice by an agency that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan, the agency must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the prompt correction action provisions of FDICIA. If an
institution fails to comply with such an order, the agency may seek to enforce
such order in judicial proceedings and to impose civil money penalties.
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COMMUNITY REINVESTMENT ACT
The Bank is subject to the provisions of the Community Reinvestment Act of 1997,
as amended (CRA). Under the terms of the CRA, the appropriate federal bank
regulatory agency is required, in connection with the examination of a bank, to
assess such bank's record in meeting the credit needs of the community served by
that bank, including low and moderate-income neighborhoods. The regulatory
agency's assessment of the Bank's record is made available to the public. Such
an assessment is required of any bank which has applied for any application for
a domestic deposit-taking branch, relocation of a main office, branch or ATM,
merger or consolidation with or acquisition of assets or assumption of
liabilities of a federally insured depository institution.
Under CRA regulations, banks with assets of less than $250,000,000 that are
independent or affiliated with a holding company with total banking assets of
less than $1 billion, are subject to streamlined small bank performance
standards and much less stringent data collection and reporting requirements
than larger banks. The agencies emphasize that small banks are not exempt from
CRA requirements. The streamlined performance method for small banks focuses on
the bank's loan-to-deposit ratio, adjusted for seasonal variations and as
appropriate, other lending-related activities, such as loan originations for
sale to secondary markets or community development lending or qualified
investments; the percentage of loans and, as appropriate, other lending-related
activities located in the Bank's assessment areas; the Bank's record of lending
to and, as appropriate, other lending-related activities for borrowers of
different income levels and businesses and farms of different sizes; the
geographic distribution of the Bank's loans given its assessment areas, capacity
to lend, local economic conditions, and lending opportunities; and the Bank's
record of taking action, if warranted, in response to written complaints about
its performance in meeting the credit needs of its assessment areas.
Regulatory agencies will assign a composite rating of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance" to the
institution using the foregoing ground rules. A bank's performance need not fit
each aspect of a particular rating profile in order for the bank to receive that
rating; exceptionally strong performance with respect to some aspects may
compensate for weak performance in others, and the bank's overall performance
must be consistent with safe and sound banking practices and generally with the
appropriate rating profile. To earn an outstanding rating, the bank first must
exceed some or all of the standards mentioned above. The agencies may assign a
"needs to improve" or "substantial noncompliance" rating depending on the degree
to which the bank has failed to meet the standards mentioned above.
The regulation further states that the agencies will take into consideration
these CRA ratings when considering any application and that a bank's record of
performance may be the basis for denying or conditioning the approval of an
application.
CHANGE OF CONTROL
State and federal law restricts the amount of voting stock of a bank holding
company or a bank that a person may acquire without the prior approval of
banking regulators. The overall effect of such laws is to make it more difficult
to acquire a bank holding company or bank by tender offer or similar means than
it might be to acquire control of another type of corporation.
Pursuant to North Carolina law, no person may, directly or indirectly, purchase
or acquire voting stock of any bank holding company or bank which would result
in the change of control of that entity unless the Commissioner first shall have
approved such proposed acquisition. A person will be deemed to have acquired
"control" of the bank holding company or the bank if he, she or it, directly or
indirectly, (i) owns, controls or has the power to vote 10% or more of the
voting stock of the bank holding company or bank, or (ii) possesses the power to
direct or cause the direction of its management and policy.
Federal law imposes additional restrictions on acquisitions of stock in bank
holding companies and FDIC-insured banks. Under the federal Change in Bank
Control Act and the regulations thereunder, a person or group acting in concert
must give advance notice to the Federal Reserve or the FDIC before directly or
indirectly acquiring the
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power to direct the management or policies of, or to vote 25% or more of any
class of voting securities of, any bank holding company or federally-insured
bank. Upon receipt of such notice, the federal regulator either may approve or
disapprove the acquisition. The Change in Bank Control Act generally creates a
rebuttable presumption of a change in control if a person or group acquires
ownership or control of or the power to vote 10% or more of any class of a bank
holding company or bank's voting securities; the bank holding company has a
class of securities that are subject to registration under the Securities
Exchange Act of 1934; and, following such transaction, no other person owns a
greater percentage of that class of securities.
GOVERNMENT MONETARY POLICY AND ECONOMIC CONTROLS
As a bank holding company whose primary asset is the ownership of the capital
stock of a commercial bank, the Registrant is directly affected by the
government monetary policy and the economy in general. The actions and policies
of the Federal Reserve which acts as the nation's central bank can directly
affect money supply and, in general, affect bank's lending activities by
increasing or decreasing their costs and availability of funds. An important
function of the Federal Reserve is to regulate the national supply of bank
credit in order to combat recession and curb inflation pressures. Among the
instruments of monetary policy used by the Federal Reserve to implement these
objectives are open market operations in U.S. Government securities, changes in
the discount rate and surcharge, if any, on member bank borrowings, and changes
in reserve requirements against bank deposits. These methods are used in varying
combinations to influence overall growth of bank loans, investments and
deposits, and interest rates charged on loans or paid for deposits. The Bank is
not a member of the Federal Reserve System but is subject to reserve
requirements imposed by the Federal Reserve on non-member banks. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
ITEM 2. PROPERTIES
The Registrant owns all of its properties through the Bank. At December 31,
1998, the Bank had a main office at 107 South Central Avenue, Landis, North
Carolina, and is acquiring a parcel of land in a new business park in Concord,
North Carolina on which it intends to construct its first branch office. The
Bank's main office was acquired by the Bank in 1953, and has 5,000 square feet.
It is freestanding and with adequate parking, but does not provide for drive-up
or walk-up teller windows.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank, nor any of their properties, are subject to
any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Registrant's security holders during
the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock began trading on April 28, 1998. There are 879,741 shares of
common stock outstanding which were held by approximately 329 stockholders of
record (excluding shares held in street name) on December 31, 1998. The
Company's common stock is listed over-the-counter through the National Daily
Quotation System "Electronic Bulletin Board" under the symbol "BOCF."
Interstate/Johnson Lane Corp. is the market maker for the Company's common
stock. The high and low sales prices for the common stock for the period ended
June 30, 1998 were $15.25 and $12.25, respectively; for the quarter ended
September 30, 1998 were $12.88 and $10.25, respectively; and for the quarter
ended December 31, 1998 were $10.38 and $8.37, respectively. On November 30,
1998, the Company paid a dividend of $.10 a share to stockholders of record on
November 15, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Incorporated by reference to pages 3 to 10 of Exhibit 13 of the Registrant's
Annual Report to Shareholders, attached hereto.
ITEM 7. FINANCIAL STATEMENTS.
Incorporated by reference to pages 12 to 35 of Exhibit 13 of the Registrant's
Annual Report to Shareholders, attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference to pages 3 and 5 of Exhibit 20, the Registrant's
Definitive Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to page 6 of Exhibit 20, the Registrant's Definitive
Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to page 2 of Exhibit 20, the Registrant's Definitive
Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED INVESTORS.
Incorporated by reference to page 7 of Exhibit 20, the Registrant's Definitive
Proxy Statement.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS.
The following financial statements of the Registrant are
incorporated herein
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by reference to the Registrant's 1998
Annual Report to Shareholders:
(a) Independent Auditor's Report dated February 18, 1999.
(b) Consolidated Statements of Financial Condition for
the years ended December 31, 1998 and 1997.
(c) Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997.
(d) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1998 and
1997.
(e) Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1997.
(f) Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules are omitted as
substantially all the required information is contained in
the Registrant's financial statements listed above which
are incorporated herein by reference or is not applicable.
(3) EXHIBITS.
The following exhibits are filed herewith or incorporated
herein by reference.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3 (a) * Registrant's Articles of
Incorporation
3 (b) * Registrant's Bylaws
13 1998 Annual Report to Shareholders
(filed herewith)
20 **Registrant's Definitive Proxy
Statement
29 Financial Data Schedule (filed
herewith)
* Incorporated by reference from exhibits to Registrant's
Registration Statement on Form SB-2 (File No. 333-42151)
** To be filed with the Commission pursuant to Rule 14a-6(b).
(b) REPORTS ON FORM 8-K.
During the last quarter of fiscal year 1998, the Registrant filed a
report on Form 8-K regarding the Registrant's authorization by its Board of
Directors on October 28, 1998, to purchase up to 46,000 shares of its $1.00 par
value common stock. The report also concerned the Registrant's declaration on
October 28, 1998, of a cash dividend of $.10 per common share, payable on
November 15, 1998. The only exhibit filed with the report was a press release
describing these same events.
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In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 24, 1999 /s/ Stephen R. Talbert
-----------------------------------
Stephen R. Talbert
President and Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Stephen R. Talbert March 24, 1999
- ----------------------
Stephen R. Talbert, President,
Chief Executive Officer and Director
/s/ Lisa Blalock Ashley March 24, 1999
- -----------------------
Lisa Blalock Ashley, Chief Financial Officer
/s/ Thomas P. Corriher March 24, 1999
- ----------------------
Thomas P. Corriher, Director
/s/ Henry H. Land March 24, 1999
- -----------------
Henry H. Land, Director
/s/ John A. Drye March 24, 1999
- ----------------
John A. Drye, Director
/s/Susan Linn Norvell March 24, 1999
Susan Linn Norvell, Director
/s/ Lynne Scott Safrit March 24, 1999
---------------------
Lynne Scott Safrit, Director
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
13 1998 Annual Report to Shareholders
29 Financial Data Schedule
BOC FINANCIAL CORP.
1998 ANNUAL REPORT
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
TABLE OF CONTENTS
Page No.
Report to Shareholders................................................................ 1
Selected Financial and Other Data..................................................... 2
Management's Discussion and Analysis.................................................. 3
Independent Auditors' Report.......................................................... 11
Consolidated Financial Statements
Consolidated Statements of Financial Condition..................................... 12
Consolidated Statements of Operations.............................................. 13
Consolidated Statements of Stockholders' Equity.................................... 14
Consolidated Statements of Cash Flows.............................................. 15
Notes to Consolidated Financial Statements......................................... 17
Corporate Information................................................................. 36
</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 BOC FINANCIAL CORP. AND ITS WHOLLY-OWNED
SUBSIDIARY 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 NATIONAL, REGIONAL AND LOCAL MARKET CONDITIONS,
LEGISLATIVE AND REGULATORY CONDITIONS, AND THE INTEREST RATE ENVIRONMENT.
<PAGE>
REPORT TO SHAREHOLDERS
Dear Shareholder:
We are pleased to present to you this first annual report of BOC Financial Corp.
Your Company commenced operations on April 28, 1998 with the closing of the sale
of 925,741 shares of common stock, generating net capital of $8.8 million. Bank
of the Carolinas (the "Bank"), which most of you have known for many years as
Landis Savings Bank, SSB, converted from a state chartered mutual savings bank
to a state chartered stock commercial bank on that date, and became a
wholly-owned subsidiary of BOC Financial Corp. Since April 28, 1998, we have
worked long and hard to provide additional banking products to our customers,
while maintaining the high standard of friendly and personal service that has
been our custom.
We are especially proud of two new agreements completed in 1998 to allow the
Bank to offer additional services. First, Bank of the Carolinas, Walnut Street
Securities, Inc. ("WSS") of St. Louis, Missouri, and Reid Bradshaw & Associates,
Inc. of China Grove, North Carolina, have formed an alliance that will expand
the Bank's financial services available to our customers and our community. This
expansion will allow the Bank to offer more than 300 mutual funds, more than 40
variable insurance products, plus homeowners' insurance and automobile insurance
products. This agreement established a WSS branch in the offices of Bank of the
Carolinas. In addition, Bank of the Carolinas began marketing its own credit
cards, both MasterCard and Visa, during the year. We fully expect the Bank's
credit card business to further the marketability of the Bank's name.
We expect 1999 to be an equal or better year than 1998 as the Bank grows and
continues to expand its services. The Board of Directors, the management, and
the staff thank you for your support and express our appreciation to both our
shareholders and our customers for their loyalty.
Sincerely,
Stephen R. Talbert
President and Chief Executive Officer
-1-
<PAGE>
<TABLE>
BOC FINANCIAL CORP. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------------------------------------------
At or for the year ended December 31,
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Financial condition data:
Total assets $ 31,585 $ 24,597 $ 22,661
Investments (1) 12,637 4,881 3,026
Loans receivable 18,133 18,826 18,917
Deposits 19,382 19,978 18,322
Stockholders' equity 11,977
Operating data:
Interest income 2,112 1,761 1,610
Interest expense 1,006 986 841
---------- --------- ---------
Net interest income 1,106 775 769
Provision for loan losses - 22 6
---------- --------- ---------
Net interest income after provision for
loan losses 1,106 753 763
Noninterest income 5 5 8
Noninterest expense (2) 629 608(2) 609
---------- ------- ---------
Income before income taxes 482 150 162
Income tax expense 173 43 50
---------- --------- ---------
Net income $ 309 $ 107 $ 112
========== ========= =========
Per Common Share Data:
Net income, basic (3), (4) $ 0.28 $ - $ -
Net income, diluted (3), (4) 0.28 - -
Regular cash dividends (3) 0.10 - -
Dividend payment ratio 35.31% - -
Selected Other Data:
Number of:
Outstanding loans 463 515 507
Deposit accounts 1,318 1,464 1,479
Full-service offices open 1 1 1
Return on average assets 1.02% 0.45% 0.52%
Return on average equity 3.09% 2.44% 2.64%
Average equity to average assets 32.91% 18.48% 19.86%
Interest rate spread 2.15% 2.49% 2.84%
Net yield on average interest-earning assets 3.75% 3.35% 3.71%
Average interest-earning assets to average interest-
bearing liabilities 146.62% 120.00% 121.53%
Ratio of noninterest expense to average total assets 2.07% 2.56% 2.85%
Nonperforming assets to total assets -% 0.03% 0.02%
Loan loss reserves to nonperforming loans at
period end -% 382.31% 160.0%
</TABLE>
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) Includes a special assessment of $101,000 for the year ended December 31,
1996 which was paid to recapitalize the Savings Association Insurance Fund.
(3) On April 28, 1998, Landis Savings Bank, SSB converted from a
state-chartered mutual savings bank to a state-chartered stock commercial
bank and became a wholly-owned subsidiary of BOC Financial Corp.
(4) Earnings per share is based on earnings from April 28, 1998 to December 31,
1998 divided by the weighted average number of shares outstanding during
that period.
-2-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of BOC Financial Corp. and Subsidiary. It should be read in
conjunction with the audited consolidated financial statements and accompanying
notes included in this report and the supplemental financial data appearing
throughout this discussion and analysis.
DESCRIPTION OF BUSINESS
BOC Financial Corp. ("BOC" or "Parent") was incorporated under the laws of the
State of North Carolina for the purpose of becoming the bank holding company of
Bank of the Carolinas (the "Bank") in connection with the conversion of Landis
Savings Bank, SSB from a state-chartered mutual savings bank to a
state-chartered stock commercial bank (the "Conversion"), pursuant to its Plan
of Conversion. BOC was organized to acquire all of the common stock of the Bank
upon its conversion to stock form. A subscription and community offering (the
"Offering") of BOC's common stock closed on April 28, 1998, at which time BOC
acquired all of the outstanding common stock of the Bank and commenced
operations. BOC and the Bank are collectively referred to herein as the
"Company."
In accordance with the Plan of Conversion, BOC issued common stock with a value
of $9.3 million in the Offering and received proceeds of $8.8 million, net of
Conversion costs. From the net proceeds, BOC paid $5.0 million to the Bank in
exchange for the common stock of the Bank issued in the conversion, and retained
the balance of the net conversion proceeds. The transaction was recorded as an
"as-if" pooling with assets and liabilities recorded at historical cost.
The Company operates for the primary purpose of serving the banking and mortgage
needs of its customers in its market area, while developing a personal,
home-town association with its customers. The Company offers a wide range of
banking and mortgage services, including all types of savings accounts and
certificates of deposit, IRA's, money market deposit accounts, checking
accounts, and NOW accounts; mortgage and consumer loans and, credit cards; and
other associated services. Specifically, the Company makes mortgage loans
collateralized by residential real estate, home equity loans which predominately
are second mortgage loans collateralized by the equity in a home, consumer
loans, which are collateralized by consumer products, such as automobiles,
commercial real estate loans, and other loans. The Company's primary sources of
revenue are interest income from its real estate lending activities, primarily
consisting of making first mortgage loans for the purchase and refinancing of
residential real property located in North Carolina, and interest income from
its consumer lending activities, primarily consisting of home equity loans, and,
to a lesser extent, from mortgage-backed securities. The Company also earns
revenues from interest on other loans, interest and dividend income from
investments, and fees from lending and deposit activities. The major expenses of
the Company are interest on deposits and borrowings and general and
administrative expenses such as salaries, employee benefits, federal deposit
insurance premiums, and office occupancy and related expenses. The Company
recently entered into an agreement with Walnut Street Securities whereas an
agent of the brokerage firm is present on a regularly scheduled basis in the
home office of Bank of the Carolinas to provide annuity and other investment
products to the Company's customers.
-3-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
The Company's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and, conversely, interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and,
conversely, interest expense will decrease when interest rates decrease.
INTEREST RATE GAP ANALYSIS. As a part of its interest rate risk management
policy, the Company calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. A
"negative" gap for a given period means that the amount of interest-bearing
liabilities maturing or otherwise repricing within that period exceeds the
amount of interest-earning assets maturing or otherwise repricing within the
same period. Accordingly, in a declining interest rate environment, an
institution with a negative gap would generally be expected, absent the effects
of other factors, to experience a lower decrease in the yield of its assets
relative to the cost of its liabilities and its income should be positively
affected. Conversely, the cost of funds for an institution with a negative gap
would generally be expected to increase more quickly than the yield on its
assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."
The Company's one-year interest sensitivity gap as a percentage of total
interest-earning assets at December 31, 1998 was 4.82%. At December 31, 1998,
the Company's three-year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were a negative 1.53% and a positive
1.82%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts and money market deposit accounts are assumed to be subject to
immediate repricing and depositor availability and have been placed in the
shortest period. In making the gap computations, none of the assumptions
sometimes made regarding prepayment rates and deposit decay rates have been used
for any other interest-earning assets or interest-bearing liabilities. In
addition, the table does not reflect scheduled principal payments which will be
received throughout the lives of the loans. The interest rate sensitivity of the
Company'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.
-4-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT (CONTINUED)
<TABLE>
Terms to Repricing at December 31, 1998
-----------------------------------------------------------------------
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:
Loans receivable:
Real estate loans:
1-4 Family residential
Fixed $ 16 $ 77 $ 859 $ 9,604 $ 10,556
Adjustable 6,303 185 - - 6,488
Other
Other real estate loans - adjustable 493 - - - 493
Other real estate loans - fixed 1 34 157 316 508
Other loans 82 21 15 - 118
Interest-earning balances in other banks 7,425 - - - 7,425
Federal funds sold 1,285 - - - 1,285
Investments 1,756 1,234 - 750 3,740
FHLB common stock(1) - - - 187 187
--------- ---------- --------- --------- ----------
Total interest-earning assets $ 17,361 $ 1,551 $ 1,031 $ 10,857 $ 30,800
========= ========== ========= ========= ==========
INTEREST-BEARING LIABILITIES:
Savings deposits:
Regular passbook $ 3,452 $ - $ - $ - $ 3,452
Money market 5,827 - - - 5,827
Certificate accounts 6,597 3,506 - - 10,103
--------- ---------- --------- --------- ----------
Total interest-bearing liabilities $ 15,876 $ 3,506 $ - $ - $ 19,382
========= ========== ========= ========= ==========
INTEREST SENSITIVITY GAP PER PERIOD $ 1,485 $ (1,955) $ 1,031 $ 10,857 $ 11,418
CUMULATIVE INTEREST SENSITIVITY GAP $ 1,485 $ (470) $ 561 $ 11,418 $ 11,418
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS 4.82% (1.53)% 1.82% 37.07% 37.07%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
INTEREST-BEARING LIABILITIES 109.35% 97.58% 102.89% 158.91% 158.91%
</TABLE>
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 5 years.
In addition to the traditional gap analysis, the Company also uses a computer
based interest rate risk simulation model. This comprehensive model includes
rate sensitivity gap analysis, rate shock net interest margin analysis, and
asset/liability term and rate analysis. The Company uses this model to monitor
interest rate risk on a quarterly basis and to detect trends that may affect
overall interest income. As a result, this analysis more accurately predicts the
risk to net interest income over the upcoming twelve month period. The Company
has a policy establishing the maximum allowable risk to net interest income
caused by changes in interest rates. The modeling results indicate that the
Company is within the established parameters of the interest rate risk policy.
-5-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 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 earning balance). Nonaccruing loans were
included in the computation of average balances.
<TABLE>
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning balances $ 7,812 $ 433 5.54% $ 1,474 $ 78 5.29%
Investments 3,575 209 5.85% 2,919 182 6.23%
Loans 18,133 1,470 8.11% 18,767 1,501 8.00%
-------- -------- ------- -------- -------- -------
Total interest-earning assets 29,520 2,112 7.15% 23,160 1,761 7.60%
Other assets 838 610
-------- --------
Total assets $ 30,358 $ 23,770
======== ========
Interest-bearing liabilities:
Deposits $ 20,133 1,006 5.00% $ 19,300 986 5.11%
-------- ------- -------- -------
Other liabilities 235 77
Stockholders' equity 9,990 4,393
-------- --------
Total liabilities and
stockholders' equity $ 30,358 $23,770
======== =======
Net interest income and
interest rate spread $ 1,106 2.15% $ 775 2.49%
======== ========= ========= ========
Net yield on average interest-
earning assets 3.75% 3.35%
========== ========
Ratio of average interest-earning assets to
average interest-bearing liabilities 146.62% 120.00%
============= ==============
</TABLE>
-6-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
<TABLE>
Year Ended December 31, 1998 vs. 1997
-----------------------------------------
Increase (Decrease) Due To
-----------------------------------------
Volume Rate Total
------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Interest-earning balances $ 12 $ 343 $ 355
Investments (13) 40 27
Loans 20 (51) (31)
----------- ------------ ------------
Total interest income 19 332 351
Interest expense:
Deposits (21) 42 21
----------- ------------ ------------
Net interest income $ 40 $ 290 $ 330
=========== ============ ============
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND 1997
Total assets increased by $7.0 million during the year ended December 31, 1998,
from $24.6 million at December 31, 1997 to $31.6 million at year-end. The growth
in assets was attributable to the sale, on April 28, 1998, of 925,741 shares of
the Company's common stock, generating net cash proceeds of $8.8 million. Of
this amount, $1.0 million was used to fund a loan to the Bank's Employee Stock
Ownership Plan ("ESOP") for the purchase of common shares, while approximately
$596,000 was used to fund a net reduction in customer deposits from $20.0
million at December 31, 1997 to $19.4 million at December 31, 1998. The
reduction in deposits resulted from the conversion of customer deposit accounts
which were used to purchase shares of the Company's common stock. The remaining
net proceeds, combined with a decrease in federal funds sold of $465,000 and a
decrease in loans of $693,000, were used to fund increases of $7.4 million and
$831,000, respectively, in interest-earning cash balances and investment
securities available for sale.
-7-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
Net income for 1998 was $309,000 as compared with net income of $107,000 for
1997, an increase of $202,000. The increase in net income was principally
attributable to an increase of $330,000 in net interest income as a result of
the infusion of capital and increased interest-earning liquid assets arising
from the sale of the Company's common stock in April of 1998. In addition,
because of the unexpected death of a director in 1997, the Company provided
$72,000 of additional costs during 1997 to recognize the full value of benefits
to be paid to that director's surviving spouse under the Company's directors'
retirement plan. The Company also made a provision for loan losses of $22,000
during 1997, while no addition to the allowance for loan losses was considered
to be necessary for the year ended December 31, 1998. During 1998 the Company
incurred additional personnel costs of $24,000 relating to the ESOP, and other
expenses increased by $53,000, principally as a result of additional operating
costs arising because of the conversion to a publicly-owned entity. Income taxes
increased from $43,000 in 1997 to $173,000 in 1998, both as a result of the
higher level of income before income taxes in 1998, and because of the higher
federal rate brackets applicable to the higher income level.
ASSET QUALITY
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due. While non-performing
assets represent potential losses to the Company, management does not anticipate
any aggregate material losses since most loans are believed to be adequately
secured. Management believes the allowance for loan losses is sufficient to
absorb known risks in the portfolio. No assurance can be given that economic
conditions will not adversely affect borrowers and result in increased losses.
The following table summarizes non-performing assets by type at the dates
indicated. Other than the amounts listed, there were no other loans that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
SCHEDULE OF NON-PERFORMING ASSETS
At December 31,
----------------
1998 1997
------ -----
(Thousands)
Non-accrual loans $ - $ -
Loans past due 90 days or more and still accruing - 8
Other real estate - -
Renegotiated troubled debt - -
--------- ---------
Total non-performing assets $ - $ 8
========= =========
-8-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
During 1998, BOC Financial Corp. paid cash dividends of $0.10 per share.
Although BOC Financial Corp. anticipates that it will continue to declare cash
dividends on a regular basis, the Board of Directors will review its policy on
the payment of dividends on an ongoing basis, and such payment will be subject
to future earnings, cash flows, capital needs, and regulatory restrictions.
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of the Company's asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. The Bank's primary uses of
liquidity are to fund loans and to make investments. As of December 31, 1998,
liquid assets (cash, interest-earning deposits, federal funds sold, and
marketable investment securities) were approximately $12.9 million, which
represents 66.4% of deposits.
At December 31, 1998, outstanding loan commitments were $526,000, and the
undisbursed portion of construction loans was $180,000. Funding for these
commitments is expected to be provided from deposits, loan principal repayments,
maturing investments and income generated from operations.
Under federal capital regulations, BOC and the Bank must satisfy certain minimum
leverage ratio requirements and risk-based capital requirements. Failure to meet
such 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. At December 31, 1998 and
1997, BOC and the Bank exceeded all such requirements.
A significant source of BOC's funds are interest income and dividends received
from the Bank. These funds should be adequate to cover BOC's needs.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have, or that are reasonably
likely to have, a material effect on the Company's liquidity, capital resources,
or other operations.
-9-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the Company's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
YEAR 2000 COMPLIANCE ISSUES
All levels of the Company's management and its Board of Directors are aware of
the issues created by the Year 2000 century change and the serious effects it
may have on the Bank and its customers. In May 1997, the Federal Financial
Institutions Examination Council ("FFIEC") issued an Interagency Statement,
"Year 2000 Project Management Awareness," to emphasize the critical issues that
need to be addressed to implement an effective Year 2000 project management
plan. The FFIEC Statement identifies five phases of the Year 2000 project
management process. The Company has formed a Year 2000 project team, consisting
of senior officers within the Bank's operations, information systems, financial
and management areas, to ensure that the Bank will be Year 2000 compliant.
Although the Company relies entirely upon outside vendors and service providers
for its computer hardware and software and its security and communications
equipment, all date sensitive systems are being evaluated for Year 2000
compliance. During 1998, the Company completed upgrading and testing of systems
that have been identified as critical to conducting its banking business.
Testing of systems with lower priorities is planned for early 1999. The Company
is also developing contingency plans for its computer processes, including the
use of alternative systems and the manual processing of certain critical
operations. In addition, the Company is undertaking efforts to ensure that
significant vendor and customer relationships are or will be Year 2000
compliant. There can be no guarantee that the systems of other entities on which
the Company either or indirectly relies will be timely converted, or that a
failure to convert by another entity, or a conversion that is incompatible with
the Company's systems, would not have a material adverse effect on the Company
in future periods. However, the Company's management believes that all of its
systems will be verified Year 2000 compliant. The Company estimates that it will
incur Year 2000 compliance costs of approximately $12,000, of which
approximately $2,000 will be capitalized and $10,000 have or will be charged to
operations. In addition to the estimated costs of its Year 2000 compliance, the
Company routinely makes annual investment in technology in its efforts to
improve customer service and to efficiently manage its product and service
delivery systems.
-10-
<PAGE>
[GRAPHIC GOES HERE]
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
BOC Financial Corp.
Landis, North Carolina
We have audited the accompanying consolidated statements of financial condition
of BOC Financial Corp. and Subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BOC Financial Corp.
and Subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DIXON ODOM PLLC
SANFORD, NORTH CAROLINA
FEBRUARY 18, 1999
-11-
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
ASSETS 1998 1997
-------------- --------------
<S> <C> <C>
Cash on hand and in banks $ 425,916 $ 335,670
Interest-earning balances in other banks 7,424,974 35,061
Federal funds sold 1,285,023 1,750,000
Investment securities available for sale, at fair value
(amortized cost of $3,724,986 and $2,898,728 at
December 31, 1998 and 1997, respectively) (Note B) 3,739,733 2,908,717
Loans receivable, net (Note C) 18,133,053 18,825,931
Accrued interest receivable 53,985 44,747
Premises and equipment, net (Note D) 267,982 286,812
Stock in the Federal Home Loan Bank, at cost 187,200 187,200
Other assets 67,410 223,255
-------------- --------------
TOTAL ASSETS $ 31,585,276 $ 24,597,393
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts (Note G) $ 19,381,976 $ 19,977,920
Advance payments from borrowers for property
taxes and insurance 6,949 16,835
Accrued expenses and other liabilities 219,491 178,573
-------------- --------------
TOTAL LIABILITIES 19,608,416 20,173,328
---------- ----------
Commitments and contingencies (Notes C and K)
Stockholders' Equity (Note J)
Preferred stock, no par value, 1,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $1 par value, 9,000,000 shares
authorized; 879,741 shares issued and
outstanding 879,741 -
Additional paid in capital 7,490,173 -
ESOP note receivable (Note H) (1,019,027) -
Retained earnings, substantially restricted 4,617,125 4,417,976
Accumulated other comprehensive income 8,848 6,089
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 11,976,860 4,424,065
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,585,276 $ 24,597,393
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
-12-
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
1998 1997
------------ -------------
<S> <C> <C>
INTEREST INCOME
Loans $ 1,469,954 $ 1,500,983
Investments 208,997 182,522
Interest-earning balances in other banks and
federal funds sold 433,172 78,024
------------ -------------
TOTAL INTEREST INCOME 2,112,123 1,761,529
INTEREST EXPENSE
Deposit accounts 1,006,524 986,335
------------ -------------
NET INTEREST INCOME 1,105,599 775,194
PROVISION FOR LOAN LOSSES - 22,400
------------ -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,105,599 752,794
------------ -------------
OTHER INCOME
Transaction and other service fee income 3,692 2,603
Gain on sale of assets 1,983 2,792
------------ -------------
TOTAL OTHER INCOME 5,675 5,395
------------ -------------
OTHER EXPENSES
Personnel costs 392,385 420,326
Occupancy 51,841 47,102
Data processing and outside service fees 41,590 52,320
Deposit insurance premiums 13,380 11,847
Other 130,281 76,942
------------ -------------
TOTAL OTHER EXPENSES 629,477 608,537
------------ -------------
INCOME BEFORE INCOME TAXES 481,797 149,652
INCOME TAX EXPENSE 173,000 43,000
------------ -------------
NET INCOME $ 308,797 $ 106,652
============ =============
NET INCOME PER COMMON SHARE (Note A)
Basic and diluted $ .28 $ -
============ ============
Weighted average shares outstanding 848,660 -
=========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
-13-
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
$1 Par value Accumulated
common stock Additional ESOP other Total
--------------- paid-in note Retained comprehensive stockholders'
Shares Amount capital receivable earnings income Equity
------ ------ --------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 - $ - $ - $ - $4,311,324 $ 1,174 $ 4,312,498
Comprehensive income:
Net income for 1997 - - - - 106,652 - 106,652
Unrealized gain on
investment securities
available for sale net of
deferred income taxes of
$2,987 - - - - - 4,915 4,915
----------
Total comprehensive
income 111,567
------ ------- ---------- ----------- ---------- ----------- ----------
Balance at December 31,
1997 - - - - 4,417,976 6,089 4,424,065
Comprehensive income:
Net income for 1998 - - - - 308,797 - 308,797
Unrealized gain on
investment securities
available for sale net
of deferred income
taxes of $1,999 - - - - - 2,759 2,759
----------
Total comprehensive
income 311,556
Net proceeds from sale of
common stock 925,741 925,741 7,881,820 - - - 8,807,561
Purchase of 74,059
shares of common
stock by ESOP - - - (1,043,484) - - (1,043,484)
Repayment of ESOP
note - - - 24,457 - - 24,457
Repurchase of
common stock (46,000) (46,000) (391,647) - (25,480) - (463,127)
Cash dividends paid
($0.10 per share) - - - - (84,168) - (84,168)
------- --------- ----------- ----------- ---------- ---------- ----------
Balance at December 31,
1998 879,741 $ 879,741 $7,490,173 $ (1,019,027) $4,617,125 $ 8,848 $11,976,860
======= ========= ========== ============ ========== ======= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
-14-
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 308,797 $ 106,652
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 33,790 29,277
Amortization, net (1,242) (32,086)
Gain on sale of assets, net (1,983) (2,792)
Provision for loan losses - 22,400
Deferred income taxes (6,746) (48,000)
Deferred compensation 21,038 123,000
Changes in assets and liabilities:
Increase in accrued interest receivable (9,238) (4,307)
Decrease in other assets 4,409 56,530
Increase in accrued expenses and other liabilities 19,880 37,921
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 368,705 288,595
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning balances in other banks (7,389,913) (1,871)
Net (increase) decrease in federal funds sold 464,977 (1,075,000)
Purchases of available for sale investment securities (3,474,938) (3,244,262)
Proceeds from maturities of available for sale investment securities 2,150,156 650,000
Proceeds from sales of available for sale investment securities 500,625 1,846,109
Purchase of Federal Home Loan Bank stock - (17,000)
Proceeds from sales of loans 11,043 5,362
Net decrease in loans 682,959 93,958
Purchase of premises and equipment (14,960) (24,989)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (7,070,051) (1,767,693)
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES
-15-
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings accounts $ 447,752 $ 1,831,692
Net decrease in certificates of deposit (1,043,696) (176,256)
Net increase (decrease) in advance payments from borrowers
for taxes and insurance (9,886) 8,041
(Increase) decrease in stock conversion costs 156,183 (156,183)
Net proceeds from issuance of common stock 8,807,561 -
Repurchase of common stock (463,127) -
Loan to ESOP for purchase of common stock (1,043,484) -
Collection of ESOP note receivable principal 24,457 -
Cash dividends paid (84,168) -
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,791,592 1,507,294
------------ -------------
NET INCREASE IN CASH ON HAND AND IN BANKS 90,246 28,196
CASH ON HAND AND IN BANKS, BEGINNING 335,670 307,474
------------ -------------
CASH ON HAND AND IN BANKS, ENDING $ 425,916 $ 335,670
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,006,524 $ 986,335
============ =============
Income taxes $ 176,114 $ 43,640
============ =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Unrealized holding gains (losses) on available for sale
investment securities, net of deferred income taxes $ 2,759 $ 4,915
============ =============
</TABLE>
SEE ACCOMPANYING NOTES.
-16-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
On April 28, 1998, pursuant to a Plan of Conversion which was approved by its
members and regulators, Landis Savings Bank, SSB ("Landis" or the "Bank")
converted from a state-chartered mutual savings bank to a state-chartered stock
commercial bank (the "Conversion"), changed its name to Bank of the Carolinas
(the "Bank") and became a wholly-owned subsidiary of BOC Financial Corp. ("BOC"
or "Parent"). BOC was formed to acquire all of the common stock of the Bank upon
its conversion to stock form. BOC has no operations and conducts no business on
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
Bank of the Carolinas 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. Bank of the Carolinas 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.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of BOC
and the Bank, together referred to as the "Company." All significant
intercompany transactions and balances are eliminated in consolidation.
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.
-17-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates (Continued)
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.
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, 1998 or 1997. 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
net amount in other comprehensive income. 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 component of other
comprehensive income or loss included in stockholders' equity.
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.
-18-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
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.
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.
-19-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 I. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Benefit Plans
The Bank has an ESOP which covers substantially all of its employees. Minimum
contributions to the ESOP are based upon the amortization requirements of the
ESOP's debt to the Parent. Contributions are determined by the Board of
Directors based upon compensation limitations and are expensed in accordance
with the AICPA's Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE
STOCK OWNERSHIP PLANS.
-20-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Benefit Plans (Continued)
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.
Net Income Per Common Share
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, EARNINGS PER SHARE. This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to
international earnings per share ("EPS") standards. It replaces the presentation
of primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the statement of operations
for all entities with complex capital structures. It also requires a
reconciliation of the numerator and the denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and it is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For the period from April 28, 1998 to the end of
the fiscal year, basic and diluted earnings per share are the same amounts
because no potentially dilutive securities were outstanding during the period.
Net income per common share for the year ended December 31, 1998 is based on
unaudited net income earned from the date of Conversion, April 28, 1998, to the
end of the fiscal year, divided by the weighted average number of shares
outstanding during that period. For purposes of this computation, the number of
shares of common stock purchased by the Bank's ESOP which has not been released
for allocation to participant accounts is not assumed to be outstanding.
Adoption of New Accounting Standards
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 requires the Company to recognize the financial and servicing assets it
controls and liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished. In
December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." The Company adopted SFAS No.
127 on January 1, 1998 as required; the adoption did not affect the Company's
statements of financial condition or statements of operations and changes in
stockholders' equity.
-21-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of New Accounting Standards (Continued)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a separate financial statement or
as a component of the statement of operations or the statement of changes in
stockholders' equity and display the accumulated balance of other comprehensive
income separately in the stockholders' equity section of the statement of
financial condition. The Company adopted SFAS No. 130 on January 1, 1998 as
required.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting operating results and certain other information by operating segments
in annual and interim financial statements of public companies. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. SFAS No.
131 sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company adopted SFAS No. 131
on January 1, 1998 as required. The Company has only one segment, as that term
is defined in SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," an amendment of FASB Statements No.
87, 88, and 106. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of expense related to those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer considered
useful. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. The Company does not offer defined benefit plans or other postretirement
benefit plans to its employees; therefore, the adoption of SFAS No. 132 in 1998
did not affect the Company's financial statement disclosures.
Accounting Standards Issued but Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that the Company recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. The Company will adopt SFAS No. 133 on
January 1, 2000 as required. Given that the Company has no investments in
derivative instruments, management of the Company believes that adoption of SFAS
No. 133 will not have a material impact on the Company's statement of financial
condition or the related statements of operations and changes in stockholders'
equity.
-22-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
December 31, 1998
-------------------------------------------------------
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 $ 3,498,337 $ 13,695 $ 937 $ 3,511,095
Municipal bonds 226,649 1,989 - 228,638
----------- ----------- ------------ ------------
$ 3,724,986 $ 15,684 $ 937 $ 3,739,733
=========== =========== ============ ============
December 31, 1997
---------------------------------------------------------
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 $ 2,898,728 $ 10,413 $ 424 $ 2,908,717
=========== =========== ============ ============
</TABLE>
The amortized cost and fair values of securities available for sale at December
31, 1998 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 $ 1,749,245 $ 1,755,626
Due after one year through five years 1,225,741 1,235,044
Due after five years 750,000 749,063
------------ -------------
$ 3,724,986 $ 3,739,733
============ =============
Proceeds from maturities and sales of investment securities available for sale
during the year ended December 31, 1998 were $2,150,156 and $500,625,
respectively. Gross gains of $859 were realized on those sales.
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.
Securities with a carrying value of $350,000 at December 31, 1998 were pledged
to secure public monies on deposit as required by law.
-23-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (CONTINUED)
The following table sets forth certain information regarding the carrying
values, weighted average yields and contractual maturities of the Company's
investment portfolio and other interest-earning assets at December 31, 1998.
FHLB stock, a nonmarketable equity security, substantially all of which is
required to be maintained, is assumed to mature in periods greater than five
years.
<TABLE>
Carrying value
--------------------------------------------------------------
After one After three
One year year through years through After five
or less three years five years years Total
--------- ------------ ------------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U. S. government and agency
securities $ 1,756 $ 1,005 $ - $ 750 $ 3,511
Municipal bonds - 229 - - 229
Other:
Interest-earning balances in other
banks 7,425 - - - 7,425
Federal funds sold 1,285 - - - 1,285
Federal Home Loan Bank Stock - - - 187 187
----------- ----------- ----------- ----------- ----------
Total $ 10,466 $ 1,234 $ - $ 937 $ 12,637
=========== =========== =========== =========== ==========
Average Yield
--------------------------------------------------------------------
After one After three
One year year through years through After five
or less three years five years years Total
------------ ------------ ------------- ---------- ----------
Securities available for sale:
U. S. government and agency
securities 5.85% 5.76% -% 6.02% 5.86%
Municipal bonds - 4.43% -% - 4.43%
Other:
Interest-earning balances in other
banks 4.90% - - - 4.90%
Federal funds sold 4.52% - - - 4.52%
Federal Home Loan Bank Stock - - - 7.44% 7.44%
Weighted average 5.01% 5.51% -% 6.30% 5.16%
</TABLE>
-24-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
1998 1997
------------------------------- -------------------------------
Percentage Percentage
Amount of total Amount of total
--------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential
Fixed $ 10,645,387 58.71% $ 11,506,221 $ 61.12%
Adjustable 4,906,549 27.06% 5,165,129 27.44%
Multi-family residential
Adjustable 169,608 0.93% 198,277 1.05%
Commercial
Fixed 60,927 0.34% 65,000 0.35%
Adjustable 571,059 3.15% 245,516 1.30%
Construction
Fixed 234,500 1.29% - -
Home equity lines of credit
Adjustable 1,278,534 7.05% 1,302,954 6.92%
Home improvement loans
Fixed 446,906 2.46% 353,754 1.88%
--------------- ----------- --------------- -----------
Total real estate loans 18,313,470 100.99% 18,836,851 100.06%
Other loans:
Consumer fixed:
Loans secured by automobiles 35,366 0.20% - -
Loans secured by deposits 82,462 0.45% 104,388 0.55%
--------------- ----------- --------------- -----------
Total loans 18,431,298 101.64% 18,941,239 100.61%
Less:
Construction loans in process (179,500) (0.99%) - -
Allowance for loan losses (30,000) (0.16%) (30,000) (0.16%)
Deferred loan origination fees,
net of costs (88,745) (0.49%) (85,308) (0.45%)
--------------- ----------- --------------- -----------
$ 18,133,053 100.00% $ 18,825,931 $ 100.00%
=============== =========== =============== ===========
</TABLE>
At December 31, 1998 and 1997, and for the years then ended, the Bank had no
nonaccrual loans or restructured loans.
-25-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (CONTINUED)
The allowance for loan losses is summarized as follows:
1998 1997
------------- ------------
Balance at beginning of year $ 30,000 $ 7,600
------------ ------------
Loans charged off:
Real estate - -
Other - -
------------ ------------
Total loans charged off - -
------------ ------------
Recoveries:
Real estate - -
Other - -
------------ ------------
Total loan recoveries - -
------------ ------------
Provision for loan losses - 22,400
------------ ------------
Balance at end of year $ 30,000 $ 30,000
============ ============
At December 31, 1998, the Bank had mortgage and consumer loan commitments
outstanding of $525,800 and pre-approved but unused lines of credit totaling
$1,583,825. 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:
1998 1997
------------ ------------
Balance at beginning of year $ 328,187 $ 190,160
Additional borrowings 229,268 179,544
Loan repayments (59,121) (41,517)
------------ ------------
Balance at end of year $ 498,334 $ 328,187
============ ============
-26-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1998 1997
------------ ------------
Land $ 16,000 $ 16,000
Building and improvements 394,434 390,007
Furniture and equipment 164,254 153,721
------------ ------------
574,688 559,728
Accumulated depreciation (306,706) (272,916)
------------ ------------
$ 267,982 $ 286,812
============ ============
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, 1998, there were no advances on
this line of credit.
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at December 31, 1998 and 1997 follows:
<TABLE>
1998 1997
------------------------ -------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Savings deposits:
Regular passbook $ 3,452,265 3.20% $ 4,069,228 3.20%
Money market 5,826,700 4.71% 4,761,984 5.23%
------------- -------------
9,278,965 4.15% 8,831,212 4.29%
Certificates of deposit 10,103,011 5.51% 11,146,708 5.68%
------------- -------------
Total deposit accounts $ 19,381,976 4.86% $ 19,977,920 5.07%
============= =============
</TABLE>
-27-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE G - DEPOSIT ACCOUNTS (CONTINUED)
A summary of certificate accounts by maturity as of December 31, 1998 follows:
<TABLE>
Less than $100,000
$100,000 or More Total
---------- ----------- -------------
<S> <C> <C> <C>
Three months or less $ 2,290,126 $ 271,729 $ 2,561,855
Over three months through twelve months 3,350,185 685,157 4,035,342
Over one year through three years 2,834,157 671,657 3,505,814
Over three years - - -
----------- ----------- -------------
Total certificate accounts $ 8,474,468 $ 1,628,543 $ 10,103,011
=========== =========== =============
</TABLE>
Interest expense on deposits for the years ended December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
Regular passbook savings $ 152,011 $ 128,714
Money market savings 284,066 209,328
Certificates of deposit 572,476 650,264
------------ ------------
1,008,553 988,306
Penalties for early withdrawal 2,029 1,971
------------ ------------
$ 1,006,524 $ 986,335
============ ============
</TABLE>
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
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,
1998 and 1997, the Bank incurred expense in the form of contributions to the
plan of $24,000 and $18,000, respectively.
-28-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
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 $33,000 and $105,000,
respectively, for the years ended December 31, 1998 and 1997.
Employee Stock Ownership Plan
In the mutual to stock conversion, the Bank of the Carolinas Employee Stock
Ownership Plan (the "ESOP") purchased 74,059 shares of the common stock of BOC
Financial Corp. sold in the public offering at a total cost of $1,043,484. The
ESOP executed a note payable to BOC for the full price of the shares purchased.
The note is to be repaid over 32 years in quarterly installments of principal
and interest. Interest is based upon the prime rate and will be adjusted
quarterly. Dividends, if any, paid on shares held by the ESOP may be used to
reduce the loan. Dividends paid on unallocated shares held by the ESOP are not
reported as dividends in the financial statements. The note may be prepaid
without penalty. The unallocated shares of stock held by the ESOP are pledged as
collateral for the note. The ESOP is funded by contributions made by the Bank in
amounts sufficient to retire the debt. At December 31, 1998, the outstanding
balance of the note is $1,019,027 and is presented as a reduction of
stockholders' equity.
Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among active 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.
Expense of $24,457 has been incurred in connection with the ESOP during the year
ended December 31, 1998. At December 31, 1998, 2,554 shares held by the ESOP
have been released or committed to be released to the plan's participants for
purposes of computing earnings per share. The fair value of the unallocated
shares amounted to approximately $643,545 at December 31, 1998.
-29-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE I - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 1998 and 1997:
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
Current tax expense $ 179,746 $ 91,000
Net deferred expense (benefit) included in operations (6,746) (48,000)
------------ ------------
$ 173,000 $ 43,000
============ ============
</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, 1998 and 1997:
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
Income tax at federal statutory rate $ 163,811 $ 50,882
State income tax, net of federal tax benefit 11,220 614
Effect of graduated rate brackets - (9,267)
Other (2,031) 771
------------ ------------
$ 173,000 $ 43,000
============ ============
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets relating to:
Allowance for loan losses $ 11,454 $ 11,454
Deferred compensation 46,643 41,234
Loan fees and costs 32,779 31,442
------------ ------------
Gross deferred tax assets 90,876 84,130
Valuation allowance - -
------------ ------------
Net deferred tax assets 90,876 84,130
------------ ------------
Deferred tax liabilities relating to:
FHLB stock dividends 26,842 26,842
Unrealized gains on investment securities
available for sale 5,899 3,900
------------ ------------
Total deferred tax liabilities 32,741 30,742
------------ ------------
Net deferred tax assets $ 58,135 $ 53,388
============ ============
</TABLE>
-30-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE I - INCOME TAXES (CONTINUED)
Retained earnings at December 31, 1998 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 and successor banks from being taxed on these pre-1987 bad debt
reserves. Further, the use of the reserve method is now required for all
thrifts.
NOTE J - REGULATORY RESTRICTIONS
Capital Requirements
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 measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to adjusted assets (as defined) and of tangible capital to adjusted
assets. Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject. A reconciliation of
stockholders' equity to the Bank's regulatory capital at June 30, 1998 is as
follows:
Consolidated stockholders' equity $ 11,976,860
Less separate equity of BOC Financial Corp. 2,318,614
--------------
Tier 1 and tangible capital 9,658,246
Add general loan loss allowance 30,000
Risk-based capital $ 9,688,246
==============
-31-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE J - REGULATORY RESTRICTIONS (CONTINUED)
The Bank's regulatory capital amounts and ratios are presented below.
<TABLE>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $ 9,688 75.9% > $1,021 > 8.0% > $ 1,276 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) 9,658 75.7% > 510 > 4.0% > 765 > 6.0%
- - - -
Tier 1 Capital
(to Adjusted Assets) 9,658 30.4% > 953 > 3.0% > 1,588 > 5.0%
- - - -
Tangible Capital
(to Adjusted Assets) 9,658 30.4% > 477 > 1.5% N/A N/A
- -
</TABLE>
NOTE K - 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, 1998 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage and consumer loans $ 525,800
Undisbursed construction loans 179,500
Undisbursed lines of credit 1,583,825
NOTE L - OTHER COMMITMENTS
On November 5, 1998, the Bank signed a letter of intent to purchase land for a
new branch location for $640,000.
-32-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE M - 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 statement of financial condition,
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-EARNING 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.
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.
-33-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 K, 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, 1998:
<TABLE>
Carrying Estimated
Amount Fair Value
------------- -------------
<S> <C> <C>
Financial assets:
Cash, interest bearing balances and federal funds sold $ 9,135,913 $ 9,135,913
Investment securities 3,739,733 3,739,733
Loans 18,133,053 18,150,000
Stock in Federal Home Loan Bank of Atlanta 187,200 187,200
Financial liabilities:
Deposits 19,381,976 19,400,000
</TABLE>
NOTE N - PLAN OF CONVERSION
On September 29, 1997, the Board of Directors of the Bank adopted a Plan of
Holding Company Conversion whereby the Bank converted from a state-chartered
mutual savings bank to a state-chartered stock commercial bank and became a
wholly-owned subsidiary of BOC (the "Company" or "Holding Company") a holding
company formed in connection with the conversion. On April 28, 1998, the Bank
completed its conversion. The conversion occurred through the sale of 925,741
shares of common stock ($1.00 par value) of BOC. Total proceeds of $9.3 million
were reduced by conversion expenses of $450,000. BOC paid $5.0 million to the
Bank in exchange for the common stock of the Bank issued in the conversion, and
retained the balance of the net conversion proceeds. The transaction was
recorded as an "as-if" pooling with assets and liabilities recorded at
historical cost.
At the time of conversion, the Bank established 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
-34-
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE N - PLAN OF CONVERSION (CONTINUED)
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.
NOTE O - PARENT COMPANY FINANCIAL DATA
Following are condensed financial statements of BOC Financial Corp. as of and
for the period ended December 31, 1998:
CONDENSED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets:
Cash $ 17,316
Note receivable from Bank of the Carolinas 2,308,892
Investment in Bank of the Carolinas 9,658,246
Accrued interest receivable 7,406
--------------
$ 11,991,860
==============
Liabilities:
Accrued expenses $ 15,000
Stockholders' equity:
Common stock 879,741
Additional paid-in capital 7,490,173
ESOP note receivable (1,019,027)
Retained earnings 4,617,125
Accumulated other comprehensive income 8,848
--------------
$ 11,991,860
==============
CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM APRIL 28, 1998 TO DECEMBER 31, 1998
Equity in earnings of subsidiary $ 155,596
Interest income 149,815
Operating expenses (11,033)
Income taxes (54,000)
--------------
Net income $ 240,378
==============
</TABLE>
-35-
<PAGE>
BOC FINANCIAL CORP.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
EXECUTIVE OFFICERS
<S> <C> <C>
Stephen R. Talbert John A. Drye Henry H. Land
PRESIDENT AND CEO VICE PRESIDENT SECRETARY AND CFO
DIRECTORS
Thomas P. Corriher, Chairman Lynne Scott Safrit
OWNER, CAMERA AND HOBBY SHOP PRESIDENT, ATLANTIC AMERICAN PROPERTIES, INC.
Susan Linn Norvell John A. Drye Henry H. Land
HOMEMAKER CO-OWNER, CLAY WRIGHT INSURANCE AGENCY PARTNER, MCCLARY, STOCKS, SMITH
AND LAND, PA, CPAS
Stephen R. Talbert
PRESIDENT AND CEO, BOC FINANCIAL CORP AND
BANK OF THE CAROLINAS
STOCK TRANSFER AGENT ANNUAL MEETING
Registrar and Transfer Company The annual meeting of stockholders of BOC Financial Corp.
10 Commerce Drive will be held at 2:00 p.m. on May 4, 1999 at Bank of the
Cranford, New Jersey 07016 Carolinas, 107 South Central Ave., Landis, NC.
FORM 10-KSB
SPECIAL LEGAL COUNSEL
A COPY OF FORM 10-KSB AS FILED WITH THE SECURITIES AND
Moore & Van Allen, PLLC EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO THE
100 N. Tryon Street, Floor 47 COMPANY'S STOCKHOLDERS FOR THE COMPANY'S MOST RECENT FISCAL
Charlotte, NC 28202 YEAR UPON WRITTEN REQUEST TO STEPHEN R. TALBERT, PRESIDENT,
BOC FINANCIAL CORP., 107 SOUTH CENTRAL AVE, LANDIS, NC 28088
INDEPENDENT AUDITORS CORPORATE OFFICE
Dixon Odom PLLC 107 South Central Ave.
408 Summit Drive Landis, NC 28088
Sanford, NC 27330
</TABLE>
COMMON STOCK INFORMATION
The Company's stock began trading on April 28, 1998. There are 879,741 shares of
common stock outstanding which were held by approximately 329 stockholders of
record (excluding shares held in street name) on December 31, 1998. The
Company's common stock is listed over-the-counter through the National Daily
Quotation System "Electronic Bulletin Board" under the symbol "BOCF." Interstate
Johnson Lane is the market maker for the Company's common stock. The high and
low sales prices for the common stock for the period ended June 30, 1998 were
$15.25 and $12.25, respectively; for the quarter ended September 30, 1998 were
$12.88 and $10.25, respectively; and for the quarter ended December 31, 1998
were $10.38 and $8.37, respectively. On November 30, 1998, the Company paid a
dividend of $.10 a share to stockholders of record on November 15, 1998.
DISCLAIMER
THIS ANNUAL REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
-36-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 426
<INT-BEARING-DEPOSITS> 7,425
<FED-FUNDS-SOLD> 1,285
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,740
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 18,163
<ALLOWANCE> 30
<TOTAL-ASSETS> 31,585
<DEPOSITS> 19,382
<SHORT-TERM> 0
<LIABILITIES-OTHER> 226
<LONG-TERM> 0
0
0
<COMMON> 880
<OTHER-SE> 11,097
<TOTAL-LIABILITIES-AND-EQUITY> 31,585
<INTEREST-LOAN> 1,470
<INTEREST-INVEST> 209
<INTEREST-OTHER> 433
<INTEREST-TOTAL> 2,112
<INTEREST-DEPOSIT> 1,007
<INTEREST-EXPENSE> 1,007
<INTEREST-INCOME-NET> 1,005
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 629
<INCOME-PRETAX> 482
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<YIELD-ACTUAL> 3.74
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 30
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 30
<ALLOWANCE-DOMESTIC> 30
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
Earnings per share is based on earnings from April 28, 1998 to December 31, 1998
divided by the weighted average number of shares outstanding during that period.
</FN>
</TABLE>
