SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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ANNUAL REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 0-24245
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BOC FINANCIAL CORP.
(Exact Name of Bank as specified in its charter)
NORTH CAROLINA
(State of Incorporation)
56-6511744
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(I.R.S. Employer Identification No.)
107 SOUTH CENTRAL AVENUE
LANDIS, NORTH CAROLINA 28088
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(Address of Principal Office)
(800) 543-7250
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(Bank's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO
-- --
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
--
The Registrant's revenues for the year ended December 31, 1999 were $2,129,764.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at December 31, 1999 was approximately $2,965,467.
The number of shares of the Registrant's Common Stock outstanding on December
31, 1999 was 805,000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Annual Report to Shareholders for the Fiscal Year
Ended December 31, 1999 (Part II).
2. Proxy Statement-Prospectus for the 2000 Annual Meeting of
Shareholders (Parts I and III).
Transitional Small Business Disclosure Format Yes No X
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FORM 10-KSB CROSS REFERENCE INDEX
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As indicated below, portions of (i) the Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1999, and (ii) the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
May 9, 2000, filed with the Securities and Exchange Commission via EDGAR are
incorporated by reference into Parts II and III of this Report.
KEY
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<TABLE>
<CAPTION>
<S> <C>
AR Annual Report to Shareholders for the fiscal year ended December 31, 1999.
Proxy Proxy Statement for the Annual Meeting of Shareholders to be held May 9, 2000.
10-KSB 10-KSB for the year ended December 31, 1999.
<CAPTION>
PART I PAGE DOCUMENT
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<S> <C> <C> <C>
Item 1. Business 3 10-KSB
Item 2. Properties 8 10-KSB
Item 3. Legal Proceedings 8 10-KSB
Item 4. Submission of Matters to a Vote of Security Holders 8 10-KSB
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9 AR
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 AR
Item 7. Financial Statements and Supplementary Data 9 AR
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 9 10-KSB
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of Exchange Act 9 Proxy
Item 10. Executive Compensation 9 Proxy
Item 11. Security Ownership of Certain Beneficial Owners and
Management 9 Proxy
Item 12. Certain Relationships and Related Transactions 9 Proxy
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Index to Exhibits 9 10-KSB
(b) Reports on Form 8-K filed during the
three months ended December 31, 1999 10 10-KSB
</TABLE>
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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, 1999, the Registrant and its only subsidiary, the Bank, had ten
full-time employees.
BUSINESS OF THE REGISTRANT AND THE BANK
The Registrant's only function is the ownership of all of the issued and
outstanding stock of the Bank. The Registrant does not engage in any separate
lines of business. The Bank engages in a general banking business in parts of
Cabarrus, Iredell and Rowan Counties, North Carolina. Since the Bank originally
was chartered as a savings and loan association, its loan portfolio and primary
lending function is concentrated in one-to-four family residential home
mortgages. 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
are concentrated in residential lending but also 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 and equity lines of credit. 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
personnel are also important competitive factors. Many of the Bank's competitors
have greater resources, broader
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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 the 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 "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.
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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 the
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.
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
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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.
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-
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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 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.
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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.
The Gramm-Leach-Bliley Act of 1999 represents the most sweeping reform of
financial services regulation in over sixty years. The Act permits the creation
of new financial services holding companies that can offer a range of financial
products under a regulatory regime based on the principle of functional
regulation. The legislation eliminates legal barriers to affiliations among
banks and securities firms, insurance companies, and other financial services
companies. The Act provides financial organizations with flexibility in
structuring these new financial affiliations through a holding company structure
or a financial subsidiary, with appropriate safeguards.
Registrant cannot predict what legislation might be enacted or what regulations
might be adopted, or if enacted or adopted, the effect thereof on Registrant's
operations.
ITEM 2. PROPERTIES
The Registrant owns all of its properties through the Bank. At December 31,
1999, 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 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Incorporated by reference to Page 36 of the Registrant's Annual Report to
Shareholders attached hereto as Exhibit 13.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Incorporated by reference to pages 3 to 10 of the Registrant's Annual Report to
Shareholders, attached hereto as Exhibit 13.
ITEM 7. FINANCIAL STATEMENTS.
Incorporated by reference to pages 12 to 35 of the Registrant's Annual Report to
Shareholders, attached hereto as Exhibit 13.
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 4 of the Registrant's Definitive Proxy
Statement filed as Exhibit 20.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to page 6 of the Registrant's Definitive Proxy
Statement filed as Exhibit 20.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to page 3 of the Registrant's Definitive Proxy
Statement filed as Exhibit 20.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED INVESTORS.
Incorporated by reference to page 9 of the Registrant's Definitive Proxy
Statement filed as Exhibit 20.
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 by reference to the
Registrant's 1999 Annual Report to Shareholders:
(a) Independent Auditor's Report dated February
17, 2000.
(b) Consolidated Statements of Financial
Condition for the years ended December 31,
1999 and 1998.
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(c) Consolidated Statements of Operations for
the years ended December 31, 1999 and 1998.
(d) Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1999 and 1998.
(e) Consolidated Statements of Cash Flows for
the years ended December 31, 1999 and 1998.
(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
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3 (a) Registrant's Articles of Incorporation *
3 (b) Registrant's Bylaws *
13 1999 Annual Report to Shareholders (filed
herewith)
20 Registrant's Definitive Proxy Statement **
27 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 1999, the Registrant
filed a report on Form 8-K regarding the Registrant's
authorization by its Board of Directors on September 9, 1999
to issue 37,029 shares of its $1.00 par value Common Stock
permitted under the Management Recognition Plan. The report
also concerned the Registrant's declaration on September 9,
1999, of a one time return of capital dividend of $3.50 per
share of Common Stock, payable on October 8, 1999. The only
exhibit filed with the report was a press release describing
the return of capital dividend.
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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 30, 2000 /s/ Stephen R. Talbert
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Stephen R. Talbert
President and Chief Executive Officer
11
<PAGE>
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 30, 2000
- ----------------------
Stephen R. Talbert, President,
Chief Executive Officer and Director
/s/ Lisa Blalock Ashley March 30, 2000
- -----------------------
Lisa Blalock Ashley, Chief Financial Officer
/s/ Henry H. Land March 30, 2000
- -----------------
Henry H. Land, Director
/s/ John A. Drye March 30, 2000
- ----------------
John A. Drye, Director
/s/Susan Linn Norvell March 30, 2000
- ---------------------
Susan Linn Norvell, Director
/s/ Lynne Scott Safrit March 30, 2000
---------------------
Lynne Scott Safrit, Director
12
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
13 1999 Annual Report to Shareholders
27 Financial Data Schedule
EXHIBIT 13
BOC FINANCIAL CORP.
1999 ANNUAL REPORT
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
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
Common Stock Information............................................. 36
Corporate Information................................................ 37
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 the 1999 annual report of BOC Financial Corp.
It has been a year in which the Company's Board of Directors and Management have
taken significant actions to enhance shareholder value. It has also been a year
during which the Company has made real progress toward the goal of developing a
much broader array of banking products and services. And through it all, we have
worked long and hard to maintain the high standard of personal service that our
customers have come to expect.
The Board of Directors and Management determined through careful study and
consultation that the Company's capital exceeded the level necessary to achieve
targeted goals and objectives. Therefore, in order to put that capital back into
the hands of shareholders, the Company in October paid a special one-time return
of capital dividend in the amount of $3.50 per share, aggregating in excess of
$2.8 million. In addition, during 1999 the Company continued its stock
repurchase program, reacquiring 74,741 shares at a cost of $729,000 and reducing
the total number of shares outstanding to 805,000 shares.
In 1999, Bank of the Carolinas continued its efforts to develop and offer a
broader array of consumer and commercial services over a larger geographic area.
The Bank acquired an excellent commercial property on Speedway Boulevard in
Concord. Our plans include the future development of a second full service
banking facility on this property. Early in 1999 the Bank made its initial entry
into the fast growing Concord area with the opening of a loan origination office
there.
We are not satisfied with our profit performance for 1999, as our net income
decreased to $109,000 for the year. The Company's profitability was negatively
impacted by the capital management and business development activities described
above. The purchase of land, the share repurchases and the special dividend
decreased funds available for investment with a corresponding decrease in
income. The new loan origination office also impacted earnings negatively, both
in terms of costs incurred to get that operation started and in terms of
operating expenses incurred in excess of revenues generated as the office moves
toward breakeven. We believe, however, that the profits sacrificed in 1999 are
justified in order to build a Company that is properly capitalized and capable
of generating higher levels of profitability in the future.
While 1999 brought mixed results in terms of profitability and development for
the future, we have high hopes for 2000. The Board of Directors, Management and
the staff of BOC Financial Corp. and Bank of the Carolinas thank you for your
support and look forward to a profitable 2000.
Sincerely,
Stephen R. Talbert
President and Chief Executive Officer
-1-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
At or for the year ended December 31,
1999 1998 1997
------------- -------------- ---------
(Dollars in thousands)
FINANCIAL CONDITION DATA:
<S> <C> <C> <C>
Total assets $ 32,310 $ 31,585 $ 24,597
Investments (1) 9,365 12,637 4,881
Loans receivable 21,100 18,133 18,826
Deposits 22,147 19,382 19,978
Stockholders' equity 8,044 11,977 -
OPERATING DATA:
Interest income $ 2,116 $ 2,112 $ 1,761
Interest expense 1,053 1,006 986
------------- -------------- --------------
Net interest income 1,063 1,106 775
Provision for loan losses - - 22
------------- -------------- --------------
Net interest income after provision for loan losses 1,063 1,106 753
Noninterest income 14 5 5
Noninterest expense 942 629 608
------------- -------------- --------------
Income before income taxes 135 482 150
Income tax expense 26 173 43
------------- -------------- --------------
Net income $ 109 $ 309 $ 107
============= ============== ==============
PER COMMON SHARE DATA:
Net income, basic (2), (3) $ .14 $ .28 $ -
Net income, diluted (2), (3) .14 .28 -
Regular cash dividends (2) .15 .10 -
Dividend payment ratio (4) 107.14% 35.71% -
Special return of capital dividend $ 3.50 $ - $ -
SELECTED OTHER DATA:
Number of:
Outstanding loans 466 463 515
Deposit accounts 1,389 1,318 1,464
Full-service offices open 1 1 1
Return on average assets .33% 1.02% 0.45%
Return on average equity 1.01% 3.09% 2.44%
Average equity to average assets 33.27% 32.91% 18.48%
Interest rate spread 1.92% 2.15% 2.49%
Net yield on average interest-earning assets 3.42% 3.74% 3.35%
Average interest-earning assets to average interest-
bearing liabilities 147.43% 146.62% 120.00%
Ratio of noninterest expense to average total assets 2.89% 2.07% 2.56%
Nonperforming assets to total assets -% -% 0.03%
Loan loss reserves to nonperforming loans at
period end -% -% 382.31%
</TABLE>
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) 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.
(3) Net income per share for 1998 is based on net income from April 28, 1998 to
December 31, 1998 divided by the weighted average number of shares
outstanding during that period.
(4) The dividend payment ratio represents regular cash dividends per share as a
percentage of net income per share and excludes the special nonrecurring
$3.50 return of capital dividend during the year ended December 31, 1999.
-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. On
October 8, 1999, BOC paid a special $3.50 per share return of capital dividend,
returning to shareholders approximately $2.8 million.
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, individual and
commercial checking accounts, and NOW accounts, mortgage and consumer loans,
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
principal 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. 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
non-interest expenses such as salaries, employee benefits, office occupancy and
related expenses. The Company has an agreement with Walnut Street Securities
whereby 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, 1999 was a negative 17.31%. At December
31, 1999, the Company's three-year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 22.24% and
a negative 10.50%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 which are
projected to reprice or mature in each of the future time periods shown. 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 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>
<CAPTION>
Terms to Repricing at December 31, 1999
--------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
------------ ------------ ----------- ------------ -------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable:
Real estate loans:
1-4 Family residential
<S> <C> <C> <C> <C> <C>
Fixed $ 1 $ 105 $ 780 $ 8,969 $ 9,855
Adjustable 5,195 - - - 5,195
Other real estate loans
Fixed 2 44 101 466 613
Adjustable 5,187 194 - - 5,381
Other loans 48 19 19 - 86
Interest-earning balances in
other banks 2,556 - - - 2,556
Federal funds sold 1,268 - - - 1,268
Investments 725 1,960 2,681 - 5,366
FHLB common stock(1) - - - 175 175
------------ ------------ ------------ ------------- ------------
Total interest-earning
assets $ 14,982 $ 2,322 $ 3,581 $ 9,610 $ 30,495
============ ============ ============ ============= ============
INTEREST-BEARING LIABILITIES:
Deposit accounts:
Regular passbook $ 2,980 $ - $ - $ - $ 2,980
Money market and other 8,492 - - - 8,492
Certificate accounts 6,890 3,825 - - 10,715
Borrowings 1,900 - - - 1,900
------------ ------------ ------------ ------------- ------------
Total interest-bearing
liabilities $ 20,262 $ 3,825 $ - $ - $ 24,087
============ ============ ============ ============= ============
INTEREST SENSITIVITY GAP
PER PERIOD $ (5,280) $ (1,503) $ 3,581 $ 9,610 $ 6,408
CUMULATIVE INTEREST
SENSITIVITY GAP $ (5,280) $ (6,783) $ (3,202) $ 6,408 $ 6,408
CUMULATIVE GAP AS A
PERCENTAGE OF TOTAL
INTEREST-EARNING
ASSETS (17.31%) (22.24%) (10.50%) 21.01% 21.01%
CUMULATIVE INTEREST-
EARNING ASSETS AS A
PERCENTAGE OF INTEREST
BEARING LIABILITIES 73.94% 71.84% 86.71% 126.60% 126.60%
</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
-5-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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.
NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Company's assets and liabilities for the years ended
December 31, 1999 and 1998. 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>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- ---------- -------------- -------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning balances $ 8,129 $ 406 4.99% $ 7,812 $ 433 5.54%
Investments 4,329 266 6.14% 3,575 209 5.85%
Loans 18,621 1,444 7.75% 18,133 1,470 8.11%
---------- ---------- -------- ---------- ---------- -------
Total interest-earning assets 31,079 2,116 6.81% 29,520 2,112 7.15%
---------- -------- ---------- -------
Other assets 1,477 838
---------- ----------
Total assets $ 32,556 $ 30,358
========== ==========
Interest-bearing liabilities:
Deposits $ 21,080 1,020 4.84% $ 20,133 1,007 5.00%
Borrowings 438 33 7.53% - - -
---------- ---------- ------- ---------- ---------- -------
Total interest bearing liabilities 21,518 1,053 4.89% 20,133 1,007 5.00%
---------- ------- ---------- -------
Other liabilities 205 235
Stockholders' equity 10,833 9,990
---------- ----------
Total liabilities and stockholders' equity $ 32,556 $ 30,358
========== ==========
Net interest income and interest rate spread $ 1,063 1.92% $ 1,105 2.15%
=========== ====== ========== ====
Net yield on average interest-earning assets 3.42% 3.74%
====== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities 147.43% 146.62%
========== =========
</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>
<CAPTION>
Year Ended December 31, 1999 vs. 1998
---------------------------------------------------
Increase (Decrease) Due To
---------------------------------------------------
Volume Rate Total
-------------- ------------- ------------
(Dollars in thousands)
Interest income:
<S> <C> <C> <C>
Interest-earning balances $ 17 $ (44) $ (27)
Investments 45 12 57
Loans 39 (65) (26)
-------------- -------------- --------------
Total interest income 101 (97) 4
-------------- -------------- --------------
Interest expense:
Deposits 47 (34) 13
Borrowings 16 17 33
-------------- -------------- --------------
Total interest expense 63 (17) 46
-------------- -------------- --------------
Net interest income (loss) $ 38 $ (80) $ (42)
============== ==============- ==============
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND 1998
Total assets increased by $725,000 during 1999, from $31.6 million at December
31, 1998 to $32.3 million at year-end. The Company experienced strong growth in
loans receivable, which increased by $3.0 million or 16.4% from $18.1 million at
January 1, 1999 to $21.1 million at December 31, 1999. The Company also
increased its level of available for sale investments by $1.6 million during the
year, to $5.4 million. On October 8, 1999, the Company paid a special return of
capital dividend of $3.50 per share, aggregating $2.8 million. In addition,
during the year the Company executed share repurchases totaling $1.1 million.
The special dividend and share repurchases are the principal reasons for the
decrease in stockholders' equity, which decreased by $3.9 million during the
year to $8.0 million, a level that continues to be well in excess of all
regulatory capital requirements. In addition, during 1999 the Company acquired
at a cost of $640,000 land located at 4020 Gateway Lane, NW (Speedway
Boulevard), Concord, North Carolina to be used for a future branch location.
The activities discussed above were principally funded through deposit growth, a
reduction in short-term interest-earning deposits in other banks and through
borrowings. Total deposit accounts increased by $2.8 million or 14.3% to $22.1
million at the end of the year, while the Company's interest-earning balances in
other banks decreased by $4.9 million during the year to $2.6 million. In
addition, to partially fund the special dividend, the Company borrowed $1.9
million through a loan from another bank. This loan was repaid on January 3,
2000.
-7-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET INCOME. Net income for 1999 was $109,000 or $.14 per share as compared with
net income of $309,000 for 1998, a decrease of $200,000 relating principally to
a decrease in net interest income and an increase in non-interest expenses. Net
interest income for 1999 decreased by $43,000 from the corresponding amount for
1998, while non-interest expenses increased by $313,000, from $629,000 for 1998
to $942,000 for the year ended December 31, 1999. Personnel costs have risen as
a result of the Company's ESOP, the addition of a full staff for the Company's
new loan origination office and the deferred directors' compensation plan.
Occupancy costs have increased primarily because of the new loan origination
office, and other expenses have increased principally as a result of the higher
costs of operating as a publicly owned entity and the costs of operating the new
loan origination office.
NET INTEREST INCOME. Net interest income decreased by $43,000 principally due to
a relatively higher level of interest expense during 1999 as compared with 1998.
Total interest income increased slightly during the year, as an increase of
approximately $1.5 million in average interest-earning assets during the year
was offset by a decrease of 34 basis points in the average yield earned during
1999 as compared with 1998. The increase in average interest-bearing liabilities
for 1999 approximated the increase in average interest-earning assets, but the
decrease in the average rates paid for during the year decreased by only 11
basis points. Thus, while the increased volume of interest-earning assets
negated the effects of the decrease in rates earned, the decrease in rates paid
on interest-bearing liabilities did not offset the effects of the volume
increase, resulting in an increase of $47,000 in interest expense for the year.
NON-INTEREST EXPENSES. Total non-interest expenses were $942,000 for the year
ended December 31, 1999, an increase of $313,000 from the 1998 total of
$629,000. Of this overall increase, approximately $170,000 represents operating
costs attributable to the loan origination office that the Company opened early
during the second quarter of the year. Unfortunately, this loan origination
office contributed incremental income approximating only $20,000, making it the
single factor most affecting the Company's decrease in profitability for the
year. Management is currently undertaking plans to significantly reduce the
costs associated with the loan origination office which, with the higher level
of income generation expected going forward, is expected to reverse the trend of
operating losses generated during 1999. In addition to the increased costs
arising from the loan origination office, the Company incurred additional
compensation costs of $18,000 in connection with the Management Recognition Plan
approved by the Company's shareholders during the year and additional franchise
taxes of approximately $20,000 as a result of the infusion of capital from the
conversion offering completed in the previous year. The balance of the increase
in non-interest expenses relates to normal inflationary increases and to
additional costs incurred as a result of the Company's conversion to a
shareholder-owned entity.
-8-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 Company had no non-performing assets at December 31, 1999 and 1998.
Additionally, management is aware of no 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.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, BOC paid regular cash dividends of $.15 per share. Although BOC
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.
After thoroughly assessing the Company's capital needs, the Company's Board of
Directors also authorized a special non-recurring return of capital dividend of
$3.50 per share that was paid during 1999. The Board of Directors does not
contemplate payment of additional special dividends in the foreseeable future.
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, 1999,
liquid assets (cash, interest-earning deposits, federal funds sold, and
marketable investment securities) were approximately $9.8 million, which
represents 30.2% of total assets.
At December 31, 1999, outstanding loan commitments were $273,000, the
undisbursed portion of construction loans was $1.9 million and outstanding lines
of credit aggregated $2.5 million. Funding for these commitments is expected to
be provided from deposits, loan principal repayments, maturing investments and
income generated from operations.
-9-
<PAGE>
BOC FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 1999 and
1998, 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.
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
The Year 2000 issue has posed business risks to most business organizations,
including the Company. In response, the Company formed a Year 2000 project team,
consisting of senior officers within the Company's operations, information
systems, financial and management areas, to ensure that the Company attained
Year 2000 compliance. All date sensitive systems were evaluated for Year 2000
compliance, with complete upgrading and testing of systems completed well in
advance of the Year 2000 date change. The Company also developed contingency
plans for its computer processes, including the use of alternative systems and
the manual processing of certain critical operations. In addition, the Company
had undertaken extensive efforts to ensure that significant vendor and customer
relationships were Year 2000 compliant. The Company's management is pleased, but
not surprised, that business continued as normal without adverse impact to the
Company during the critical date change. In coming months, the Company will
continue monitoring external entities to assure that they have not experienced
any Year 2000 problems that could impact their relationship with the Company.
The Company's total Year 2000 compliance costs have not been significant.
-10-
<PAGE>
[GRAPHIC]
DIXON ODOM PLLC
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, 1999 and 1998 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, 1999 and 1998, 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 17, 2000
---------
PAGE 11
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
--------------- ----------------
<S> <C> <C>
Cash on hand and in banks $ 569,011 $ 425,916
Interest-earning balances in other banks 2,556,250 7,424,974
Federal funds sold 1,267,719 1,285,023
Investment securities available for sale, at
fair value (Note B) 5,366,430 3,739,733
Loans receivable, net (Note C) 21,100,257 18,133,053
Accrued interest receivable 74,918 53,985
Premises and equipment, net (Note D) 969,125 267,982
Stock in the Federal Home Loan Bank, at cost 175,100 187,200
Other assets 231,404 67,410
--------------- ----------------
TOTAL ASSETS $ 32,310,214 $ 31,585,276
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts (Note G) $ 22,146,897 $ 19,381,976
Borrowings (Note F) 1,900,000 -
Advance payments from borrowers for property
taxes and insurance 36,825 6,949
Accrued expenses and other liabilities 182,940 219,491
--------------- ----------------
TOTAL LIABILITIES 24,266,662 19,608,416
--------------- ----------------
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; 805,000 and 879,741 shares issued
and outstanding at December 31, 1999 and 1998,
respectively 805,000 879,741
Additional paid in capital 4,296,805 7,490,173
Unearned compensation (Note H) (1,584,205) (1,019,027)
Retained earnings, substantially restricted 4,595,368 4,617,125
Accumulated other comprehensive income (69,416) 8,848
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 8,043,552 11,976,860
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,310,214 $ 31,585,276
=============== ================
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. PAGE 12
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
INTEREST INCOME
Loans $ 1,444,131 $ 1,469,954
Investments 265,654 208,997
Interest-earning balances in other banks and
federal funds sold 406,294 433,172
--------------- ----------------
TOTAL INTEREST INCOME 2,116,079 2,112,123
--------------- ----------------
INTEREST EXPENSE
Deposit accounts 1,019,836 1,006,524
Borrowings 33,501 -
--------------- ----------------
TOTAL INTEREST EXPENSE 1,053,337 1,006,524
--------------- ----------------
NET INTEREST INCOME 1,062,742 1,105,599
PROVISION FOR LOAN LOSSES - -
--------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,062,742 1,105,599
--------------- ----------------
NON-INTEREST INCOME 13,685 5,675
--------------- ----------------
NON-INTEREST EXPENSES
Personnel costs 476,188 392,385
Occupancy 72,580 51,841
Data processing and outside service fees 48,895 41,590
Deposit insurance premiums 11,765 13,380
Other 332,377 130,281
--------------- ----------------
TOTAL NON-INTEREST EXPENSES 941,805 629,477
--------------- ----------------
INCOME BEFORE INCOME TAXES 134,622 481,797
INCOME TAX EXPENSE (NOTE I) 26,000 173,000
--------------- ----------------
NET INCOME $ 108,622 $ 308,797
=============== ================
NET INCOME PER COMMON SHARE
Basic and diluted $ .14 $ .28
=============== ================
Weighted average shares outstanding 754,969 848,660
=============== ================
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. PAGE 13
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
$1 Par value Accumulated
common stock Additional other Total
---------------------- paid-in Unearned Retained comprehensive stockholders'
Shares Amount capital compensation earnings income equity
-------- ----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997 - $ - $ - $ - $ 4,417,976 $ 6,089 $ 4,424,065
Comprehensive income:
Net income for 1998 - - - - 308,797 - 308,797
Net unrealized gain on
investment securities
available for sale - - - - - 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
by ESOP - - - (1,043,484) - - (1,043,484)
Release of ESOP shares - - - 24,457 - - 24,457
Share repurchases (46,000) (46,000) (391,647) - (25,480) - (463,127)
Cash dividends of $.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
Comprehensive income:
Net income for 1999 - - - - 108,622 - 108,622
Net unrealized loss on
investment securities
available for sale - - - - - (78,264) (78,264)
-----------
Total comprehensive
income 30,358
-----------
Purchase and award of
37,029 common shares
by MRP - - 1,277 (356,400) - - (355,123)
Repurchase of common
stock (74,741) (74,741) (636,352) - (17,644) - (728,737)
MRP shares earned - - - 17,820 - - 17,820
Release of ESOP shares - - - 32,609 - - 32,609
Cash dividends of $.15
per share - - - - (112,735) - (112,735)
Special cash dividend of
$3.50 per share - - (2,558,293) (259,207) - - (2,817,500)
------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at December 31,
1999 805,000 $ 805,000 $ 4,296,805 $(1,584,205) $ 4,595,368 $ (69,416) $ 8,043,552
======= =========== =========== =========== =========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. PAGE 14
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 108,622 $ 308,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,477 33,790
Amortization, net 140 (1,242)
Gain on sale of assets, net - (1,983)
Provision for loan losses - -
Deferred income taxes (6,300) (6,746)
Release of ESOP shares 32,609 24,457
Amortization of MRP shares 17,820 -
Deferred compensation 20,788 21,038
Changes in assets and liabilities:
Increase in accrued interest receivable (20,933) (9,238)
(Increase) decrease in other assets (112,795) 4,409
Increase (decrease) in accrued expenses and
other liabilities (57,339) 19,880
--------------- ----------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 8,089 393,162
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-earning balances
in other banks 4,868,724 (7,389,913)
Net decrease in federal funds sold 17,304 464,977
Purchases of available for sale investment securities (4,000,000) (3,474,938)
Proceeds from maturities of available for sale investment
securities 2,250,000 2,150,156
Proceeds from sales of available for sale investment
securities - 500,625
Redemption of Federal Home Loan Bank stock 12,100 -
Proceeds from sales of loans - 11,043
Net (increase) decrease in loans (2,967,204) 682,959
Purchase of premises and equipment (726,620) (14,960)
--------------- ----------------
NET CASH USED BY
INVESTING ACTIVITIES (545,696) (7,070,051)
--------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. PAGE 15
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand accounts $ 2,153,409 $ 447,752
Net increase (decrease) in certificates of deposit 611,512 (1,043,696)
Proceeds from borrowings 1,900,000 -
Net increase (decrease) in advance payments from borrowers
for taxes and insurance 29,876 (9,886)
Decrease in stock conversion costs - 156,183
Net proceeds from issuance of common stock - 8,807,561
Repurchase of common stock (1,083,860) (463,127)
Loan to ESOP for purchase of common stock - (1,043,484)
Cash dividends paid (2,930,235) (84,168)
--------------- ----------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 680,702 6,767,135
--------------- ----------------
NET INCREASE IN CASH ON HAND AND IN BANKS 143,095 90,246
CASH ON HAND AND IN BANKS, BEGINNING 425,916 335,670
--------------- ----------------
CASH ON HAND AND IN BANKS, ENDING $ 569,011 $ 425,916
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,019,836 $ 1,006,524
=============== ================
Income taxes $ 203,965 $ 176,114
=============== ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Unrealized holding gains (losses) on available for sale
investment securities, net of deferred income taxes $ (78,264) $ 2,759
================ ================
- ----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. PAGE 16
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
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 banking office 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. The Bank operates a loan
origination office in Concord, North Carolina. 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 the 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 susceptible to significant change relate to the determination of
the allowance for losses on loans.
- --------------------------------------------------------------------------------
PAGE 17
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities
- ---------------------
The Bank classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading or held to
maturity securities at December 31, 1999 or 1998. 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.
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.
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
PAGE 18
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
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.
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.
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
- ------------
- --------------------------------------------------------------------------------
PAGE 19
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
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.
Stock Compensation Plans
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date and, under
Opinion No. 25, no compensation cost is recognized for them. The Company has
elected to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting had been applied.
Employee Stock Ownership Plan
- -----------------------------
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.
- --------------------------------------------------------------------------------
PAGE 20
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Profit Sharing Plan
- -------------------
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.
Earnings Per Common Share
- -------------------------
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options and are determined using the treasury stock method. The dilutive
effect of outstanding options and unearned shares in the management recognition
plan was negligible for the years ended December 31, 1999 and 1998.
Accounting Standards Issued But Not Yet Adopted
- -----------------------------------------------
In June 1998, the Financial Accounting Standards Board 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 Bank 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
Bank will adopt SFAS No. 133 on January 1, 2001, as required. Management of the
Bank believes that adoption of SFAS No. 133 will not have a material impact on
the Bank's balance sheet or the related statements of operations and changes in
stockholders' equity.
- --------------------------------------------------------------------------------
PAGE 21
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------
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 $ 5,249,729 $ 272 $ 108,671 $ 5,141,330
Municipal bonds 225,117 - 17 225,100
-------------- ------------- ------------- --------------
$ 5,474,846 $ 272 $ 108,688 $ 5,366,430
============== ============= ============= ==============
<CAPTION>
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
============== ============= ============= ==============
The amortized cost and fair values of securities available for sale at December
31, 1999 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.
<CAPTION>
Securities Available for Sale
-----------------------------------
Amortized Fair
Cost Value
---------------- ----------------
<S> <C> <C>
Due within one year $ 724,846 $ 725,100
Due after one year through three years 2,000,000 1,960,157
Due after three years through five years 2,750,000 2,681,173
--------------- ----------------
$ 5,474,846 $ 5,366,430
=============== ================
</TABLE>
Proceeds from maturities of investment securities available for sale during the
year ended December 31, 1999 were $2,250,000. There were no sales of investment
securities in 1999. 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.
Securities with a carrying value of $500,000 at December 31, 1999 were pledged
to secure public monies on deposit as required by law.
- --------------------------------------------------------------------------------
PAGE 22
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
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, 1999.
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>
<CAPTION>
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 $ 500 $ 1,960 $ 2,681 $ - $ 5,141
Municipal bonds 225 - - - 225
Other:
Interest-earning balances in other
banks 2,556 - - - 2,556
Federal funds sold 1,268 - - - 1,268
Federal Home Loan Bank Stock - - - 175 175
------------- -------------- ------------- ------------- --------------
Total $ 4,549 $ 1,960 $ 2,681 $ 175 $ 9,365
============= ============== ============= ============= ==============
<CAPTION>
Average Yield
---------------------------------------------------------------------------
After one After three
One year year through years through After five
or less three years five years years Total
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U. S. government and
agency securities 5.50% 6.16% 6.47% - 5.80%
Municipal bonds 4.50% - - - 4.50%
Other:
Interest-earning balances in
other banks 4.25% - - - 4.25%
Federal funds sold 5.03% - - - 5.03%
Federal Home Loan Bank
Stock - - - 7.72% 7.72%
Weighted average 4.62% 6.16% 6.47% 7.72% 5.28%
- -------------------------------------------------------------------------------------------------------------------
PAGE 23
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------------- ------------------------------
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 $ 9,922,829 47.02% $ 10,645,387 58.71%
Adjustable 5,235,129 24.80 4,906,549 27.06
Multi-family residential
Adjustable 977,005 4.63 169,608 .93
Commercial
Fixed 56,482 .27 60,927 .34
Adjustable 1,803,690 8.55 571,059 3.15
Construction
Fixed - - 234,500 1.29
Adjustable 3,059,100 14.50 - -
Home equity lines of credit
Adjustable 1,441,316 6.83 1,278,534 7.05
Home improvement loans
Fixed 556,588 2.64 446,906 2.46
-------------- ---------- --------------- ----------
Total real estate loans 23,052,139 109.24 18,313,470 100.99
Other loans:
Consumer fixed:
Loans secured by automobiles 38,494 .18 35,366 .20
Loans secured by deposits 47,839 .23 82,462 .45
-------------- ---------- --------------- ----------
Total loans 23,138,472 109.65 18,431,298 101.64
Less:
Construction loans in process (1,899,771) (9.00) (179,500) (.99)
Allowance for loan losses (30,000) (.14) (30,000) (.16)
Deferred loan origination fees,
net of costs (108,444) (.51) (88,745) (.49)
-------------- ---------- --------------- ----------
$ 21,100,257 100.00% $ 18,133,053 100.00%
============== ========== =============== ==========
</TABLE>
At December 31, 1999 and 1998, and for the years then ended, the Bank had no
nonaccrual loans or restructured loans. The Bank has had no loan charge-offs or
recoveries, and has made no provision for loan losses, for the years ended
December 31, 1999 and 1998.
- --------------------------------------------------------------------------------
PAGE 24
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (CONTINUED)
At December 31, 1999, the Bank had mortgage and consumer loan commitments
outstanding of $273,200 and pre-approved but unused lines of credit totaling
$2,490,786. 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:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Balance at beginning of year $ 498,334 $ 328,187
Additional borrowings 20,349 229,268
Loan repayments (278,008) (59,121)
--------------- ----------------
Balance at end of year $ 240,675 $ 498,334
=============== ================
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1999 1998
--------------- ----------------
Land $ 655,570 $ 16,000
Building and improvements 439,970 394,434
Furniture and equipment 205,768 164,254
--------------- ----------------
1,301,308 574,688
Accumulated depreciation (332,183) (306,706)
--------------- ----------------
$ 969,125 $ 267,982
=============== ================
</TABLE>
Included in land is a commercial property in Concord, North Carolina that was
acquired in 1999 as a future branch site at a cost of approximately $640,000.
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
- --------------------------------------------------------------------------------
PAGE 25
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank has a $3,500,000 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, 1999, there were no advances on
this line of credit.
Borrowings at December 31, 1999 consisted of a note payable to another bank for
$1,900,000, bearing interest at 7.25%. This note was repaid on January 13, 2000.
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
<S> <C> <C>
Demand accounts:
Regular passbook $ 2,980,384 3.05% $ 3,452,265 3.20%
Money market and other 8,451,990 4.64% 5,826,700 4.71%
--------------- ---------------
11,432,374 4.23% 9,278,965 4.15%
Certificates of deposit 10,714,523 5.41% 10,103,011 5.51%
--------------- ---------------
Total deposit accounts $ 22,146,897 4.80% $ 19,381,976 4.86%
=============== ===============
A summary of certificate accounts by maturity as of December 31, 1999 follows:
<CAPTION>
Less than $100,000
$100,000 or More Total
-------------- --------------- ----------------
<S> <C> <C> <C>
Three months or less $ 2,519,865 $ 464,856 $ 2,984,721
Over three months through twelve months 3,375,819 529,310 3,905,129
Over one year through three years 3,150,830 673,843 3,824,673
-------------- -------------- ----------------
Total certificate accounts $ 9,046,514 $ 1,668,009 $ 10,714,523
============== ============== ================
Interest expense on deposits for the years ended December 31, 1999 and 1998 is
summarized as follows:
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Regular passbook savings $ 97,209 $ 152,011
Money market savings 307,773 284,066
Certificates of deposit 614,854 570,447
--------------- ----------------
$ 1,019,836 $ 1,006,524
=============== ================
- ----------------------------------------------------------------------------------------------------------------------
PAGE 26
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Management Recognition Plan
- ---------------------------
At the annual meeting which was held on April 8, 1999, the Company's
stockholders approved the Management Recognition Plan (the "MRP"). The MRP
provides for the award of up to 37,029 shares of the Company's common stock to
directors, officers and employees of the Bank. The Company elected to fund the
plan by purchasing shares in the open market. During September of 1999, 37,029
common shares were awarded under the MRP at a value of $9.63 per share at the
date of grant. Personnel costs for the year ended December 31, 1999 include
$17,820 which represents the value of MRP shares earned through that date.
Stock Option Plan
- -----------------
On April 8, 1999, the stockholders approved the BOC Financial Corp. Stock Option
Plan (the "SOP"). The SOP provides for the issuance to directors, officers, and
employees of the Bank options to purchase up to 175,948 shares of the Company's
common stock. On November 12, 1999, the Company granted options to purchase
77,316 shares of the Company's common stock at an exercise price of $6.63 per
share, including 38,000 options granted to the Company's directors and 39,316
options granted to the Company's executive officers and employees. Options
granted to directors were fully vested on the date of grant. Options granted to
executive officers and employees will vest 20% annually. All options will expire
if not exercised within ten years from the date of grant. None of the options
were exercised during the year ended December 31, 1999. At such date, options to
purchase 38,000 shares at $6.63 per share were exercisable. As permitted by SFAS
No. 123, the Company has applied APB Opinion No. 25 for measurement of
stock-based compensation in the accompanying financial statements. If the
Company had used the fair value based method of accounting for stock-based
compensations, operating results for the year ended December 31, 1999 would have
been affected as set forth below:
As Reported Pro Forma
----------- ---------
Net income $ 108,622 $ 49,227
Net income per share, basic and diluted $ .14 $ .07
In determining the pro forma disclosures above, the fair value of options
granted was estimated as of the grant date under the Black-Scholes Option
Pricing Model using the following assumptions: a risk-free interest rate of
5.25%, a dividend yield of 3.02%, an expected life of 7 years, and expected
volatility of 20%. The effects of applying SFAS No. 123 in the above pro forma
disclosure are not indicative of future amounts.
- --------------------------------------------------------------------------------
PAGE 27
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)
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,
1999 and 1998, the Bank incurred expense in the form of contributions to the
plan of $30,000 and $24,000, respectively.
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 $21,000 and $33,000,
respectively, for the years ended December 31, 1999 and 1998.
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. 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, 1999 and 1998, the outstanding balance of the note was
$986,419 and $1,019,027, respectively, and is presented as a reduction of
stockholders' equity.
- --------------------------------------------------------------------------------
PAGE 28
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)
Employee Stock Ownership Plan (Continued)
- -----------------------------
Dividends on unallocated shares may be used by the ESOP to repay the loan to BOC
and are not reported as dividends in the financial statements. Dividends on
allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements. Special
return of capital dividends on unallocated ESOP shares totaling $259,207 are
recorded as unearned compensation and reported as a reduction of stockholders'
equity. These funds are expected to be used by the ESOP to purchase additional
shares of BOC's common stock which may result in the ESOP owning a larger
percentage of the outstanding common stock than was originally anticipated at
the time of the Conversion.
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.
Expenses of $32,344 and $24,457 have been incurred in connection with the ESOP
during the years ended December 31, 1999 and 1998, respectively. At December 31,
1999, 5,870 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
$357,000 at December 31, 1999.
<TABLE>
<CAPTION>
NOTE I - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 1999 and 1998:
<S> <C> <C>
1999 1998
--------------- ----------------
Current tax expense $ 32,300 $ 179,746
Net deferred expense (benefit) included in operations (6,300) (6,746)
--------------- ----------------
$ 26,000 $ 173,000
=============== ================
- -------------------------------------------------------------------------------------------------------------------
PAGE 29
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE I - INCOME TAXES (CONTINUED)
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Income tax at federal statutory rate $ 45,771 $ 163,811
State income tax, net of federal tax benefit 2,311 11,220
Effect of graduated rate brackets (10,349) -
Tax exempt interest income (3,347) (2,464)
Other (8,386) 433
--------------- ----------------
$ 26,000 $ 173,000
=============== ================
Deferred tax assets and liabilities arising from temporary differences at
December 31, 1999 and 1998 are summarized as follows:
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Deferred tax assets relating to:
Allowance for loan losses $ 11,454 $ 11,454
Deferred compensation 44,657 46,643
Loan fees and costs 45,434 32,779
Unrealized losses on investment securities
available for sale 39,000 -
--------------- ----------------
Total deferred tax assets 140,545 90,876
--------------- ----------------
Deferred tax liabilities relating to:
FHLB stock dividends (24,895) 26,842
Depreciation (6,316) -
Unrealized gains on investment securities
available for sale - 5,899
--------------- ----------------
Total deferred tax liabilities (31,211) 32,741
--------------- ----------------
Net deferred tax assets $ 109,334 $ 58,135
=============== ================
</TABLE>
Retained earnings at December 31, 1999 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.
- --------------------------------------------------------------------------------
PAGE 30
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE J - REGULATORY 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, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
The Bank's regulatory capital amounts and ratios are presented below.
<TABLE>
<CAPTION>
To be well
For capital capitalized under prompt
Actual adequacy purposes corrective action provisions
--------------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital
(to Risk Weighted
Assets) $ 9,779 61.1% > $ 1,280 > 8.0% > $ 1,600 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted
Assets) 9,749 60.9% > 640 > 4.0% > 960 > 6.0%
- - - -
Tier 1 Capital
(to Adjusted Assets) 9,749 29.9% > 980 > 3.0% > 1,633 > 5.0%
- - - -
</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.
- --------------------------------------------------------------------------------
PAGE 31
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE K - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK (CONTINUED)
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, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Commitments to extend credit, mortgage and consumer loans $ 273,200
Undisbursed construction loans 1,899,771
Undisbursed lines of credit 2,490,786
</TABLE>
NOTE L - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial 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.
- --------------------------------------------------------------------------------
PAGE 32
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE L - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
STOCK IN FEDERAL HOME LOAN BANK OF ATLANTA
The fair value for FHLB stock is its carrying value, since this is
the amount for which it could be redeemed. There is no active market
for this stock and the Bank is required to maintain a minimum balance
based on the unpaid principal of home mortgage loans.
DEPOSIT LIABILITIES
The fair value of savings deposits is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of
deposit is estimated using rates currently offered for deposits of
similar remaining maturities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
With regard to financial instruments with off-balance sheet risk
discussed in Note 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, 1999:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
--------------- -----------------
<S> <C> <C>
Financial assets:
Cash, interest bearing balances and
federal funds sold $ 4,392,980 $ 4,392,980
Investment securities 5,366,430 5,366,430
Loans 21,100,257 21,108,000
Stock in Federal Home Loan Bank of Atlanta 175,100 175,100
Financial liabilities:
Deposits 22,146,897 21,791,000
Borrowings 1,900,000 1,900,000
- ----------------------------------------------------------------------------------------------------------------
PAGE 33
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
NOTE M - PARENT COMPANY FINANCIAL DATA
Following are condensed financial statements of BOC Financial Corp. as of
and for the years ended December 31, 1999 and 1998:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Assets:
Cash $ 40,483 $ 17,316
Note receivable from Bank of the Carolinas 229,380 2,308,892
Investment in Bank of the Carolinas 9,679,849 9,658,246
Other assets 29,936 7,406
--------------- -----------------
$ 9,979,648 $ 11,991,860
=============== =================
Liabilities and Stockholders' Equity:
Liabilities:
Borrowings $ 1,900,000 $ -
Accrued expenses and other liabilities 36,096 15,000
--------------- -----------------
Total liabilities 1,936,096 15,000
--------------- -----------------
Stockholders' Equity:
Common stock 805,000 879,741
Additional paid-in capital 4,296,805 7,490,173
Unearned compensation (1,584,205) (1,019,027)
Retained earnings 4,595,368 4,617,125
Accumulated other comprehensive income (loss) (69,416) 8,848
--------------- -----------------
Total stockholders' equity 8,043,552 11,976,860
--------------- -----------------
$ 9,979,648 $ 11,991,860
=============== =================
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Equity in earnings of subsidiary $ 71,365 $ 155,596
Interest income 148,385 149,815
Operating expenses (100,128) (11,033)
Income taxes (11,000) (54,000)
--------------- -----------------
Net income $ 108,622 $ 240,378
=============== =================
- ----------------------------------------------------------------------------------------------------------------
PAGE 34
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
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
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.
- --------------------------------------------------------------------------------
PAGE 35
<PAGE>
BOC FINANCIAL CORP.
COMMON STOCK INFORMATION
- --------------------------------------------------------------------------------
The Company's stock began trading on April 28, 1998. There are 805,000 shares of
common stock outstanding which were held by approximately 306 stockholders of
record (excluding shares held in street name) on December 31, 1999. 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 and Trident Securities are the market makers for the Company's
common stock. The following table reflects the stock trading and dividend
payment frequency of the Company for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Stock price Dividends, per share
--------------------------- ------------------------------
High Low Regular Special
------------ ------------ -------------- -------------
For the year ended December 31, 1999:
<S> <C> <C> <C> <C>
First quarter ending March 31 $ 9.88 $ 9.00 $ - $ -
Second quarter ending June 30 $ 9.75 $ 9.00 $ .05 $ -
Third quarter ending September 30 $ 9.63 $ 8.75 $ .05 $ -
Fourth quarter ending December 31 $ 8.75 $ 5.25 $ .05 $ 3.50
For the year ended December 31, 1998:
Period ending June 30 $ 15.25 $ 12.25 $ - $ -
Third quarter ending September 30 $ 12.88 $ 10.25 $ - $ -
Fourth quarter ending December 31 $ 10.38 $ 8.37 $ .10 $ -
- ----------------------------------------------------------------------------------------------------------------
PAGE 36
</TABLE>
<PAGE>
BOC FINANCIAL CORP.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
<S> <C> <C>
Stephen R. Talbert John A. Drye Henry H. Land
PRESIDENT AND CEO VICE PRESIDENT SECRETARY AND CFO
DIRECTORS
Lynne Scott Safrit Susan Linn Norvell
PRESIDENT, ATLANTIC AMERICAN PROPERTIES, INC. HOMEMAKER
John A. Drye Henry H. Land
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 9, 2000 at Bank of the
Cranford, NJ 07016 Carolinas, 107 South Central Ave., Landis, NC.
SPECIAL LEGAL COUNSEL FORM 10-KSB
Anthony Gaeta, Jr., P.A. A COPY OF FORM 10-KSB AS FILED WITH THE SECURITIES
Attorneys at Law AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE
808 Salem Woods Drive, Suite 201 TO THE COMPANY'S STOCKHOLDERS FOR THE COMPANY'S MOST
Raleigh, NC 27615 RECENT FISCAL 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
408 Summit Drive 107 South Central Ave.
Sanford, NC 27330 Landis, NC 28088
DISCLAIMER
THIS ANNUAL REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
- -----------------------------------------------------------------------------------------------------------------------------
PAGE 37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 569
<INT-BEARING-DEPOSITS> 2,556
<FED-FUNDS-SOLD> 1,268
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,366
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 21,130
<ALLOWANCE> 30
<TOTAL-ASSETS> 32,310
<DEPOSITS> 22,147
<SHORT-TERM> 1,900
<LIABILITIES-OTHER> 219
<LONG-TERM> 0
0
0
<COMMON> 805
<OTHER-SE> 7,239
<TOTAL-LIABILITIES-AND-EQUITY> 32,310
<INTEREST-LOAN> 1,444
<INTEREST-INVEST> 266
<INTEREST-OTHER> 406
<INTEREST-TOTAL> 2,116
<INTEREST-DEPOSIT> 1,020
<INTEREST-EXPENSE> 1,053
<INTEREST-INCOME-NET> 1,063
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 942
<INCOME-PRETAX> 135
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 3.42
<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
</TABLE>
