<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
Commission file number
--------------------------------
ANSON BANCORP, INC.
(Name of small business issuer in its charter)
North Carolina 56-2073894
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
211 South Greene Street,
Post Office Box 249 28170-0249
Wadesboro, North Carolina ----------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
704-694-2122
------------
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value N/A
- ---------------------------- -------------------------------------------
(Title of class) (Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $1,463,657.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Common Stock, no par value--$6,163,568 (based on the price at which the stock
was sold on September 16, 1998).
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, no par value 585,124
-------------------------- -----------------------------------
(Class) (Outstanding at September 16, 1998)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended June 30, 1998
(the "1998 Annual Report"), are incorporated by reference into Part I and
Part II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held November 12, 1998 (the "Proxy Statement"), are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Prior to June 19, 1998, Anson Savings Bank, SSB (the "Bank") operated as a
mutual North Carolina-chartered savings bank. On June 19, 1998, the Bank
converted from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion"). In connection with
the Conversion, all of the issued and outstanding capital stock of the Bank was
acquired by Anson Bancorp, Inc., a North Carolina corporation (the "Company")
which was organized to become the Bank's holding company. At that time, the
Company had an initial public offering of its common stock, no par value (the
"Common Stock").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's and the Bank's principal
office is located at 211 South Greene Street, Wadesboro, North Carolina. The
Company's activities consist of investing the proceeds of its initial public
offering which were retained at the holding company level and owning the Bank.
The Company's principal sources of income are earnings on its investments. In
addition, the Company will receive any dividends which are declared and paid by
the Bank on its capital stock.
The Bank was originally chartered in 1889 and has been a member of the
Federal Home Loan Bank ("FHLB") system since 1939. The deposits of the Bank are
insured by the Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC") to the maximum amount permitted by
law.
The Bank conducts business through its full service offices in Wadesboro,
North Carolina. The Bank is a community-oriented financial institution which
offers a variety of financial services to meet the needs of the communities it
serves. The Bank is principally engaged in the business of attracting deposits
from the general public and using such deposits to make one-to-four-family
residential real estate loans, nonresidential real estate loans, construction
loans and loans secured by deposit accounts.
Revenues of the Bank are derived primarily from interest on loans. The
Bank also receives interest income from its investments and interest-earning
deposit balances. The Bank receives non-interest income from transaction and
service fees and other sources. The major expenses of the Bank are interest on
deposits and general and administrative expenses such as compensation and
employee benefits, federal deposit insurance premiums, data processing expenses
and occupancy and related expenses.
At June 30, 1998, the Company had total assets of $25,125,000, net loans of
$11,515,000, deposits of $15,440,000, investment securities of $12,955,000 and
stockholders' equity of $9,382,000.
At June 30, 1998, the Company and the Bank had a total of five full-time
employees.
The Company has no operations and conducts no business of its own other
than owning the Bank and investing its portion of the net proceeds received in
the Conversion. Accordingly, the discussion of the business which follows in
the Form 10-KSB concerns the business conducted by the Bank, unless otherwise
indicated.
Primary Market Area
The Bank's primary market area is Anson County, North Carolina. The Bank
also makes loans to residents of Union, Stanley and Mecklenburg counties in
North Carolina from time to time. Anson County is rural with a population of
24,309 located on the North Carolina/South Carolina border and Wadesboro is
located 50 miles east of Charlotte, North Carolina.
<PAGE>
Employment in the Bank's primary market area is diversified among
manufacturing, mining, agriculture, retail and wholesale trade, government and
service. Other non-manufacturing employers include the county government,
school systems and the county hospital.
In recent years unemployment rates in Anson County have been high,
averaging 5.9% in 1997. At June 30, 1998, unemployment in Anson County was
7.6%. Management regards Anson County as a low-growth area in which there is
significant competition among financial service providers for market shares.
Due primarily to the economic factors discussed above, the Bank has limited
residential mortgage lending opportunities in its local market area and does not
anticipate that residential mortgage lending opportunities will increase in the
future because of lack of growth in the local economy. Management believes that
opportunities for future earnings growth in the Bank's primary market area are
limited in light of these factors. In addition, lower income levels and low
rates of growth in Anson County could result in an increase in the number of
delinquent or nonperforming loans and reduce the value of the collateral
securing such loans, adversely affecting the Bank's financial condition and
results of operations.
Lending Activities
General. The Bank's primary source of revenue is interest and fee income
from its lending activities, consisting primarily of mortgage loans for the
purchase or refinancing of one-to-four family residential real property located
in its primary market area. The Bank also makes loans secured by multi-family
and nonresidential properties, construction loans, and loans secured by pledged
deposit accounts. Less than 1.0% of the Bank's loan portfolio, before net
items, is not secured by real estate. On June 30, 1998, the Bank's largest
single outstanding loan had a balance of approximately $250,000. In addition to
interest earned on loans, the Bank receives fees in connection with loan
originations, loan modifications, late payments, loan assumptions and other
miscellaneous services. The Bank generally does not sell its loans; loans are
originated with the intention that they will be held in the Bank's loan
portfolio. The Bank also originates mortgage loans with a call feature that
varies from five to 15 years, enabling the Bank to call the loan and increase
the interest rate from the original fixed contractual rate. Interest on such
loans is amortized over the contractual life of the loan. For purposes of the
discussion and in the tables that follow, such loans with call provisions are
shown as fixed rate loans maturing at the date of the call provisions.
The Bank has recently employed someone with a background in commercial
lending and anticipates developing and seeking new lending opportunities in this
area. There can be no assurances that the Bank will be successful in expanding
its loan portfolio into the commercial lending area.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $11.5 million at June 30, 1998 representing 45.94% of the Bank's
total assets at such date. At June 30, 1998, 91.39% of the Bank's loan
portfolio, before net items, was composed of one-to-four-family residential
mortgage loans. Nonresidential real estate loans represented 4.14% of the
Bank's loan portfolio, before net items, on such date. Construction loans
represented 4.18% of the Bank's loan portfolio, before net items, on such date.
As of June 30, 1998, less than 1.0%, before net items, of the loans in the
Bank's loan portfolio had adjustable interest rates.
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
2
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1998 1997
----------------- ----------------
% of % of
Amount Total Amount Total
-------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family residential $10,911 94.76% $10,888 95.32%
Nonresidential 494 4.29 543 4.75
Construction 499 4.33 349 3.06
------- ------ ------- ------
Total real estate loans 11,904 103.38 11,780 103.13
Other loans:
Loans secured by deposits 35 .30 75 .66
------- ------ ------- ------
Total other loans 35 .30 75 .66
------- ------ ------- ------
Total loans 11,939 103.68 11,855 103.79
Less:
Allowance for loan losses 102 .89 100 .88
Undisbursed portion of construction loans 279 2.42 288 2.52
Net deferred loan origination fees 43 .37 44 .39
------- ------ ------- ------
Total reductions 424 3.68 432 3.79
------- ------ ------- ------
Total loans receivable, net $11,515 100.00% $11,423 100.00%
======= ====== ======= ======
</TABLE>
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at June 30, 1998. Loans which have adjustable rates are
shown as being due in the period during which rates are next subject to change,
while fixed rate and other loans are shown as due in the period of contractual
maturity. Demand loans, loans having no stated maturity and overdrafts are
reported as due in one year or less. The table does not include prepayments or
scheduled principal repayments. Amounts in the table are net of loans in
process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
------- --------- ---------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
TOTAL LOANS:
- ------------
Real estate loans: $ 49 $ - $ - $ - $ 49
Adjustable rate residential 1-4 family 178 279 583 9,779 10,819
Fixed rate residential 1-4 family 16 - 89 609 714
Other real estate loans - fixed 35 - - - 35
Other loans ---- ---- ---- ------- -------
278 279 672 10,388 11,617
Total
Less:
Allowance for loan losses 102 - - - 102
---- ---- ---- ------- -------
Totals $176 $279 $672 $10,388 $11,515
==== ==== ==== ======= =======
</TABLE>
3
<PAGE>
The following table sets forth the dollar amount at June 30, 1998 of all
loans maturing or repricing on or after June 30, 1999 which have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
------- ----------
(In Thousands)
<S> <C> <C>
Real estate loans $11,339 $ -
Other loans - -
------- ----------
$11,339 $ -
======= ==========
</TABLE>
Origination and Sale of Loans. The Bank generally does not originate its
one-to-four-family residential mortgage or other loans with the intention that
they will be sold in the secondary market. Although the Bank believes that many
of its one-to-four-family residential loans could be sold to investors, some of
such loans could be sold only after the Bank incurred certain costs and/or
discounted the purchase price. As a result, with respect to potential private
sales of whole loans, the Bank's loan portfolio may be less valuable than would
be the case if it was composed entirely of loans originated in conformity with
secondary market requirements.
The table below sets forth the Bank's loan origination, purchase and sale
activity and loan portfolio repayment experience during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Loans receivable, net, beginning of period $11,423 $11,572
Loan originations:
Residential 1-4 family 2,339 1,365
Nonresidential real estate 55 -
Residential construction 499 486
Loans secured by deposits 25 53
------- -------
Total loan originations 2,918 1,904
Loans purchased - -
Principal repayments (2,824) (2,051)
Other changes, net /(1)/ (2) (2)
------- -------
Increase (decrease) in loans receivable 92 (149)
------- -------
Loans receivable, net, end of period $11,515 $11,423
======= =======
</TABLE>
__________________
(1) Includes changes in deferred loan fees and the allowance for loan losses.
4
<PAGE>
One-to-Four-Family Residential Real Estate Lending. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance one-to-four-family residential real property. Consistent
with the Bank's emphasis on being a community-oriented financial institution, it
is and has been the Bank's strategy to focus its lending efforts in its primary
market area. On June 30, 1998, approximately 91.66% of the Bank's real estate
loan portfolio, before net items, consisted of one-to-four-family residential
real estate loans. These include both loans secured by detached single-family
residences and condominiums and loans secured by housing containing not more
than four separate dwelling units. Of such loan amounts, less than 1.0% had
adjustable interest rates.
The Bank does not originate its one-to-four-family loans with the intention
that they will be sold in the secondary market. The Bank generally originates
loans satisfying its underwriting requirements which are tailored for its local
community but which may not satisfy various requirements imposed by FHLMC or
FNMA. For example, the Bank may not require title insurance and may not obtain
all the loan documentation normally required by FHLMC and FNMA. As a result, to
the extent such loans are sold in the secondary market, they may not be sold on
terms as favorable as those originated in conformity with secondary market
requirements. In addition, loans which are not originated in conformity with
the purchase requirements of FHLMC and FNMA, or nonconforming loans, are
generally thought to have greater risks of default and nonperformance; however,
the Bank has not experienced a higher level of nonperformance with its
nonconforming loans. These loans satisfy a need in the Bank's local community
and generally produce a higher yield than would be produced by conforming loans.
The Bank plans to continue its practice of originating primarily nonconforming
loans.
The Bank originates conventional mortgage loans secured by owner occupied
property in amounts of up to 95% of the value of the property. Private mortgage
insurance is generally required if the loan amount exceeds 80% of the value of
the property. The loans have both fixed and adjustable rates. The maximum term
for fixed and adjustable rate loans is 30 years. The interest rates on
adjustable rate loans are generally adjustable every year and are tied to the
one-year United States treasury bill rate. The loans have rate caps which limit
the amount of changes at the time of each adjustment and over the lives of the
loans. The Bank offers loans which require monthly payments.
Adjustable rate loans are generally considered to involve a greater degree
of credit risk than fixed rate loans because borrowers may have difficulty
meeting their payment obligations if interest rates and required payment amounts
increase substantially. Substantially all of the fixed-rate loans in the Bank's
mortgage loan portfolio have due on sale provisions allowing the Bank to declare
the unpaid balance due and payable in full upon the sale or transfer of an
interest in the property securing the loan.
While one-to-four-family residential loans are normally originated for
between 15 to 25 year terms, such loans customarily remain outstanding for
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans.
The Bank generally does not require title insurance for its one-to-four-
family residential loans but does require an attorney's opinion of title. The
Bank also generally requires that fire and extended coverage casualty insurance
(and, if appropriate, flood insurance) be maintained in an amount at least equal
to the loan amount or replacement cost of the improvements on the property
securing the loans, whichever is greater.
Nonresidential Real Estate Lending. On June 30, 1998, the Bank had
$483,000 outstanding in loans secured by nonresidential properties, comprising
approximately 4.1% of its loan portfolio, before net items, as of that date.
These loans are secured by office, retail and church properties. These loans
generally do not exceed 80% of the appraised value of the real estate securing
the loans. Nonresidential real estate loans have terms of up to 15 years. See
"--One-to-Four-Family Residential Real Estate Lending."
5
<PAGE>
The Bank requires title insurance or an attorney's opinion in connection
with its nonresidential real estate loans. The Bank also requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the loan amount or the replacement
cost of the improvements on the property securing the loans, whichever is
greater.
Loans secured by nonresidential real estate generally are larger than one-
to-four-family residential loans and involve greater concentration of assets and
a greater degree of risk. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Since commercial lending is frequently secured by leased or operating
commercial properties, repayment frequently depends upon the results of
operations of the tenant or operating entity. Nonresidential loans also
generally involve more specialized and complicated underwriting decisions than
one-to-four-family residential real estate lending. The Bank intends to
continue to make nonresidential real estate loans.
Construction Lending. The Bank makes construction loans for the
construction of single-family dwellings, and for the construction of multi-
family and commercial buildings. The aggregate outstanding balance of such
loans on June 30, 1998 was approximately $499,000, representing approximately
4.18% of the Bank's loan portfolio, before net items, and included construction
loans in process of approximately $279,000. Some of these loans were made to
persons who are constructing properties for the purpose of occupying them;
others were made to builders who were constructing properties for sale.
Construction loans are "construction-permanent" loans which generally provide
for the payment of interest only during a construction period, after which the
loans convert to a permanent loan at fixed or adjustable interest rates having
terms similar to one-to-four-family residential loans.
Construction loans for one-to-four-family real estate to be occupied by the
borrower may have a maximum loan-to-value ratio of 95% of the appraised value of
the property with private mortgage insurance. Other construction loans are made
at loan to value ratios of up to 80%. Title insurance or an attorney's opinion
is generally required for construction loans. In addition, the Bank generally
requires builders risk or casualty insurance (and, if appropriate, flood
insurance) on such loans.
Loans Secured by Deposits. The Bank also offers loans secured by deposit
accounts. At June 30, 1998, such loans totaled $34,790, representing 0.70% of
the Bank's loan portfolio, before net items. The interest rates on these loans
are variable and are generally 2% above the interest rate being paid on the
deposit account serving as collateral. The maximum amounts of these loans is
generally 90% of the related deposit account.
Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.
During its loan approval process, the Bank assesses the applicant's ability
to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the responsible officer or loan officer
of the Bank analyzes the loan application and the property involved, and an
appraiser inspects and appraises the property. The Bank generally requires
independent fee appraisals on all loans in excess originated primarily on the
basis of real estate collateral. The Bank also obtains information concerning
the income, financial condition, employment and the credit history of the
applicant.
All real estate loans must be approved by the Bank's loan committee which
is made up of any three members of the Bank's board of directors. Loans secured
by deposits are approved by any two employees of the Bank, at least one of which
must be an officer.
Normally, upon approval of a residential mortgage loan application, the
Bank gives a commitment to the applicant that it will make the approved loan at
a stipulated rate any time within a 15-day period. The loan is typically funded
at such rate of interest and on other terms which are based on market conditions
existing as of the date of the
6
<PAGE>
commitment. As of June 30, 1998, the Bank had no such unfunded mortgage loan
commitments. In addition, on such date the Bank had $278,928 in undisbursed
construction loans.
Interest Rates, Terms, Points and Fees. Interest rates and fees charged on
the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in
connection with originating loans. Fees for loan modifications, late payments,
loan assumptions and other miscellaneous services in connection with loans are
also charged by the Bank.
Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. In this event, the normal procedure
followed by the Bank is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status, and late charges
are assessed as allowed by law. In most cases, delinquencies are cured. If a
delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrower, commences foreclosure proceedings. If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale. In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable to the borrower than those
normally offered. Any property acquired as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold or otherwise disposed of by the Bank in an effort to recover its
investment. As of June 30, 1998, the Bank had no real estate acquired in
settlement of loans. Real estate acquired through, or in lieu of, loan
foreclosure is initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of cost or
fair value minus costs to sell. Costs relating to the development and
improvement of the property are capitalized, and costs relating to holding the
property are charged to expenses.
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest on loans continues so long as (i) the collateral for such
loans remains sufficient, (ii) the borrower continues to make a good faith
effort to make payments to the Bank and (iii) the Board of Directors does not
otherwise decide to institute foreclosure procedures. If the Bank ultimately
institutes foreclosure procedures, the interest accrued since the last loan
payment is generally charged off.
The following table sets forth information with respect to nonperforming
assets identified by the Bank, including real estate owned at the date
indicated. At such dates, the Bank had no loans which were "troubled debt
restructurings", as defined in SFAS No. 15, Accounting by Debtors and Creditors
for Troubled Debt Restructurings.
<TABLE>
<CAPTION>
At June 30,
------------------------
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Accruing loans past due 90 days or more $ 179 $ 240
----- -----
Total non-performing loans 179 240
Foreclosed real estate - -
----- -----
Total nonperforming assets $ 179 $ 240
===== =====
Non-performing assets to total assets 0.71% 1.16%
===== =====
</TABLE>
Applicable regulations require the Bank to "classify" its own assets on a
regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
7
<PAGE>
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. "Substandard" assets include those characterized by well-defined
weakness with possible risk of loss if the deficiency is not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable." Assets classified "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a loss reserve is not warranted.
As of June 30, 1998, the Bank had approximately $179,000 of loans
internally classified as "substandard," no loans classified as "doubtful" and no
loans classified as "loss." Total classified loans as of June 30, 1998 and 1997
were approximately $179,000 and approximately $240,000, respectively.
When an insured institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. These allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities and the risks associated with particular problem assets.
When an insured institution classifies problem assets as "loss," it charges off,
or writes down the balance of, the asset. The Bank's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the Administrator which can order the
establishment of additional loss allowances.
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets are
maintained on a "watch list" and do not yet warrant adverse classification. At
June 30, 1998, there were no loans on the Bank's watch list.
Allowance for Loan Losses. In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions. It
is management's policy to maintain an allowance for loan losses based on, among
other things, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the security for the loans.
Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.
The following table describes the activity related to the Bank's allowance
for loan losses for the periods indicated.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1998 1997
---------- ---------
(In Thousands)
<S> <C> <C>
Balance, beginning of period $ 100 $ 95
----- -----
Loans Charged off:
Real Estate - -
Other - -
----- -----
Total loans charged off -
Recoveries:
Real Estate - -
Other - -
----- -----
Net loans charged off (recovered) - -
Provision for loan losses 2 5
----- -----
Balance at end of period $ 102 $ 100
===== =====
Ratio of net charge-offs (recoveries) to average
loans outstanding during the period 0% 0%
===== =====
</TABLE>
The following table sets forth the composition of the allowance for loan losses
by type of loan at the dates indicated. The allowance is allocated to specific
categories of loans for statistical purposes only, and may be applied to loan
losses incurred in any loan category.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- ----------- --------- --------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 40 39% 91.4% $ 40 40% 91.8%
Nonresidential 20 20 4.1 20 20 4.6
Construction 20 20 4.2 20 20 2.9
---- ----- ----- ---- ----- -----
Total real estate loans 80 79 99.7 80 80 99.3
Other loans:
Loans secured by deposits - - .3 - - 0.7
---- ----- ----- ---- ----- -----
Total other loans - - .3 - - 0.7
---- ----- ----- ---- ----- -----
Unallocated 22 21 - 20 20 -
---- ----- ----- ---- ----- -----
Total allowance for loan losses $102 100.0% 100.0% $100 100.0% 100.0%
==== ===== ===== ==== ===== =====
</TABLE>
9
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to the Bank after interest on
loans. In addition, the Bank receives interest income from deposits in other
financial institutions. At June 30, 1998, the Bank's investment portfolio
totaled approximately $6.32 million and consisted of U.S. government and agency
securities, interest-earning deposits in other financial institutions,
certificates of deposit and stock of the FHLB of Atlanta.
The FASB has issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in three categories and accounted for as follows: (1) debt securities that the
entity has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (2) debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with net
unrealized gains and losses included in earnings; and (3) debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as securities available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity. At June 30, 1998, the Bank had no trading securities. The
Bank adopted SFAS No. 115 as of July 1, 1994. The adoption affected only the
held-to-maturity and available-for-sale classifications. Net unrealized
securities gains on the securities available-for-sale of $279,000, net of
related deferred taxes of $154,000, are reported as a separate component of
equity in its financial statements at June 30, 1998. See Notes 2 and 6 of
"Notes to Financial Statements."
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income from
investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Prior to the
adoption of SFAS No. 115, the Bank stated its debt securities at amortized cost
and its marketable equity securities at the lower of cost or market.
Accumulated changes in net unrealized losses on marketable equity securities
were included in retained earnings.
As a member of the FHLB of Atlanta, the Bank is required to maintain
an investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of June 30, 1998, the Bank's investment in stock of the FHLB of Atlanta was
$142,600.
North Carolina regulations require the Bank to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "SUPERVISION AND REGULATION -- Regulation of the Bank --
Liquidity." The Bank is also permitted to make certain other securities
investments.
The Bank's current investment policy provides that investment
decisions will be made by Eugene M. Ward, President and Chief Executive Officer,
and reviewed monthly by the Board of Directors. The investment policy provides
that the objectives of the investment portfolio are to: (i) provide and
maintain liquidity within regulatory guidelines, (ii) maintain a balance of high
quality, diversified investments, (iii) provide collateral for pledging
requirements, (iv) serve as a counter-cyclical balance to earnings, and (v)
maximum returns without sacrificing liquidity and safety.
Permitted investments include U.S. Treasury obligations, FHLB daily
and time deposits, insured certificates of deposit, federal agency securities
and federal funds.
The following table sets forth the carrying value of the Bank's
investment portfolio at the dates indicated.
10
<PAGE>
<TABLE>
<CAPTION>
At June 30,
---------------
1998 1997
------- ------
(In Thousands)
<S> <C> <C>
Securities available for sale:
U.S. government and agency securities $ 433 $ 318
------- ------
Securities held to maturity:
U.S. government and agency securities 4,000 2,496
Mortgage-backed securities 665 800
------- ------
Total securities held to maturity 4,665 3,296
------- ------
Total investment securities 5,098 3,614
------- ------
Interest-earning balances in other banks 7,714 4,944
Federal Home Loan Bank stock 143 143
------- ------
7,857 5,087
------- ------
Total investments $12,955 $8,701
======= ======
</TABLE>
At June 30, 1998, the market value of the Bank's investment securities
available for sale and held to maturity were $433,000 and $4.67 million,
respectively.
11
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment portfolio as of June 30, 1998.
<TABLE>
<CAPTION>
More than Six Months More than One Year More than Five Years
Less Than Six Months to One Year to Five Years to Ten Years
----------------------- -------------------- ------------------ --------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
------------ --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale:
FHLMC Stock $ 433 - % $ - - % $ - - % $ - - %
Securities held to
maturity:
U.S. government and
agency securities 1,000 5.70 3,000 5.84 - - - -
Mortgage-backed securities - - - - 43 7.76 26 7.00
Other:
Interest-earning
balances in other banks 7,714 5.48 - - - - - -
Federal Home Loan Bank
stock - - - - - - - -
------ ---- ------ ---- --- ---- --- ----
Total $9,147 5.51% $3,000 5.85% $43 7.76% $26 7.00%
====== ==== ====== ==== === ==== === ====
</TABLE>
<TABLE>
<CAPTION>
After Ten Years Total
------------------ ------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities available for
sale:
FHLMC Stock $ - - % $ 433 - %
Securities held to
maturity:
U.S. government and
agency securities - - 4,000 5.81
Mortgage-backed securities 596 6.50 665 6.60
Other:
Interest-earning
balances in other banks - - 7,714 5.48
Federal Home Loan Bank
stock 143 7.25 143 7.25
---- ---- ------- ----
Total $739 6.65% $12,956 5.48%
==== ==== ======= ====
</TABLE>
12
<PAGE>
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, interest
income and advances from the FHLB of Atlanta and otherwise from its operations.
Loan repayments are a relatively stable source of funds while deposit inflows
and outflows may be significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also
be used on a longer term basis for general business purposes.
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a variety of accounts and rates. The Bank offers
passbook savings accounts, statement savings accounts, negotiable order of
withdrawal accounts, money market deposit accounts, non-interest-bearing
accounts, and fixed interest rate certificates with varying maturities. At June
30, 1998, 71.91% of the Bank's deposits consisted of certificate accounts,
23.01% consisted of passbook savings accounts and 0.60% consisted of money
market deposit accounts. Deposit flows are greatly influenced by economic
conditions, the general level of interest rates, competition, and other factors,
including the restructuring of the thrift industry. The Bank's savings deposits
traditionally have been obtained primarily from its primary market area. The
Bank utilizes traditional marketing methods to attract new customers and savings
deposits, including print, television and radio media advertising and direct
mailings. The Bank does not advertise for deposits outside of its local market
area or utilize the services of deposit brokers.
The following table sets forth certain other information regarding the
Bank's savings deposits at the dates indicated.
13
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998 At June 30, 1997
-----------------------------------------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
------- --------- --------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Demand accounts:
Passbook savings $ 3,552 3.25% 23.07% $ 3,673 3.25% 21.96%
Money market deposit
accounts 93 2.92 .60 105 3.10 0.63
------- ---- ----- ------- ---- ------
3,645 3.24 23.67 3,778 3.24 22.59
Certificate of accounts with
original maturities of:
6 months 3,334 5.05 21.66 4,372 5.08 26.14
12 months 1,511 5.04 9.81 2,414 5.15 14.43
14, 18, 30 and 36
months 6,906 5.62 44.86 6,163 5.74 36.84
------- ---- ----- ------- ---- ------
Total certificates 11,751 5.38 76.33 12,949 5.41 77.41
------- ---- ----- ------- ---- ------
Total deposits $15,396 4.88% 100% $16,727 4.92% 100.00%
======= ==== ===== ======= ==== ======
</TABLE>
14
<PAGE>
The following table presents the maturities and weighted average rates paid
on all certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
Amount Due During the Year Ending June 30,
----------------------------------------------------------------------------------------------
1999 2000 2001 Thereafter Total
----------------- ---------------- ---------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------- -------- ------ -------- ------ -------- ------ -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of
$100,000 or more $ 1,048 5.99% $ - - % $ - - % $ - - % $ 1,048 5.99%
-
Certificates of less
than $100,000 9,517 5.27% 1,112 5.59% 74 5.89% - - 10,703 5.32
------- ---- ------ ---- --- ---- ---- ---- ------- ----
Total $10,565 5.34% $1,112 5.59% $74 5.89% $ - - $11,751 5.38%
======= ==== ====== ==== === ==== ==== ==== ======= ====
</TABLE>
15
<PAGE>
As of June 30, 1998, the aggregate amount of time certificates of deposit
in amounts greater than or equal to $100,000 outstanding was approximately $1.05
million. The following table presents the maturity of these time certificates
of deposit at such date.
<TABLE>
<CAPTION>
At
June 30, 1998
--------------
(In Thousands)
<S> <C>
6 Months or less $ 665
Over 6 months through 12 months 383
Over 12 months -
------
Total $1,048
======
</TABLE>
Borrowings. The Bank's principal available source of long-term borrowings
are advances from the FHLB of Atlanta. The FHLB system functions in a reserve
credit capacity for savings institutions. As a member, the Bank is required to
own capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. The Bank has had no borrowings outstanding from
the FHLB of Atlanta since 1987 and has no immediate plans to seek any advances
from the FHLB of Atlanta.
Subsidiaries
As a North Carolina-chartered savings bank, the Bank is able to invest up
to 10% of its total assets in subsidiary service corporations. The Bank has no
subsidiaries.
Competition
The Bank is the only financial institution headquartered in Anson County
and has operated there for more than 100 years. It faces strong competition
both in attracting deposits and making real estate and other loans. Its most
direct competition for deposits has historically come from other savings
institutions, credit unions, brokerage firms and commercial banks located in its
primary market area, including large financial institutions which have greater
financial and marketing resources available to them. As of June 30, 1998, there
were four FDIC-insured depository institutions with nine offices in Anson
County, North Carolina. Based upon 1997 comparative data, the Bank had 10.9%
and 8.3% of the federally insured deposits in Wadesboro and Anson County,
respectively.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The
Bank competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
16
<PAGE>
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The
Bank competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
Regulation of the Company
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards as of the time the
institution fails to comply with such capital restoration plan.
17
<PAGE>
Under a policy of the Federal Reserve with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. The Federal Reserve under the BHCA also has the authority to require a
bank holding company to terminate any activity or to relinquish control of a
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
Dividend and Repurchase Limitations. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will pay any
taxable dividend or make any other taxable distribution to its stockholders in
excess of their current or retained earnings. Also, the Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
18
<PAGE>
Although the payment of dividends and repurchase of stock by the Company
are subject to the requirements and limitations of North Carolina corporate law,
except as set forth in this paragraph, neither the Administrator nor the FDIC
have promulgated any regulations specifically limiting the right of the Company
to pay dividends and repurchase shares. However, the ability of the Company to
pay dividends or repurchase shares may be dependent upon the Company's receipt
of dividends from the Bank. The Bank's ability to pay dividends is limited.
See " -- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank, the
Company was required to execute a Capital Maintenance Agreement whereby it has
agreed to maintain the Bank's capital in an amount sufficient to enable the Bank
to satisfy all regulatory capital requirements.
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act and will not deregister
the Common Stock for a period of three years following the completion of the
Conversion. As a result of such registration, the proxy and tender offer rules,
insider trading reporting requirements, annual and periodic reporting and other
requirements of the Exchange Act are applicable to the Company.
The registration under the Securities Act of the Offering of the Common
Stock does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company are subject to
the resale provisions of Rule 144 under the Securities Act. So long as the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
Regulation of the Bank
General. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are insured by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
19
<PAGE>
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting. The
Federal Reserve has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of unimpaired
capital and unimpaired surplus (up to $500,000). Further, pursuant to Section
22(h) the Federal Reserve requires that loans to directors, executive officers,
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and not involve more than the normal
risk of repayment or present other unfavorable features. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
20
<PAGE>
Deposit Insurance. The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum extent permitted by law. The Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the FDIC
imposed a special assessment on each depository institution with SAIF-assessable
deposits which resulted in the SAIF achieving its designated reserve ratio. In
connection therewith, the FDIC reduced the assessment schedule for SAIF members,
effective January 1, 1997, to a range of 0% to 0.27%, with most institutions
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since January 1,
1997, SAIF members are charged an assessment of 0.065% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013% until the earlier of
December 31, 1999 or the date upon which the last savings association ceases to
exist, after which time the assessment will be the same for all insured
deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test. For each of these three
tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial non-
compliance." A set of criteria for each rating is included in the regulation.
If an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the
quantitative measures do not accurately present its actual performance, or that
demographics, competitive conditions or economic or legal limitations peculiar
to the service area should be considered. The ratings received under the three
tests are used to determine the overall composite CRA rating or "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
During the Bank's last compliance examination, which was performed by the
FDIC in June 1977, the Bank received a "satisfactory" rating with respect to CRA
compliance. The Bank's rating with respect to CRA compliance would be a factor
to be considered by the Federal Reserve and FDIC in considering applications
submitted by the Bank
21
<PAGE>
to acquire branches or to acquire or combine with other financial institutions
and take other actions and could result in the denial of such applications.
Capital Requirements Applicable To The Bank. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder
("Tier II capital") may consist of a limited amount of subordinated debt,
certain hybrid capital instruments, other debt securities, certain types of
preferred stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At June 30, 1998, the
Bank had a leverage ratio of 25.48%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1998, the Bank complied with each of the capital requirements
of the FDIC and the Administrator.
Each federal banking agency was required by law to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multi-family mortgages. On August 2, 1995, the federal banking agencies
issued a joint notice of adoption of final risk-based capital rules to take
account of interest rate risk. The final regulation required an assessment of
the need for additional capital on a case-by-case basis, considering both the
level of measured exposure and qualitative risk factors. The final rule also
stated an intent to, in the future, establish an explicit minimum capital charge
for interest rate risk based on the level of a bank's measured interest rate
risk exposure. The final regulation has not had a material impact on the Bank's
capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
22
<PAGE>
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize
savings banks to make loans-to-one-borrower, for any purpose, in an amount not
to exceed $500,000. A savings bank also is authorized to make loans-to-one-
borrower to develop domestic residential housing units, not to exceed the lesser
of $30 million or 30% of the savings bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth. These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
As of June 30, 1998, the largest aggregate amount of loans which the Bank
had to any one borrower was $250,000. The Bank had no loans outstanding which
management believes violate the applicable loans-to-one-borrower limits. The
Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1998, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $142,600.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of June 30, 1998, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired by, among other things, the acquisition of more than 25% of any class
of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is
not required
23
<PAGE>
for (i) any offer with a view toward public resale made exclusively to the Bank
or its underwriters or the selling group acting on its behalf or (ii) any offer
to acquire or acquisition of beneficial ownership of more than 10% of the common
stock of the Bank by a corporation whose ownership is or will be substantially
the same as the ownership of the Bank, provided that the offer or acquisition is
made more than one year following the consummation of the Conversion. The
regulation provides that within one year following the Conversion, the
Administrator would approve the acquisition of more than 10% of beneficial
ownership only to protect the safety and soundness of the institution. During
the second and third years after the Conversion, the Administrator may approve
such an acquisition upon a finding that (i) the acquisition is necessary to
protect the safety and soundness of the Company and the Bank or the Boards of
Directors of the Company and the Bank support the acquisition and (iii) the
acquiror is of good character and integrity and possesses satisfactory
managerial skills, the acquiror will be a source of financial strength to the
Company and the Bank and the public interests will not be adversely affected.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. On June 30, 1998, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 49.96%. At June
30, 1998, the Bank had stable, core-like time deposits of $100,000 or more of
approximately $1.05 million.
Additional Limitations on Activities. FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. National banks are generally not permitted to hold equity
investments other than shares of service corporations and certain federal agency
securities. Moreover, the activities in which service corporations are
permitted to engage are limited to those of service corporations for national
banks. The FDIC has authority to grant exceptions from these prohibitions
(other than with respect to non-service corporation equity investments) if it
determines no significant risk to the insurance fund is posed by the amount of
the investment or the activity to be engaged in and if the Bank is and continues
to be in compliance with fully phased-in capital standards.
Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina
adopted nationwide reciprocal interstate acquisition legislation in 1994.
24
<PAGE>
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its Conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, no stock repurchases may be made
by the savings bank during the first year following a Conversion from mutual to
stock, except that stock repurchases of no greater than 5% of the bank's
outstanding shares may be repurchased during the first year where compelling and
valid business reasons are established to the satisfaction of the FDIC.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
Conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's Conversion from mutual to
stock ownership.
In connection with the Conversion, the Bank has agreed with the FDIC that,
during the first three years after the Conversion, neither the Company nor the
Bank will pay any taxable dividend or make any other taxable distribution in
excess of their current and retained earnings. The Bank has also agreed to
notify the FDIC before making a return of capital during the first three years
following the Conversion.
Other North Carolina Regulations. As a North Carolina chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and
25
<PAGE>
the regulation of the conduct and management of savings banks, chartering and
branching of institutions, mergers, conversions and conflicts of interest. North
Carolina law requires that the Bank maintain federal deposit insurance as a
condition of doing business.
The Administrator conducts regular examinations of North Carolina chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
26
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location of the Bank's principal office
in Wadesboro and North Carolina, as well as certain other information relating
to that office as of June 30, 1998. The Bank owns the Wadesboro office.
<TABLE>
<CAPTION>
Net Book Value Deposits
Address of Property (In Thousands)
------- -------------- --------------
<S> <C> <C>
211 South Greene Street $202,331 $15,440
P.O. Box 249
Wadesboro, North Carolina 28170-0249
</TABLE>
The Bank's management considers the property to be in good condition and is
of the opinion that it is adequately covered by insurance. The total net book
value of the Bank's furniture, fixtures and equipment on June 30, 1998 was
$5,334. Any property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold or
otherwise disposed of by the Bank in an effort to recover its investment. As of
June 30, 1998, the Bank had no recorded real estate acquired in settlement of
loans.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended June 30, 1998. On June 12, 1998, the members of the Bank voted to
approve the conversion of the Bank from a mutual institution to a stock-owned
institution.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on the inside back cover of the Company's 1998 Annual Report, which section is
incorporated herein by reference. See "Item 1. DESCRIPTION OF BUSINESS--
Regulation of the Bank--Restrictions on Dividends and Other Capital
Distributions" above for regulatory restrictions which limit the ability of the
Bank to pay dividends to the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
See the information set forth under Item I above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 11 in the Company's 1998 Annual Report, which section is
incorporated herein by reference.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company set forth on pages 12
through 33 in the Company's 1998 Annual Report are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors" beginning on page 4 of the Proxy Statement and "Executive
Officers" on page 6 of the Proxy Statement, which sections are incorporated
herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 4 of the Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Compensation" on page
6 and " - Management Compensation" on pages 6 through 7 of the Proxy Statement,
which sections are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 3 of the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
13(a) Exhibits
(3)(i) Certificate of Incorporation, incorporated herein by reference to
Exhibit (3)(i) to the Registration Statement on Form S-1,
Registration No. 333-47963, dated March 13, 1998, as amended by
Pre-Effective Amendment No. 1, dated May 8, 1998 and Pre-Effective
Amendment No. 2, dated May 8, 1998.
28
<PAGE>
(3)(ii) Bylaws, incorporated herein by reference to Exhibit (3)(ii) to the
Registration Statement on Form S-1, Registration No. 333-47963, dated
March 13, 1998, as amended by Pre-Effective Amendment No. 1, dated
May 8, 1998 and Pre-Effective Amendment No. 2, dated May 8, 1998.
(4) Specimen Stock Certificate incorporated herein by reference to
Exhibit 4 to the Registration Statement on Form S-1, Registration No.
333-47963 dated March 13, 1998, as amended by Pre-Effective Amendment
No. 1, dated May 8, 1998 and Pre-Effective Amendment No. 2, dated May
8, 1998.
10(a) Employment Agreement with Eugene M. Ward
10(b) Severance Agreement
(11) Statement Regarding Computation of Per Share Earnings
(13) Portions of 1998 Annual Report to Stockholders
(21) See Item 1. Description of Business for discussion of subsidiaries
(27) Financial Data Schedule
(13)(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended September 30, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANSON BANCORP, INC.
Date: September 25, 1998 By: /s/ Eugene M. Ward
---------------------------------------
Eugene M. Ward
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Eugene M. Ward Director, President and Chief September 25, 1998
- -------------------------------------------------- Executive Officer (Principal
Eugene M. Ward Executive Officer)
/s/ Nancy H. Allen Treasurer (Principal Financial September 25, 1998
- -------------------------------------------------- and Accounting Officer)
Nancy H. Allen
/s/ Preston A. Burns Chairman of the Board September 25, 1998
- --------------------------------------------------
Preston A. Burns
/s/ John J. Crawford Director September 25, 1998
- --------------------------------------------------
John J. Crawford
/s/ W. Kenneth Huntley Director September 25, 1998
- --------------------------------------------------
W. Kenneth Huntley
/s/ Emmett S. Patterson Director September 25, 1998
- --------------------------------------------------
Emmett S. Patterson
/s/ John R. Potter Director September 25, 1998
- --------------------------------------------------
John R. Potter
/s/ H. Patrick Taylor, Jr. Director September 25, 1998
- --------------------------------------------------
H. Patrick Taylor, Jr.
</TABLE>
30
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10(a) Employment Agreement with Eugene M. Ward
10(b) Severance Plan
11 Statement Regarding Computation of Per Share Earnings
13 Portions of the 1998 Annual Report to Stockholders
27 Financial Data Schedule
31
<PAGE>
Exhibit 10(A)
ANSON SAVINGS BANK, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of April 28, 1998, by and between ANSON
SAVINGS BANK, INC. (hereinafter referred to as the "Savings Bank") and EUGENE M.
WARD (hereinafter referred to as the "Officer") and is joined in by ANSON
BANCORP, INC., the parent holding company of the Savings Bank (hereinafter
referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank as
its President and Chief Executive Officer; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and the
wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer as
the President and Chief Executive Officer of the Savings Bank upon the terms and
conditions set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Savings Bank, and his reputation and contacts in the industry and
the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Savings Bank and of the Officer
to secure the continued services of the Officer notwithstanding any change in
control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance of a
sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Holding
Company, the Savings Bank and their stockholders; and
WHEREAS, the parties desire to enter into this Agreement in order to set
forth the terms and conditions of the Officer's employment relationship with the
Savings Bank.
<PAGE>
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the President and Chief Executive Officer of the Savings Bank.
The Officer shall render such administrative and management services to the
Savings Bank as are customarily performed by persons situated in a similar
executive capacity. The Officer shall promote the business of the Savings Bank
and perform such other duties as shall, from time to time, be reasonably
prescribed by the Board of Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $69,000 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
increased rate of salary, as the case may be, may be further increased, but not
decreased, from time to time in such amounts as the Board, in its discretion,
may decide. In determining salary increases, the Board shall compensate the
Officer for increases in the cost of living and may also provide for performance
or merit increases. Participation in incentive compensation, deferred
compensation, discretionary bonus, profit-sharing, retirement, stock option and
other employee benefit plans that the Savings Bank or the Holding Company have
adopted or may from time to time adopt, and participation in any fringe
benefits, shall not reduce the salary payable to the Officer
2
<PAGE>
under this Section. The Officer will be entitled to such customary fringe
benefits, vacation and sick leave as are consistent with the normal practices
and established policies of the Savings Bank.
3. Annual Bonus. The Board has established a program for awarding an
------------
annual bonus to all employees of the Savings Bank (the "Annual Bonus"). Under
the terms of the Annual Bonus plan, after the "Profits" of the Savings Bank
exceed a certain dollar figure which is determined annually by the Board, an
aggregate amount equal to ten percent of the Profits of the Savings Bank is
divided pro rata among the full-time employees of the Savings Bank based on each
employee's annual base salary, provided that each such Annual Bonus shall not
exceed twenty percent of each such employee's annual salary. The Savings Bank
agrees to pay the Officer his pro rata share of the Annual Bonus on or before
September 5 of each fiscal year provided that the Officer is still an employee
of the Savings Bank as of June 30 of each fiscal year. "Profit" for purposes of
determining the Annual Bonus shall be the profit of the Savings Bank before
income taxes as determined by the Savings Bank's certified public accountant
(the "CPA") and certified by the CPA to the Board of the Savings Bank in the
annual audit report prepared by said CPA and covering the subject fiscal year.
For example, if the Board set the profit goal at $50,000 and the profits of the
Savings Bank were determined to be $60,000, there would be a $6,000 Annual Bonus
to be distributed pro rata among all the employees of the Savings Bank.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
- --------
deferred compensation, stock awards, stock options, stock ownership plan, stock
purchases, pension, thrift, profit sharing, group life insurance, medical and
dental coverage, disability coverage, education, or other retirement or employee
benefits that the Savings Bank or the Holding Company have adopted, or may, from
time
3
<PAGE>
to time adopt, for benefit of their executive employees and for employees
generally, subject to the eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. The Savings Bank shall
reimburse the Officer for all out-of-pocket reasonable and necessary business
expenses which the Officer may incur in connection with his services on behalf
of the Savings Bank. Additionally, the Officer shall be entitled to such
vacation and sick leave as shall be established under uniform employee policies
promulgated by the Directors.
5. Term. The initial term of employment under this Agreement shall be
----
for the period commencing upon the effective date of this Agreement and ending
three (3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement, the term of this Agreement
shall automatically be extended for an additional one year period beyond the
then effective expiration date unless written notice from the Savings Bank or
the Officer is received 90 days prior to an anniversary date advising the other
party that this Agreement shall not be further extended; provided that the
Directors shall review the Officer's performance annually and make a specific
determination pursuant to such review to renew this Agreement prior to the 90
day notice period.
6. Loyalty. The Officer shall devote his full efforts and entire
-------
business time to the performance of his duties and responsibilities under this
Agreement.
4
<PAGE>
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information, except in the ordinary course of his duties under this
Agreement, without the prior written consent of the Holding Company or the
Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Savings Bank will provide the
Officer with the working facilities and staff customary for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated upon
the death of the Officer during the term of this Agreement, in which event, the
Officer's estate shall be entitled to receive the compensation due the Officer
through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter. Notwithstanding the
foregoing, in the event of the Officer's death following a change in control (as
defined in Paragraph 10), the Officer's designated beneficiary or the designated
beneficiary's estate shall be entitled to receive the compensation due the
Officer through the last day of the remaining terms of this Agreement.
(b) The Officer's employment under this Agreement may be terminated at any
time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
5
<PAGE>
(c) In the event the Officer becomes disabled during the term of his
employment under this Agreement and it is determined by the Savings Bank that
the Officer is permanently unable to perform his duties hereunder, the Savings
Bank shall continue to compensate the Officer at the level of compensation
described in Paragraph 2 above, and shall continue to provide the Officer each
of the other benefits set forth or described in this Agreement, for the
remaining term of this Agreement, less any other payments provided under any
disability income plan of the Savings Bank which is applicable to the Officer.
In the event of any disagreement between the Officer and the Savings Bank as to
whether the Officer is physically or mentally incapacitated such as will result
in the termination of the Officer's employment pursuant to this Paragraph 8(c),
the question of such incapacity shall be submitted to an impartial and reputable
physician for determination, selected by mutual agreement of the Officer and the
Savings Bank or, failing such agreement, by two (2) physicians (one (1) of whom
shall be selected by the Savings Bank and the other by the Officer), and such
determination of the question of such incapacity by such physician or physicians
shall be final and binding on the Officer and the Savings Bank. The Savings
Bank shall pay the reasonable fees and expenses of such physician or physicians
in making any determination required under this Paragraph 8(c).
(d) The Board may terminate the Officer's employment at any time, but any
termination by the Board, other than termination for cause, shall not prejudice
the Officer's right to compensation or other benefits under this Agreement for
the remaining period which would have been covered by this Agreement if such
termination had not occurred. The Officer shall have no right to receive
compensation or other benefits for any period after termination for "cause."
Termination for "cause" shall include termination because of the Officer's
personal dishonesty,
6
<PAGE>
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provisions of this
Agreement.
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank shall (i) pay the Officer all of the compensation withheld while
its contract obligations were suspended and (ii) reinstate (in whole or in part)
any of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the
7
<PAGE>
Savings Bank, (i) by the Federal Deposit Insurance Corporation (the
"Corporation"), at the time the Corporation enters into an agreement to provide
assistance to or on behalf of the Savings Bank under the authority contained in
Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. (S) 1818(c)); or
(ii) by the Administrator of the Savings Institutions Division of the North
Carolina Department of Commerce (the "Administrator"), at the time the
Administrator approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Administrator to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in Subparagraph (c)
below), the term of employment under this Agreement automatically shall be
extended for a period of three (3) years beginning on the date of the Change in
Control, and the acquiror shall be bound by the terms of this Agreement and
shall be prohibited, during the remainder of such term, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status at
the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in effect
at such time; or
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Subparagraph 10(b) of this
Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans, stock ownership plan or similar plans or benefits,
including, without limitation, the provision of the Officer's
automobile and payment of civic and social club dues, being provided
by the Savings
8
<PAGE>
Bank or the Holding Company to the Officer as of the effective date of
the Change in Control; or
(iv) Transferring Officer to a location outside of Anson County,
North Carolina, without the Officer's express written consent.
(b) In the event of a Change in Control, in lieu of continuing to receive
the Annual Bonus described in Paragraph 3, the Officer's base salary shall be
adjusted to include an amount equal to the average of the Officer's pro rata
share of the two previous years' Annual Bonus, and such adjusted base salary
shall be increased by not less than six percent (6%) annually beginning at the
date of the Change in Control and continuing each year for the three-year term
thereafter.
(c) For the purposes of this Agreement, the term "Change in Control" shall
mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Savings Bank
representing 25 percent or more of the combined voting power of the
outstanding Common Stock of the Holding Company or Common Stock of the
Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Savings Bank's or
Holding Company's shareholders was
9
<PAGE>
approved by the Savings Bank's or Holding Company's Board of Directors
or Nominating Committee, as applicable, shall be considered as though
he or she were a member of the Incumbent Board or Incumbent Holding
Company Board, as applicable; or
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the
Savings Bank, respectively, is the surviving corporation in such
transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, Officer and Savings Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
(d) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by conversion,
10
<PAGE>
merger, consolidation, purchase or otherwise, all or substantially all of the
assets of the Holding Company or the Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
12. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing, signed by the Officer and on behalf of the Savings Bank
by such officer as may be specifically designated by the Directors. No waiver
by either party hereto, at any time, of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
ANSON SAVINGS BANK, INC.
By:/s/ Preston A. Burns
----------------------------------
Chairman of the Board
/s/ Eugene M. Ward
------------------------------------- (SEAL)
Eugene M. Ward
The foregoing Agreement is consented and agreed to by Anson Bancorp, Inc.,
the parent holding company of Anson Savings Bank, Inc.
ANSON BANCORP, INC.
By:/s/ Preston A. Burns
--------------------------------
Chairman of the Board
12
<PAGE>
Exhibit 10(B)
ANSON SAVINGS BANK, INC.
SEVERANCE PLAN
THIS IS THE SEVERANCE PLAN ("PLAN") OF ANSON SAVINGS BANK, INC. (THE
"BANK"), A NORTH CAROLINA-CHARTERED SAVINGS BANK, WITH ITS PRINCIPAL OFFICE IN
WADESBORO, NORTH CAROLINA, ADOPTED BY THE BOARD OF DIRECTORS OF THE BANK, TO BE
EFFECTIVE ON THE DATE SET FORTH ON THE LAST PAGE HEREOF.
1. Purpose. The purpose of this Plan is to aid the Bank in attracting
-------
and retaining capable employees by providing the employees with the severance
benefits set forth herein in the event that there is a change in control of the
Bank. For purposes of this Plan, the term "Employee" means and includes any
person employed by the Bank on a full time basis on the date of consummation or
occurrence of a "Change in Control" (as defined in Subparagraph 2(d) below),
excluding any person employed by the Bank on such date pursuant to a written
employment agreement between any such employee and the Bank.
2. Severance Benefit.
-----------------
(a) In the event (i) the Bank or its successor terminates the employment
of any Employee in connection with, or within twenty-four (24) months
after, a "Change in Control" (as defined in Subparagraph 2(d) below),
other than for "cause" (as defined in Paragraph 3 below) or (ii) an
Employee terminates his employment following a Termination Event
pursuant to Paragraph 2(b) below, the Bank shall pay the Employee a
"Severance Benefit" (as calculated pursuant to Subparagraph 2(c)
below).
(b) An Employee shall have the right to terminate his or her employment
upon the occurrence of any of the following events (the "Termination
Events") within twenty-four (24) months following a Change in Control:
(i) The Employee's annual base salary rate is decreased from the level
existing at the effective time of the Change in Control; or
(ii) The Employee is transferred to a location outside of either Anson
County, North Carolina.
A Termination Event shall be deemed to have occurred on the date such
action or event is implemented or takes effect.
(c) For the purposes of this Plan, the amount of any Employee's "Severance
Benefit" shall be calculated as follows:
(i) If the Employee has been employed with the Bank for less than
twenty (20) years, such Employee's Severance Benefit shall be
equal to the greater of (A) an amount equal to two weeks' salary
at the Employee's existing salary rate at
<PAGE>
the time of termination multiplied times the Employee's number of
complete years of service as an employee of the Bank or (B) the
amount of one month's salary at the Employee's existing salary
rate at the time of termination.
(ii) If the Employee has been employed with the Bank at least twenty
(20) years, such Employee's Severance Benefit shall be equal to
the greater of (A) an amount equal to two weeks' salary of the
Employee's existing salary rate at the time of termination
multiplied times the Employee's number of complete years of
services as an employee of the Bank, or (B) the amount of two
times the annual salary payable to the Employee at his salary rate
existing on the date of such termination.
Such sum shall be payable as provided in Subparagraph 2(f) below.
(d) For the purposes of this Plan, the term "Change in Control" shall mean
any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K
by the Bank or by any parent holding company of the Bank pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 as
in effect on the date hereof (the "Exchange Act"); or
(ii) such time as any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Bank or any parent holding
company of the Bank representing 25 percent or more of the
combined voting power of the outstanding capital stock of the Bank
or any parent holding company of the Bank; or
(iii) individuals who constitute the Board of Directors of the Bank or
any parent holding company of the Bank on the date hereof (each,
an "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a
vote of at least three-quarters of the directors comprising the
Incumbent Board or whose nomination for election by the
shareholders of the Bank or any parent holding company of the Bank
was approved by the Board of Directors of the Bank or any parent
holding company of the Bank or any Nominating Committee of any
such Board, as applicable, shall be considered as though he or she
were a member of the Incumbent Board; or
(iv) the Bank or any parent holding company of the Bank consolidates or
merges with or into another corporation, association or entity or
is otherwise reorganized, where the Bank or any parent holding
company of the Bank is not the surviving corporation in such
transaction; or
2
<PAGE>
(v) all or substantially all of the assets of the Bank or any parent
holding company of the Bank are sold or otherwise transferred to
or are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 2(d), neither (i)
the conversion of the Bank from a mutual savings bank to a stock savings
bank ("Conversion") pursuant to the rules and regulations regarding
mutual to stock conversions, (ii) the acquisition of capital stock of
the Bank by a parent holding company formed by the Bank to acquire the
capital stock of the Bank issued in connection with a Conversion (iii)
the sale by such parent holding company of its capital stock to the
members of the Bank and the general public pursuant to the rules and
regulations regarding conversions, or (iv) any other event or
transaction which the Board of Directors of the Bank shall determine is
not a Change in Control for purposes of its Plan prior to the
consummation or occurrence thereof, shall constitute a Change in
Control. In addition, a transaction or event shall not be considered a
Change in Control with respect to any Employee benefitted hereby if,
prior to the consummation or occurrence of such transaction or event,
such Employee and the Bank agree in writing that the same shall not be
treated as a Change in Control for purposes of this Plan.
(d) Amounts payable pursuant to this Paragraph 2 shall be paid, at the
option of the Bank or any successor in one lump sum or in equal monthly
payments over a period not to exceed a number of months equal to the
Employee's years of service with the Bank divided by two.
(e) Following a Termination Event which gives rise to an Employee's rights
hereunder, the Employee shall have six (6) months from the date of
occurrence of the Termination Event to terminate his or her employment
pursuant to this Paragraph 2. Any such termination shall be deemed to
have occurred only upon delivery to the Bank (or to any successor
corporation) of written notice of termination which describes the
Change in Control and Termination Event. If an Employee does not so
terminate his employment within such six-month period, he or she shall
thereafter have no further rights hereunder with respect to that
Termination Event, but shall retain rights, if any, hereunder with
respect to any other Termination Event as to which such six month
period has yet to expire.
3. Termination for "Cause." Termination for "cause" shall include
----------------------
termination because of the Employee's personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, or willful violation of any law, rule, regulation (other
than traffic violations or similar offenses) or final cease-and-desist order.
4. Effect on Other Benefits. The benefits payable to or owed to any
------------------------
Employee under this Plan shall not be reduced or otherwise affected by the
Employee's receipt or entitlement to benefits under (i) any agreement between
the Employee and the Bank or any parent holding company of the Bank, or (ii)
any other fringe benefit, compensation, or other employee benefit plan of the
Bank or any parent holding company of the Bank, including, but not limited to,
stock option plan, restricted stock
3
<PAGE>
agreements or employee stock ownership plan. In addition, the benefits payable
to or owed to any Employee under any such fringe benefit, compensation or other
employee benefit plan of the Bank or any parent holding company of the Bank
shall not be reduced or otherwise affected by the Employee's receipt or
entitlement to benefits under this Plan.
5. Binding Effect. This Plan shall be binding upon any corporate or
--------------
other successor of the Bank which shall acquire, directly or indirectly, by
merger, consolidation, purchase, or otherwise, all or substantially all of the
assets of the Bank.
6. Modification, Waiver, Amendments. Prior to the consummation or
--------------------------------
occurrence of a Change in Control, as defined herein, this Plan may be
terminated, modified or amended in any manner whatsoever, by resolution adopted
by the Bank's Board of Directors. Prior to the time of the consummation or
occurrence of any Change in Control, no employee shall have any vested rights
pursuant to this Plan. After the consummation or occurrence of a Change in
Control, all Employees shall have vested rights pursuant to this Plan, and this
Plan may not be terminated or modified or amended in a manner to reduce the
benefits payable to any Employee, without the written consent of such Employee.
7. Effect of Plan on Employees. This Plan shall not confer upon any
---------------------------
employee of the Bank the right to continued employment with the Bank or any
successor to the Bank, nor shall it limit the right of the Bank or any successor
of the Bank to terminate the employment of any employee at any time, subject to
the terms hereof.
8. Withholding. The Bank or any successor to the Bank shall have the
-----------
right to deduct or otherwise effect a withholding of any amount required by
federal or state laws to be withheld as a result of any payments required to be
made under this Plan.
9. Governing Law. Without regard to principles of conflicts of laws, the
-------------
laws of the State of North Carolina shall govern and control the validity,
interpretation, performance and enforcement of this Plan.
10. Inspection of Plan. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Bank and shall be shown to any
proper person making inquiry with respect thereto.
11. Waiver. Any Employee shall have the right to waive the receipt of any
------
benefits which would otherwise be payable to such Employee pursuant to this Plan
by executing a writing setting forth the terms of such waiver.
12. Excise Taxes. It is the intent of the parties hereto that all
------------
payments made pursuant to this Plan shall be deductible by the Bank for federal
income tax purposes and not result in the imposition of an excise tax on any
Employee. Notwithstanding anything contained in this Plan to the contrary, any
payments to be made to or for the benefit of any Employee which are deemed to be
"parachute payments," as such term is defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), shall be modified or reduced to
the extent, but only to the extent, reasonably deemed to
4
<PAGE>
be necessary by the Bank to avoid the imposition of excise taxes on the Employee
under Section 4999 of the Code or the disallowance of a deduction to the Bank
under Section 280G(a) of the Code.
Dated April 28, 1998
5
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The weighted average number of shares outstanding includes all 585,124
shares issued and outstanding.
<TABLE>
<S> <C>
Net income for the period from June 30, 1997 to June 30, 1998 $ 8,300
Weighted average number of shares outstanding 585,124
Earnings per share $ 0.01
</TABLE>
Earnings per share is not significant for the year ended June 30, 1998. Common
stock was not issued or outstanding prior to the conversion date of June 19,
1998.
<PAGE>
Exhibit 13
1998 ANNUAL REPORT TO SECURITY HOLDERS
Portions of the 1998 Annual Report to Stockholders.
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $25,125 $20,720 $21,456 $21,458 $22,163
Investments (1) 12,955 8,700 9,122 8,877 9,122
Loans receivable, net 11,515 11,423 11,572 11,915 12,414
Deposits 15,440 16,791 17,623 17,755 18,825
Equity (2) (3) 9,382 3,756 3,621 3,471 3,185
Book value per share 16.03 - - - -
Operating Data:
Interest income 1,459 1,442 1,559 1,553 1,587
Interest expense 829 819 894 773 754
------- ------- ------- ------- -------
Net interest income 630 623 665 780 833
Provision for loan losses 2 5 7 9 12
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 628 618 658 771 821
Non-interest income 4 6 2 9 2
Non-interest expense (4) 466 555 481 489 475
------- ------- ------- ------- -------
Income (loss) before income taxes 166 69 179 291 348
Income tax expense 41 19 52 100 111
------- ------- ------- ------- -------
Net income $ 125 $ 50 $ 127 $ 191 $ 237
======= ======= ======= ======= =======
Earnings per share (3) (5) - - - - -
Dividends per share (6) - - - - -
Selected Other Data:
Number of outstanding loans 368 397 408 428 455
Number of deposit accounts 1,704 1,754 1,876 1,943 2,024
Number of full-service offices open 1 1 1 1 1
Return on average assets (4) 0.59% .24% .58% .90% 1.07%
Return on average equity (4) 3.15% 1.34% 3.59% 6.01% 7.39%
Average equity to average assets 19.10% 17.81% 16.37% 14.91% 14.52%
Interest rate spread 2.23% 2.29% 2.39% 3.10% 3.26%
Net yield on average interest-earning assets 3.09% 3.08% 3.16% 3.70% 3.80%
Average interest-earning assets to average
interest-bearing liabilities 121% 119% 118% 118% 117%
Ratio of non-interest expense to average
total assets (4) 2.20% 2.65% 2.23% 2.29% 2.15%
Nonperforming assets to total assets .71% 1.16% .92% 1.08% .72%
Allowance for loan losses to nonperforming
loans at year end 56.98% 41.67% 47.98% 38.09% 53.46%
Retained earnings to total assets 14.64% 17.14% 16.32% 16.17% 14.37%
</TABLE>
(1) Includes interest-earning deposits, federal funds sold, FHLB stock and
investment securities.
(2) On June 19, 1998, Anson Savings converted from a state-chartered mutual
savings bank to a state-chartered stock savings bank and became a wholly-
owned subsidiary of Anson Bancorp, Inc.
(3) Includes unrealized gains on investments amounting to $279,000, $204,000,
$119,000, $95,000 and $91,000 at June 30, 1998, 1997, 1996, 1995 and 1994,
respectively.
(4) Includes non-recurring expense of $114,000 for the year ended June 30, 1997
for a one-time premium to recapitalize the SAIF.
(5) Earnings per share is based on earnings from June 19, 1998 (date of
conversion) to June 30, 1998 divided by the weighted average number of
shares outstanding during the same period. Earnings per share for the
eleven days, June 19, 1998 to June 30, 1998, was not significant.
(6) No dividends were paid in the Company's 1998 fiscal year because it did not
begin operations until June 19, 1998.
-1-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of Anson Bancorp, Inc. and subsidiary. The information
contained in this section should be read in conjunction with the audited
consolidated financial statements, the accompanying Notes to Financial
Statements and the supplemental financial data appearing throughout this
discussion and analysis.
Description of Business
Anson Bancorp, Inc. (the "Company") was incorporated under North Carolina law in
March, 1998 at the direction of Anson Savings Bank, S.S.B. ("Anson Savings" or
the "Bank") for the purpose of acquiring and holding all of the outstanding
stock of Anson Savings to be issued in its conversion from a North Carolina
chartered mutual savings bank to a North Carolina chartered stock savings bank
(the "Conversion") pursuant to a Plan of Conversion. A subscription offering of
the Company's common stock closed on June 19, 1998, at which time the Company
acquired all of the outstanding common stock of the Bank.
In accordance with the Plan of Conversion, the Company issued 585,124 shares of
common stock with a value of $5,851,240 and received net proceeds of $5,424,815.
A portion of the proceeds were transferred to Anson Savings for the purchase of
all of the outstanding common stock of the Bank.
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System under the Bank Holding Company Act of 1956, as
amended, and the savings bank holding company laws of North Carolina. The
Company has no operations and conducts no business of its own other than owning
the Bank and investing its portion of the net proceeds received in the
Conversion.
The Bank operates as a stock savings bank and its primary activities consist of
obtaining deposits and providing credit in the form of one-to-four family
residential loans to customers in its primary market, Anson County, North
Carolina. The Bank's primary regulators are the Federal Deposit Insurance
Company ("FDIC") and the Administrator of North Carolina Savings Institutions
Division (the "NC Administrator"). The Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC. . The Bank's principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, office occupancy costs, data processing expenses and federal
deposit insurance premiums.
Because the Company has no operations and conducts no business other than
described above, the discussion contained in this "Management's Discussion and
Analysis" concerns primarily the business of the Bank.
Capital Resources and Liquidity
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Company's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
cash flows generated by investments, including mortgage-backed securities.
External sources of funds include increases in deposits and advances from the
Federal Home Loan Bank of Atlanta (FHLB). In recent years, advances from the
FHLB have not been a primary source of liquidity.
North Carolina-chartered savings banks must maintain liquid assets equal to at
least 10% of total assets. The computation of liquidity under North Carolina
regulations allows the inclusion of mortgage-backed securities and investments
with readily marketable value, including investments with maturities in excess
of five years. At June 30, 1998, the Bank exceeded the North Carolina
regulatory requirements. Anson Savings believes that it will have sufficient
funds available to meet its anticipated future loan commitments as well as other
liquidity needs.
-3-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
Subject to applicable law, the Board of Directors of Anson Savings and Anson
Bancorp, Inc. may each provide for the payment of dividends. Future declaration
of cash dividends, if any, by the Company may depend upon dividend payments by
the Bank to the Company. Subject to regulations promulgated by the NC
Administrator, the Bank will be permitted to pay dividends on its common stock
if its stockholder's equity would not be reduced below the amount required for
the liquidation account or its capital requirement.
For a period of five years after its conversion from mutual to stock form, Anson
Savings must obtain the written approval from the NC Administrator before
declaring or paying a cash dividend to Anson Bancorp, Inc. on its capital stock
in an amount in excess of one-half of the greater of (i) the Bank's net income
for the most recent fiscal year end or (ii) the average of the Bank's net income
after dividends for the most recent fiscal year-end and not more than two of the
immediately preceding fiscal year ends.
Operating Strategy
The primary goals the Company's management are to increase Anson Savings'
profitability, monitor its capital position and enhance its banking franchise.
The Bank's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on its interest-earning
assets, such as loans and investments, and the cost of its interest-bearing
liabilities, consisting of deposits. The Bank's operations are affected to a
much lesser degree by non-interest income, such as transaction and other service
fee income. Net income is also affected by, among other things, provisions for
loan losses and operating expenses. Anson Savings' principal operating
expenses, aside from interest expense, consist of compensation and employee
benefits, office occupancy cost, data processing expenses and federal deposit
insurance premiums. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions, and the attendant actions of
regulatory authorities.
In guiding the operations of Anson Savings, management has implemented various
strategies designed to continue the Institution's profitability while
maintaining its safety and soundness. These strategies include: (i) emphasizing
one-to-four family residential lending; (ii) maintaining asset quality; (iii)
controlling operating expenses; and (iv) monitoring interest-rate risk. It is
anticipated, subject to market conditions, that the strategies presently in
place will be continued and the Bank will look for other opportunities to
increase its deposits and loans.
Emphasis on One-to-Four Family Residential Housing. Historically, Anson Savings
has been predominantly a one-to-four family residential lender. As of June 30,
1998, approximately 91.39% of its loan portfolio, before net items, was composed
of permanent one-to-four family residential loans. As of such date, an
additional 4.14% of its loan portfolio, before net items, was composed of
nonresidential loans, 4.18% of its loan portfolio before net items was composed
of construction loans and .29% of the Bank's loans were secured by deposits. As
a result, the Bank has developed expertise in mortgage loan underwriting and
origination. The Bank has established methods to expand its loan origination
through contacts with realtors, homebuilders and past and present customers.
The institution also uses advertising and community involvement to gain exposure
within the communities in which it operates.
Maintenance of Asset Quality. At June 30, 1998, the Bank's ratio of
nonperforming assets to total assets was 0.71%. Since 1991, no net loan
charges-offs have been necessary. Anson Savings has attempted to maintain asset
quality through its underwriting and collection procedures.
-4-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
Monitoring of Interest-Rate Risk. Although Anson Savings has a significant
"negative gap" and its net interest income would likely be negatively impacted
by increases in interest rates, management does not consider its interest rate
sensitivity position at June 30, 1998 to be unacceptable in view of the Bank's
historical results of operations and highly capitalized position. In order to
reduce the impact on the Bank's net interest income resulting from changes in
interest rates, as described below, management has implemented several
strategies described below. (See "Interest Rate Risk")
Control of General and Administrative Expenses. Anson Savings closely monitors
its general and administrative expenses and seeks to control them while
maintaining the necessary personnel to properly serve its customers. Since June
30, 1996, Anson Savings Bank's ratio of general and administrative expenses to
average assets has averaged 2.4%. Exclusive of the one-time SAIF assessment of
$114,000 in December, 1996, Anson Savings' ratio of general and administrative
expenses to average assets averaged 2.18%.
Interest Rate Risk
Anson Savings' 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 Bank's control, such as market interest rates and competition, may
also have an impact on the Bank's interest income and interest expense.
In the absence of other factors, the yield or return associated with Anson
Savings' earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decreases 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.
Therefore, by controlling the increases and decreases in its interest income
and interest expense which are brought about by changes in market and interest
rates, Anson Savings can significantly influence its net interest income.
Interest Rate Gap Analysis. As a part of the Bank's interest rate risk
management policy, it 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 of rate adjustment. The "gap" is the difference between the amounts of
such liabilities maturing or otherwise repricing within that period which
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 Bank's one year interest sensitivity gap as a percentage of total interest-
earning assets at June 30, 1998 was a negative 6.79%. At June 30, 1998, the
Bank's three year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were negative 11.13% and negative
8.22%, respectively. At June 30, 1998, the interest sensitivity gap was greatly
improved over June 30, 1997 due primarily to the proceeds received from the
issuance of common stock primarily held in interest-bearing deposits and short-
term investments at June 30, 1998.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998 which are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liability. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Passbook accounts,
money market deposit accounts or other transaction accounts are assumed to be
subject to immediate repricing and depositor availability and have been
-5-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
placed in the shortest period. In making the gap computations, none of the
assumptions sometimes made regarding prepayments rates and deposit decay rates
have been used for any other interest-earning assets or interest-bearing
liabilities. In addition, the table does not reflect scheduled principal
payments which will be received throughout the lives of the loans. The interest
rate sensitivity of the Bank's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differed from that indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1998
----------------------------------------------------------------------------
More Than More Than
Six Months Six Months One year to Three Years More Than
or Less to One Year Three Years to Five Years Five Years
---------- ----------- ----------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans Receivable:
Adjustable rate one-to-four family residential $ 49 $ - $ - $ - $ -
Fixed rate one-to-four family residential 112 66 279 1,275 9,087
Other secured real estate - fixed rate 44 - - 78 592
Other loans 35 - - - -
Interest-bearing deposits 7,290 - - - -
Investments 4,858 - - 42 623
FHLB common stock - - - - 143
------------ ----------- ------------ ------------ ----------
Total interest-earning assets $ 12,388 $ 66 $ 279 $ 1,395 $ 10,445
============ =========== ============ ============ ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts 3,552 - - - -
Money market deposit accounts 93 - - - -
Certificate accounts 6,813 3,636 1,346 - -
------------ ----------- ------------ ------------ ----------
Total interest-bearing liabilities $ 10,458 $ 3,636 $ 1,346 $ - $ -
============ =========== ============ ============ ==========
INTEREST SENSITIVITY GAP PER PERIOD 1,930 (3,570) (1,067) 1,395 10,445
CUMULATIVE INTEREST SENSITIVITY GAP 1,930 (1,640) (2,767) (1,312) 9,133
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS 7.85% (6.67)% (11.02)% 5.34% 37.17%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING
LIABILITIES 118% 88% 82% 92% 159%
<CAPTION>
Total
-----------
<S> <C>
INTEREST-EARNING ASSETS:
Loans Receivable:
Adjustable rate one-to-four family residential $ 49
Fixed rate one-to-four family residential 10,819
Other secured real estate - fixed rate 714
Other loans 35
Interest-bearing deposits 7,290
Investments 5,523
FHLB common stock 143
------------
Total interest-earning assets $ 24,573
INTEREST-BEARING LIABILITIES: ============
Deposits:
Passbook and statement accounts 3,552
Money market deposit accounts 93
Certificate accounts 11,795
------------
Total interest-bearing liabilities $ 15,440
============
INTEREST SENSITIVITY GAP PER PERIOD 9,133
CUMULATIVE INTEREST SENSITIVITY GAP 9,133
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS 37.17%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING
LIABILITIES 159%
</TABLE>
-6-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
The Bank's net income during recent periods has been positively impacted by
decreasing interest rates, and its net income in the near future is likely to be
reduced if interest rates increase. However, management did not view the Bank's
interest rate sensitivity position at June 30, 1998 to be unacceptable in view
of the Bank's historical results of operations and highly capitalized position.
Nevertheless, in order to maintain its interest rate risk position within levels
management believes to be acceptable, Anson Savings has begun (i) attempting to
originate adjustable and or callable rate loans when market conditions permit,
(ii) maintaining a short-term investment portfolio, and (iii) attempting to
lengthen deposit maturities. As a result, the Bank will strive to maintain an
acceptable one year interest rate sensitivity gap.
Anson Savings does not originate its loans for sale, or sell its loans, in the
secondary market. This tends to increase its exposure to interest rate risk.
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 rate 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 Bank's assets and liabilities for the year ended June
30, 1998 and 1997. For the years 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).
<TABLE>
<CAPTION>
At June 30, 1998 Year Ended June 30, 1998
------------------------ -------------------------------------
Average Average Average
Balance Yield/Cost Balance Interest Rate
--------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing balances $ 6,215 6.00% $ 5,485 $ 299 5.45%
Investments 6,740 6.08% 3,442 215 6.24%
Loans 11,515 8.02% 11,484 945 8.23%
--------- ---------- ----------
Total interest-earning assets 24,470 6.97% 20,411 1,459 7.15%
Other assets 655 725
--------- ----------
Total assets $ 25,125 $ 21,136
========= ==========
Interest-bearing liabilities:
Deposits $ 15,440 4.88% $ 16,847 829 4.92%
Other liabilities 303 316
Equity 9,382 3,973
--------- ---------- ----------
Total liabilities and retained earnings $ 25,125 $ 21,136
========= ==========
Net interest income and interest rate spread 2.09% $ 630 2.23%
==========
Net yield on average interest-earning assets 3.09%
Ratio of average interest earning assets to
average interest bearing liabilities 121%
<CAPTION>
Year Ended June 30, 1997
------------------------------------------
Average Average
Balance Interest Rate
----------- ------------- ---------
<S> <C> <C> <C>
Interest earning assets:
Interest-bearing balances $ 4,783 $ 263 5.50%
Investments 3,635 215 5.91%
Loans 11,771 963 6.18%
----------- --------
Total interest-earning assets 20,189 1,441 7.14%
Other assets 731
-----------
Total assets $ 20,920
===========
Interest-bearing liabilities:
Deposits $ 16,899 819 4.85%
Other liabilities 296
Equity 3,725
----------- ----------
Total liabilities and retained earnings $ 20,920
===========
Net interest income and interest rate spread $ 622 2.29%
=========
Net yield on average interest-earning assets 3.08%
Ratio of average interest earning assets to
average interest bearing liabilities 119%
</TABLE>
-7-
<PAGE>
ANSON BANCORP, INC. 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 (1) 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 June 30, 1998 vs 1997
---------------------------------------
Increase (Decrease) Due To
----------------------------------------
Volume Rate Total
------------ -------- -------------
<S> <C> <C> <C>
Interest income
Interest-bearing balances 39 ( 2) 37
Investments (12) 11 ( 1)
Loans (23) 5 (18)
--- --- ---
Total interest income 4 14 18
Interest expense
Deposts (3) 13 10
--- --- ---
Net interest income 7 1 8
=== === ===
</TABLE>
Comparison of Financial Condition
In connection with the Conversion of Anson Savings and the subsequent issuance
of stock, $5,424,815 of additional capital was raised in the year ended June 30,
1998. Because of this, the Bank has experienced an increase in its asset base.
Total assets were $25.13 million at June 30, 1998 compared to $20.72 million at
June 30, 1997. Net loans receivable at these dates have remained relatively
unchanged, $11.52 million at June 30, 1998 compared to $11.42 million at June
30, 1997. The Bank's deposits decreased approximately 8% from $16.79 million at
June 30, 1997 compared to $15.44 million at June 30, 1998. The reduction in
deposits was anticipated by management and was primarily due to depositors using
funds on deposit with the Bank to purchase the Company's common stock. During
the same period, investments also increased approximately 49% from $8.7 million
at June 30, 1997 compared to $12.9 million at June 30, 1998. Equity totaled
$3.76 million and $9.38 million at June 30, 1997 and June 30, 1998,
respectively. The increase in both investments and equity is directly related
to capital raised as a result of the Conversion.
The principal category of earnings assets is loans receivable which amounted to
$11.52 million and $11.42 million, at June 30, 1998 and 1997, respectively.
Loan originations for the year ended June 30, 1998 totaled $2.92 million and
principal repayments for 1998 totaled $2.82 million. The Bank experienced a net
decrease in the loan portfolio of $93,000 over 1997. Management believes
competitive rates within its community contributed to the decreased loan demand
in 1998. Anson maintains underwriting and credit standards designed to maintain
the quality of the loan portfolio. Nonperforming loans at June 30, 1998 and
1997 totaled $179,000 and $240,000, respectively and were 1.55% and 2.10% of
total loans respectively.
-8-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
In addition to loans, the Bank invests in U.S. Treasury and Government agency
securities. Management does not engage in the practice of trading securities,
rather, the Bank's investment portfolio consists primarily of investments
designated and held to maturity. Investment securities, including interest-
bearing deposits and FHLB stock, at June 30, 1998 and 1997 totaled $12.96
million and $8.70 million, respectively. The increase in investments is
primarily attributed to the additional capital raised from the Conversion.
Anson Savings has experienced some decline in savings deposits. At June 30,
1998 and June 30, 1997, the Bank's deposits decreased $1,351 to $15.40 million
and $16.79 million, respectively. The Bank has priced its deposits to be at or
near the top of the market because of its dependence on the local market for
funds availability. The decrease is primarily due to deposits used to purchase
the Company's common stock during the Conversion, which was anticipated by
Management.
Anson Saving's equity, which consists entirely of additional capital, retained
earnings and unrealized gains on securities available for sale, net of tax,
amounted to $9.38 million and $3.76 million at June 30, 1998 and 1997,
respectively. The Bank has classified a portion of its investments as available
for sale which requires reporting such investments at market with unrealized
gains or losses, net of tax, shown as a separate component of equity. The
equity component for net unrealized gains (losses) at June 30, 1998 and 1997
amounted to $279,000 and $204,000, respectively.
The Company has invested the net proceeds it retained from the Conversion, after
purchasing all of the Bank's common stock, primarily in interest-earning
deposits, U.S. Government, federal agency and other marketable securities and
mortgage-backed securities.
Comparison of Results of Operations for the Years Ended June 30, 1998 and 1997
Net Income. The Bank's net income for the years ended June 30, 1998 and 1997
was $126,000 and $50,000, respectively. Net income was positively affected in
1998 by an overall sustained downward trend in interest rates Net income was
negatively affected for the year ended June 30, 1997 by a one-time charge of
$114,000 related to a one-time assessment of deposit insurance premiums. See
"Insurance Premium Surcharge". Except for the one-time SAIF assessment, net
income for years ended June 30, 1998 and 1997 would have been approximately
$126,000 and $127,000, respectively.
Net Interest Income. Net interest income for the fiscal year ended June 30, 1998
increased 1% from the fiscal year ended June 30, 1997 from $623,000 to $630,000.
This increase in net interest income is due to the influx of capital in June
related to the issuance of common stock.
Provision for Loan Losses. The provision for loan losses was $2,000 and $5,000
for the years ended June 30, 1998 and 1997, respectively. For the years ended
June 30, 1998 and 1997, the Company's loan loss allowances totaled $102,000 and
$100,000, respectively, representing 57% and 42%, respectively, of nonperforming
loans at such dates Anson Savings experienced no loan charge-offs during the
years ended June 30, 1998 and 1997.
Noninterest Income. Noninterest income consists primarily of fees related to
safe deposit boxes and other miscellaneous items and amounted to $4,000 and
$6,000 for the years ended June 30, 1998 and 1997, respectively.
Noninterest Expense. Noninterest expense for the years ended June 30, 1998 and
1997 were $466,000 and $555,000, respectively. Exclusive of the impact of the
one-time SAIF assessment discussed above, general and administrative expenses
increased from $441,000 to $466,000 for fiscal years ended June 30, 1998 and
June 30, 1997, respectively. This increase is largely due to increased
compensation expenses, service expenses and examination fees.
-9-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
Income Taxes. Income tax expense increased to $41,000 in the fiscal year ended
June 30, 1998 from $19,000 in the fiscal year ended June 30, 1997. The
fluctuations were primarily attributable to corresponding fluctuations in income
before income taxes.
Insurance Premium Surcharge
A comprehensive continuing appropriations bill which was passed by the United
States Congress and signed by the President on September 30, 1996, provided for
a one-time assessment to recapitalized the SAIF. The assessment equaled 65.7
cents per each $100 of insured domestic deposits and was payable in 1996. This
assessment had the effect of reducing the capital of the Company by the amount
of the assessment, net of the income tax benefit. The assessment was $114,000
before income taxes and was accrued as an expense during the quarter ended
September 30, 1996. As a result of this expense, Anson Savings experienced a
net loss for that fiscal quarter and the six months ended December 31, 1996.
Recapture of Bad Debts
Recently enacted federal legislation has repealed the reserve method of
accounting for thrift loan debt reserves and would require thrifts to recapture
into income over a six-year period their post-1987 additions to their excess bad
debt tax reserves, thereby generating additional tax liability At June 30,
1998, Anson Savings had no material post-1987 excess reserves.
Impact of Inflation and Changing Prices
The Consolidated 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 due to inflation. Unlike most industrial companies,
nearly all the assets and liabilities of Anson Bancorp, Inc. 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.
Impact of New Accounting Standards
In February, 1997 the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure", which is effective for financial statements for periods
ending after December 31, 1997. This statement applies to both public and
nonpublic entities. The Bank anticipates that adoption of this standard will
not have a material effect on the Bank.
In June, 1997 the FASB issued SFAS No. 130. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. In addition to net
income as has been historically determined, comprehensive income for the Company
would include net unrealized holding gains and losses on investment securities
available for sale. This Statement will be effective for the Company's fiscal
year ending June 30, 1999, and the Company does not intend early adoption of the
Statement. Had the Company adopted this Statement, it would have reported
comprehensive income of $200,996 and $135,551 for the years ended June 30, 1998
and 1997, respectively.
Also in June, 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information". This Statement establishes standards
for the way public enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of application,
comparative information
-10-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
for earlier years is to be restated unless it is impractical to do so. It is not
anticipated that the adoption of this Statement will materially affect the
Bank's current method of financial reporting.
In February, 1998 the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Post Retirement Benefits". This Statement addresses
disclosure issues related to pension and other post retirement benefits and is
not expected to materially affect the Bank's current method of reporting. This
new standard is effective for fiscal years beginning after December 15, 1997.
In June, 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires recording all derivative
instruments as assets or liabilities measured at fair value. This new standard
is effective for fiscal years beginning after June 15, 1999 and the Company does
not plan to adopt this standard at an earlier date. Management does not believe
the impact of adopting SFAS No. 133 will be material to the Company's
consolidated financial statements.
-11-
<PAGE>
FAULKNER AND THOMPSON, P.A.
226 NORTHPARK DRIVE, SUITE 110
ROCK HILL, SOUTH CAROLINA 29730
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Anson Bancorp, Inc. and Subsidiary
Wadesboro, North Carolina
We have audited the accompanying consolidated statements of financial
condition of Anson Bancorp, Inc. and Subsidiary as of June 30, 1998 and 1997,
and the related consolidated statements of income, 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Anson Bancorp, Inc. and
Subsidiary as of June 30, 1998 and 1997 and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
Faulkner and Thompson, P.A.
July 26, 1998
Charlotte, North Carolina
-12-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing deposits and cash $ 218,494 $ 197,056
Interest earning deposits 5,790,071 3,843,554
Federal funds sold 425,000 600,000
----------- -----------
6,433,565 4,640,610
Investment securities
Held to maturity (fair value at June 30, 1998
and 1997 of $6,322,544 and $3,933,344, respectively) 6,307,425 3,938,524
Available for sale 433,000 317,521
Loans receivable, net 11,515,484 11,422,892
Premises and equipment, net 207,665 222,125
Interest receivable 100,158 59,976
Other assets 68,985 61,719
----------- -----------
$25,066,282 $20,663,367
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings deposits, plus accrued interest thereon $15,439,963 $16,791,101
Accounts payable and accrued expenses 133,066 36,624
Deferred income taxes 111,000 79,200
----------- -----------
15,684,029 16,906,925
COMMITMENTS AND CONTINGENCIES - Notes 4, 12 and 14
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 5,000,000
shares; no shares issued and outstanding - -
Common stock, no par value, authorized 20,000,000
shares; issued and outstanding 585,124 in 1998 5,424,815 -
Retained earnings - substantially restricted 3,678,008 3,552,442
Unrealized gains on securities available for sale, net of tax 279,430 204,000
----------- -----------
9,382,253 3,756,442
----------- -----------
$25,066,282 $20,663,367
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-13-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 945,474 $ 963,385
Interest on investments and deposits in other banks 513,734 478,076
---------- ----------
Total interest income 1,459,208 1,441,461
INTEREST EXPENSE
Interest on savings deposits 828,958 818,740
---------- ----------
Net interest income 630,250 622,721
PROVISION FOR LOAN LOSSES 2,000 5,000
---------- ----------
Net interest income after provision for loan losses 628,250 617,721
NONINTEREST INCOME 4,449 5,963
NONINTEREST EXPENSE
Compensation and employee benefits 266,627 246,347
Federal insurance premiums 10,375 130,552
Data processing 34,307 31,946
Examinations and audit 34,062 26,168
Occupancy including depreciation 21,981 22,598
Other 98,781 97,128
---------- ----------
Total noninterest expense 466,133 554,739
---------- ----------
Income before income taxes 166,566 68,945
INCOME TAXES
Current expense 46,000 18,800
Deferred benefit ( 5,000) -
---------- ----------
41,000 18,800
---------- ----------
Net income $ 125,566 $ 50,145
========== ==========
Earnings per share (Note 1) - -
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Earnings Unrealized Total
Common Substantially Gain on Stockholders'
Stock Restricted Securities Equity
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 $ - $3,502,297 $ 118,594 $3,620,891
Net income - 50,145 - 50,145
Changes in unrealized gain on
securities available
for sale, net of tax - - 85,406 85,406
---------- ------------- ---------- ----------
BALANCE AT JUNE 30, 1997 - 3,552,442 204,000 3,756,442
Net proceeds from issuance of
common stock 5,424,815 - - 5,424,815
Net income - 125,566 - 125,566
Changes in unrealized gain on
securities available
for sale, net of tax - - 75,430 75,430
---------- ------------- ---------- ----------
BALANCE AT JUNE 30, 1998 $5,424,815 $ 279,430 $3,678,008 $9,382,253
========== ============= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 125,566 $ 50,145
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 2,000 5,000
Provision for depreciation 14,460 14,419
Deferred income taxes (5,000) -
Changes in assets and liabilities
Interest receivable (40,182) 25,933
Other assets (10,515) 71,995
Accounts payable and accrued expenses 96,442 (76,931)
----------- -----------
Net cash provided by operating activities 182,771 90,561
----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in loans receivable (94,592) 143,610
Purchases of securities held to maturity (4,550,370) (2,501,384)
Proceeds from maturities of securities held
to maturity 2,181,469 4,139,891
Purchases of premises and equipment - (3,461)
----------- -----------
Net cash provided by (used for) investing
activities (2,463,493) 1,778,656
----------- -----------
FINANCING ACTIVITIES
Net decrease in savings deposits (1,351,138) (831,968)
Net proceeds from issuance of common stock 5,424,815 -
----------- -----------
Net cash provided by (used for) financing
activities 4,073,677 (831,968)
----------- -----------
Increase in cash and cash equivalents 1,792,955 1,037,249
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,640,610 3,603,361
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,433,565 $ 4,640,610
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest $ 850,185 $ 840,875
=========== ===========
Cash paid during the year for income taxes $ 5,382 $ 25,382
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Conversation and Organization of Holding Company
On June 19, 1998, pursuant to a Plan of Conversion which was approved by its
members and regulators, Anson Savings Bank, SSB ("Anson Savings" or the
"Bank") converted from a North Carolina-chartered mutual savings bank to a
North Carolina-chartered stock savings bank (the "Conversion"), and became a
wholly-owned subsidiary of Anson Bancorp, Inc. (the "Company"). The Company
was formed to acquire all of the common stock of the Bank upon its conversion
to stock form. The Company has no operations and conducts no business of its
own other than owning the Bank and investing the retained portion of the net
proceeds received in the Conversion.
Nature of Business
The Company is a bank holding company registered with the Board of Governors
of the Federal Reserve System under the Bank Holding Company Act of 1956, as
amended, and the savings bank holding company laws of North Carolina. The
Bank operates as a stock savings bank and its primary activities consist of
obtaining deposits and providing credit in the form of one-to-four family
residential loans to customers in its primary market, Anson County, North
Carolina. The Bank's primary regulators are the Federal Deposit Insurance
Company ("FDIC") and the Administrator of North Carolina Savings Institutions
Division, North Carolina Department of Commerce (the "NC Administrator").
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
from those estimates.
Principles of Consolidation
The consolidated financial statements for the year ended June 30, 1998
include the accounts of Anson Bancorp, Inc. and its wholly-owned subsidiary,
Anson Savings Bank, Inc. Anson Bancorp, Inc. was capitalized on June 19,
1998; therefore, the consolidated financial statements include the operations
of the Company for the period subsequent to June 19, 1998. The financial
statements prior to June 19, 1998 present only the accounts and operations of
Anson Savings. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all interest-
bearing deposits with maturities of less than three months at acquisition,
noninterest-bearing deposits, federal funds sold, and cash on hand to be cash
equivalents. At times, the Company maintains deposits in correspondent banks
in amounts that may be in excess of the FDIC insurance limit.
-17-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Investment Securities
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, debt
securities are classified upon purchase as available for sale, held to
maturity or trading. Such assets classified as available for sale are
carried at market value. Unrealized holding gains or losses are reported as
a component of stockholders' equity net of deferred income taxes. Securities
classified as held to maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. In order to qualify
as held to maturity the Company must have the intent and ability to hold the
securities to maturity. Trading securities are carried at market value.
Gains or losses on disposition of securities are based on the difference
between the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method. The Company held no trading
securities at June 30, 1998 or 1997.
Loans
The Bank's loan portfolio consists principally of long-term conventional
mortgage loans secured by first deeds of trust. Loans are stated at the
principal balance outstanding and origination fees and certain direct
originating costs are capitalized and recognized as an adjustment of the
yield of the related loan. Interest income on loans is accrued and taken
into income based upon the interest method. The recognition of interest
income is discontinued when, in management's judgment, the interest is not
collectible in the normal course of business.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all creditors value loans at the loan's fair value if it is probable
that the creditor will be unable to collect all amounts due according to the
terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market prices of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate. SFAS No.
114 was amended by SFAS No. 118 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest income on an
impaired loan. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under
the contractual terms of the loan agreement first to principal then to
interest income. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income, to the extent that
any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are
typically applied to principal and interest receivable in accordance with the
terms of the restructured loan agreement. Interest income is recognized on
these loans using the accrual method of accounting. As of June 30, 1998 and
1997, the Company had no impaired loans.
-18-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Allowance for Loan Losses
The allowance for loan losses is based on management's ongoing evaluation of
the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, adequacy of
collateral, the composition of the loan portfolio, and management's estimate
of anticipated credit losses. Loans are charged against the allowance at
such time as they are determined to be losses. Subsequent recoveries are
credited to the allowance. Management considers the year-end allowance
appropriate and adequate to cover possible losses in the loan portfolio;
however, management's judgment is based upon a number of assumptions about
future events, which are believed to be reasonable, but which may or may not
prove valid. Thus, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
increases in the allowance for loan losses will not be required.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. For financial reporting purposes, depreciation is computed by
use of the straight-line method over the estimated useful lives of the
various classes of assets.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. The significant components of deferred
tax assets and liabilities arise principally from temporary differences
related to unrealized gains on investments, depreciation expense, allowance
for loan losses, deferred loan fee income and prepaid pension expenses.
Net Income per Common Share
Net income per common share for the year ended June 30, 1998 is based on
unaudited net income earned from the date of Conversion, June 19, 1998, to
the end of the fiscal year, divided by the weighted average number of shares
outstanding during that period. There are no differences between basic and
diluted earnings per share. Earnings per share for the eleven days, June 19,
1998 to June 30, 1998, was not significant.
Reclassifications
Certain 1997 balance sheet accounts have been reclassified to conform to the
1998 presentation. This reclassification had no effect on income for any
period.
-19-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
Investment securities are as follows:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $3,999,579 $ 5,313 $2,078 $4,002,814
---------- ---------- ---------- ----------
Government National Mortgage
Association Securities:
Due after one year through
five years 42,504 1,285 - 43,789
Due after five years through
ten years 26,390 1,257 - 27,647
Due after ten years 596,352 9,342 - 605,694
---------- ---------- ---------- ----------
665,246 11,884 - 677,130
---------- ---------- ---------- ----------
Federal Home Loan Bank stock 142,600 - - 142,600
---------- ---------- ---------- ----------
Fixed-rate, fixed-term deposits 1,500,000 - - 1,500,000
---------- ---------- ---------- ----------
Total $6,307,425 $ 17,197 $2,078 $6,322,544
========== ========== ========== ==========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $424,117 $ $ 433,000
========== ========== ========== ==========
</TABLE>
-20-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $1,496,406 $ 3,594 $ - $1,500,000
Due after one year through
five years 1,000,000 - - 1,000,000
---------- ---------- ---------- ----------
2,496,406 3,594 - 2,500,000
---------- ---------- ---------- ----------
Government National Mortgage
Association Securities:
Due after one year through five
years 47,016 2,362 - 49,378
Due after five years through ten
years 281,481 2,625 - 284,106
Due after ten years 471,021 - 13,761 457,260
---------- ---------- ---------- ----------
799,518 4,987 13,761 790,744
---------- ---------- ---------- ----------
Federal Home Loan Bank stock 142,600 - - 142,600
---------- ---------- ---------- ----------
Fixed-rate, fixed-term deposits 500,000 - - 500,000
---------- ---------- ---------- ----------
Total $3,938,524 $ 8,581 $13,761 $3,933,344
========== ========== ========== ==========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $308,638 $ _ $ 317,521
========== ========== ========== ==========
</TABLE>
-21-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 3 - FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank (FHLB) stock is a required deposit with the FHLB that
is classified as a restricted investment security, carried at cost and
evaluated for impairment. These shares can only be sold at their par value of
$100 per share and only to the FHLB or to another member institution.
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Principal Balances:
Real estate loans
One-to-four family residential $10,911,199 $10,887,058
Nonresidential 494,226 543,015
Secured by deposits 34,790 75,131
Construction loans 499,247 349,794
----------- -----------
11,939,462 11,854,998
----------- -----------
Allowance for loan losses (102,000) (100,000)
Undisbursed portion of construction
loans (278,928) (288,281)
Net deferred loan origination fees (43,050) (43,825)
----------- -----------
(423,978) (432,106)
----------- -----------
$11,515,484 $11,422,892
=========== ===========
</TABLE>
Loan commitments outstanding were $0 and $169,400 at June 30, 1998 and 1997,
respectively. At June 30, 1998 and 1997, there were no loans that were in a
nonaccrual status.
Set forth below is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
For the years ended June 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Balance, beginning of year $100,000 $ 95,000
Loans charged-off - -
Recoveries of loans charged-off - -
Provision for loan losses 2,000 5,000
-------- --------
Balance, end of year $102,000 $100,000
======== ========
</TABLE>
-22-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Land $ 30,808 $ 30,808
Land improvements 2,774 2,774
Building 562,545 562,545
Furniture and equipment 227,590 227,590
-------- --------
823,717 823,717
Less allowances for depreciation 616,052 601,592
-------- --------
$207,665 $222,125
======== ========
</TABLE>
NOTE 6 - INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Accrued interest on interest bearing
deposits and investments $ 92,441 $52,497
Accrued interest on loans receivable 7,717 7,479
-------- -------
$100,158 $59,976
======== =======
</TABLE>
NOTE 7 - COMPOSITION OF SAVINGS DEPOSITS
The composition of savings deposits by interest rate is as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------------- --------------------------
Amount % of Total Amount % of Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
3.25 % passbook $ 3,551,896 23.01% $ 3,441,163 20.49%
Term certificates, 3.25% 31,291 .20 41,521 .25
Term certificates, 4.4% - 5.5% 6,736,363 43.63 8,872,711 52.84
Term certificates, 5.6% - 7.0% 4,335,182 28.08 3,345,034 19.92
Money market, 3.1% 93,036 .60 104,710 .62
Deposits greater than $100,000,
3.25% - 7.0% 648,450 4.20 920,991 5.49
----------- ------ ----------- -----------
15,396,218 99.72 16,726,130 99.61
Accrued interest payable on
deposits 43,745 .28 64,971 .39
----------- ------ ---------- -----------
$15,439,963 100.00% $16,791,101 100.00%
=========== ====== =========== ==========
</TABLE>
-23-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Scheduled maturities of certificate accounts are as follows at June 30, 1998:
<TABLE>
<CAPTION>
June 30,
-----------
<S> <C>
1999 $10,405,510
2000 924,116
2001 421,660
-----------
$11,751,286
===========
</TABLE>
Interest expense on savings deposits consists of the following components for
the years ended June 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Passbook accounts $125,252 $128,355
Money market accounts 3,041 3,994
Certificate accounts 700,665 686,391
-------- --------
$828,958 $818,740
======== ========
</TABLE>
NOTE 8 - INCOME TAXES
The differences between income taxes at the U.S. statutory rate and the
effective income taxes as reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Income tax expense at federal
statutory rate of 34% $ 57,000 $23,400
Effect of graduated income
tax rates (11,000) (4,600)
Other ( 5,000) -
-------- -------
$ 41,000 $18,800
======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Bank's deferred tax assets are as follows:
-24-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred revenue $ 19,000 $ 18,000
Loan loss reserve 40,000 39,000
--------- ----------
Total deferred income tax assets $ 59,000 $ 57,000
========= ==========
Deferred tax liabilities:
Unrealized gain on investments $ 143,000 $ 103,200
Book basis versus tax basis for premises
and equipment 9,000 8,000
Prepaid pension 18,000 21,000
Other - 4,000
--------- ----------
Total deferred income tax liabilities 170,000 136,200
--------- ----------
Net deferred income tax liability $(111,000) $ (79,200)
========= ==========
</TABLE>
Legislation has been passed which repeals the "reserve" method of accounting
for thrift bad debt reserves for the first tax year beginning after December
31, 1995 (the fiscal year ending June 30, 1996 for the Bank). This
legislation requires all thrifts (including the Bank) to account for bad debts
using either the specific charge-off method (available to all thrifts) or the
experience method (available only to thrifts that qualify as "small banks",
i.e. under $500 million in assets). The Bank currently uses the experience
method of accounting for its tax bad debt reserves. The legislation also
suspends recapture of bad debt reserves taken through 1987 (i.e., the base
year reserve), but requires thrifts to recapture or repay bad debt deductions
taken after 1987 over six years. As of June 30, 1997, bad debt reserves
subject to recapture were not significant. As permitted under SFAS 109, no
deferred tax liability is provided for approximately $1,000,000 ($340,000
approximate tax effect) of such tax bad debt reserves that arose prior to
October 1, 1988.
NOTE 9 - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Pension Plan
The Bank established a noncontributory defined benefit plan in 1990 which
covers substantially all employees. The plan benefits as of June 30, 1994
were frozen and the current plan benefits are based on plan years of service
and the employee's compensation during the last ten years of service. The
Bank's policy is to fund pension costs accrued. Pension expense for the
years ended June 30, 1998 and 1997, was approximately $43,000 and $38,000,
respectively. The components of pension expense are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Service costs $ 37,000 $ 34,000
Interest cost on projected
benefit obligation 26,000 22,000
Return on plan assets (27,000) (14,000)
Amortization 7,000 (4,000)
-------- --------
Net period pension cost $ 43,000 $ 38,000
======== ========
</TABLE>
-25-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
A summary of the Plan's funded status and the pension liability recognized
in the Bank's financial statements at June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Accumulated benefit obligation $ 353,000 $ 294,700
========= =========
Plan assets at fair value $ 367,000 $ 295,500
--------- ---------
Projected benefit obligation for
service rendered to date:
Vested (328,000) (236,000)
Additional benefits based on estimated
future salary levels (64,000) (99,500)
--------- ---------
(392,000) (335,500)
--------- ---------
Projected benefit obligation in excess
of plan assets (25,000) (40,000)
Unrecognized net transition liability 49,000 53,000
Unrecognized net prior service cost gain (63,000) (67,600)
Unrecognized net loss 106,000 105,100
--------- ---------
Prepaid pension cost $ 67,000 $ 50,500
========= =========
</TABLE>
Assumptions used in the actuarial calculation at June 30, 1998 and 1997 were
8% for the weighted-average discount rate and expected long-term rate of
return on assets and 4% for the rate of increase in compensation levels. At
June 30, 1998 and 1997, substantially all of the plan assets were invested
in a certificate of deposit at the Bank.
Employment Agreement
The Bank has entered into an employment agreement with its chief executive
officer to ensure a stable and competent management base. The agreement
provides for a three-year term, but upon each anniversary, the agreement may
be extended for an additional year so that the remaining term shall always
be three years. The agreement provides for benefits as spelled out in the
contract and cannot be terminated by the Board of Directors, except for
cause, without prejudicing the officer's right to receive certain vested
rights, including compensation, for the remaining term of the agreement. In
the event of a change in control of the Bank, as defined in the agreement,
the agreement will automatically be extended for three years from the date
of such change in control.
Severance Plan
The Bank has also adopted a severance plan for the benefit of its employees
in the event of a change in control of the Bank which provides for varying
severance benefits for employees based on their salaries and length of
service with the Bank.
-26-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Proposed Management Recognition and Stock Option Plans
The Company's stockholders will be asked to consider at a future
stockholders' meeting approval of a management recognition plan. Such a
plan is designed to provide the directors, officers and certain employees of
the Bank with an ownership interest in the Company to encourage their
continued service to the Bank. Up to 23,405 shares of the Company's stock
would be awarded under the plan. The stockholders will be asked to approve
a stock option plan for directors, officers and employees of the Bank. The
plan may provide for the issuance of incentive stock options and non-
qualified stock options. As many as 58,512 shares are expected to be
reserved for future issuance under the stock option plan. The Company may
elect to fund any approved plans through the issuance of authorized but
unissued shares, or may elect to purchase the shares to fund the plans in
the open market.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information, whether or not recognized in
the statement of financial position, when it is practical to estimate the
fair value. SFAS 107 defines a financial instrument as cash, evidence of an
ownership interest in an entity or contractual obligations which require the
exchange of cash or other financial instruments. Certain items are
specifically excluded from the disclosure requirements, including the Bank's
common stock, premises and equipment and other assets and liabilities.
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 and Cash Equivalents and Short-Term Investments
For cash and cash equivalents and short-term investments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices and dealer quotes. The carrying values of
restricted equity securities approximate fair values.
Loans Receivable
Fair values of real estate loans and savings deposit loans are estimated
using discounted cash flow analyses, with interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Interest Receivable
The carrying amounts of interest receivable approximate fair values.
Savings Deposits
The fair value of savings accounts and certain money market deposits is the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is based upon the discounted value of the
contractual cash flows. The discount rates used in these calculations
approximates the current rates offered for deposits of similar remaining
maturities.
-27-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates.
The estimated fair value of the Bank 's financial instruments were as
follows at:
<TABLE>
<CAPTION>
June 30, 1998
------------------------
Carrying
Amount Fair Value
----------- -----------
<S> <C> <C>
Financial Assets:
Cash, interest bearing deposits,
and federal funds sold $ 6,433,565 $ 6,433,565
Investments
Securities available for sale 433,000 433,000
Securities held to maturity 6,307,425 6,322,544
Loans receivable 11,617,484 11,912,570
Interest receivable 100,158 100,158
Financial Liabilities:
Savings deposits 15,439,963 15,465,000
Unrecognized Financial Instruments:
Commitments to extend credit - -
</TABLE>
NOTE 11 - RELATED PARTIES
The Bank has entered into transactions with its officers and directors. The
aggregate amount of loans to such related parties at June 30, 1998 and 1997,
were $0 and $890, respectively. Such loans were made substantially on the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other borrowers and do not involve
more than the normal risks of collectibility. The Bank also had related party
deposits of $199,502 and $531,244 at June 30, 1998 and 1997, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, which are
not reflected in the accompanying financial statements. Although these
commitments do expose the Bank to certain types of risk, management does not
expect losses to result from these transactions.
Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Existing credit and commitments are reviewed continually to ensure there is no
deterioration in the credit worthiness of the borrower. Outstanding
commitments at June 30, 1998 were $0. Collateral held is obtained based on
management's credit evaluation of the customer and generally includes either
real property or savings deposits.
-28-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS
Capital Requirements
The Company is regulated by the Board of Governors of the Federal Reserve
System and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is
regulated by the FDIC and the NC Administrator.
The Bank is subject to various regulatory capital requirements administered
by its primary federal regulator, the FDIC and the State of North Carolina.
Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material effect on the
Bank and the financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines involving 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 classification under the prompt corrective action guidelines are
also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
The FDIC requires the Bank to have a minimum leverage ratio of Tier I
Capital (principally consisting of retained earnings and any future common
stockholders' equity, less any intangible assets) to total assets of at
least 3%, provided the FDIC determines that the Bank is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity,
good earnings and in general is considered a strong banking organization,
rated composite 1 under the Uniform Financial Institutions Rating System
(the CAMEL rating system) established by the Federal Financial Institutions
Examination Council. All other institutions which do not meet the
aforementioned standards are required to maintain a Tier I capital ratio of
3% plus at least an additional 100 to 200 basis points and therefore are
required to maintain a ratio of Tier 1 capital to total assets of not less
than 4%. The FDIC also requires the Bank to have a ratio of total capital
to risk-weighted assets of 8%, of which at least 4% must be in the form of
Tier I capital. The state regulations require a net worth equal to at least
5% of total assets.
As shown below, at June 30, 1998 the Bank complied with all the capital
requirements described above and also all of the requirements to be
classified as well-capitalized.
<TABLE>
<CAPTION>
Leverage
Ratio of Tier I Risk- N.C.
Tier I Adjusted Risk-Based Savings Bank
Capital Capital Capital Capital
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Consolidated stockholders' equity $ 9,382,253 $ 9,382,253 $ 9,382,253 $ 9,382,253
Separate equity of Anson
Bancorp, Inc. (2,717,290) (2,717,290) (2,717,290) (2,717,290)
Unrealized gain on securities ( 279,430) ( 279,430) ( 279,430) ( 279,430)
Loan loss allowance - - 102,000 102,000
----------- ----------- ----------- -----------
Regulatory capital 6,385,533 6,385,533 6,487,533 6,487,533
Minimum capital requirement 655,000 368,000 737,000 1,118,000
----------- ----------- ----------- -----------
Excess regulatory capital $ 5,730,533 $ 6,017,533 $ 5,750,533 $ 5,369,533
=========== =========== =========== ===========
</TABLE>
-29-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Stockholders' Equity
On June 19, 1998, Anson Bancorp, Inc. completed and closed its stock offering.
Gross proceeds from the sale of 585,124 shares amounted to $5,851,240 and were
reduced by conversion costs of $426,425. The Company paid $2,712,409 for all
of the common stock of the Bank, and retained the remaining net proceeds.
Concurrent with the Conversion, the Bank established a liquidation account in
an amount equal to its net worth as reflected in its latest statement of
financial condition used in the Company's prospectus distributed in connection
with the offering of common stock. The liquidation account will be maintained
for the benefit of eligible deposit account holders and supplemental eligible
deposit account holders who continue to maintain their deposit accounts in the
Bank after the Conversion. Only in the event of a complete liquidation will
eligible deposit account holders and supplemental eligible deposit account
holders be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted sub-account balance for
deposit accounts then held before any liquidation distribution may be made
with respect to common stockholders.
Subject to applicable law, the Board of Directors of Anson Savings and the
Company may each provide for the payment of dividends. Future declaration of
cash dividends, if any, by the Company may depend upon dividend payments by
the Bank to the Company. Subject to regulations promulgated by the NC
Administrator, the Bank will be permitted to pay dividends on its common stock
if its stockholder's equity would not be reduced below the amount required for
the liquidation account or its capital requirement.
For a period of five years after its conversion from mutual to stock form,
Anson Savings must obtain the written approval from the NC Administrator
before declaring or paying a cash dividend to the Company on its capital stock
in an amount in excess of one-half of the greater of (i) the Bank's net income
for the most recent fiscal year end or (ii) the average of the Bank's net
income after dividends for the most recent fiscal year-end and not more than
two of the immediately preceding fiscal year ends.
NOTE 14 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997 the FASB issued SFAS No. 130. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. In addition to net
income as has been historically determined, comprehensive income for the
Company would include net unrealized holding gains and losses on investment
securities available for sale. This Statement will be effective for the
Company's fiscal year ending June 30, 1999, and the Company does not intend to
elect an early adoption. Had the Company adopted this Statement previously,
it would have reported comprehensive income of $200,996 and $135,551 for the
years ended June 30, 1998 and 1997, respectively.
Also in June, 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information". This Statement establishes standards
for the way public enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to stockholders. Statement 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial year
of application, comparative information for earlier years is to be restated
unless it is impractical to do so. It is not anticipated that the adoption of
this Statement will materially affect the Bank's current method of financial
reporting.
In February, 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Post Retirement Benefits". This Statement addresses
disclosure issues related to pension and other post retirement benefits and is
not expected to materially affect the Bank's current method of reporting.
This new standard is effective for fiscal years beginning after December 15,
1997.
-30-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires recording all derivative
instruments as assets or liabilities measured at fair value. This new
standard is effective for fiscal years beginning after June 15, 1999 and the
Company does not plan to adopt this standard at an earlier date. Management
does not believe the impact of adopting SFAS No. 133 will be material to the
Company's consolidated financial statements.
NOTE 15 - YEAR 2000
The Bank recognizes that there is a business risk in computerized systems as
the calendar rolls over into the next century. The Federal Financial
Institutions Examination Council (FFIEC) issued an interagency statement on
May 5, 1997 outlining five phases for institutions to effectively manage the
Year 2000 challenge. The phases were: Awareness, Assessment, Renovation,
Validation, and Implementation. The FFIEC encouraged institutions to have all
critical applications identified and priorities set by September 30, 1997 and
to have renovation work largely completed and testing well underway by
December 31, 1998. The Bank has an ongoing program designed to ensure that
its operational and financial systems will not be adversely affected by year
2000 software failures, due to processing errors arising from calculations
using the year 2000 date. The Board of Directors and management of the Bank
have established year 2000 compliance as a strategic initiative. While the
Bank believes that it has available resources to assure year 2000 compliance,
it is to some extent dependent on vendor cooperation. At the present time,
the Bank expects its most critical application software vendor to have all of
its system in compliance by December 31, 1998. The Bank expects to install
the necessary software releases in 1998 and have testing of such systems
substantially completed by December 31, 1998.
At this time, the Bank has not determined the cost of making any modifications
to correct any year 2000 problems; however, equipment and software expenses
are not expected to materially differ from past results. The Bank routinely
upgrades and purchases technologically advanced software and hardware on a
continual basis and expects to specifically evaluate and test such purchases
for year 2000 compliance.
-31-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL DATA
The following is a summary of the condensed financial statements of Anson
Bancorp, Inc. as of and for the year ended June 30, 1998:
Condensed Balance Sheet
June 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
Assets:
<S> <C>
Cash and cash equivalents $2,765
Investment in Anson Savings Bank, Inc. 6,665
------
$9,430
======
Liabilities and Stockholders' Equity:
Liabilities - accounts payable $ 48
Stockholders' equity
Common stock 5,425
Retained earnings 3,678
Unrealized gain on available for sale
securities, net of tax 279
------
$9,430
======
</TABLE>
Condensed Statement of Income
Period from June 19, 1998 (date of Conversion) to June 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
Equity in earnings of subsidiary $ 4
Interest income 5
Operating expenses -
----
Net income before taxes 9
Income taxes ( 1)
----
Net income $ 8
====
</TABLE>
-32-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Condensed Statement of Cash Flows
Period from June 19, 1998 (date of Conversion) to June 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 4
Equity in earnings of Anson Savings Bank 4
Increase in other assets ( 3)
-------
Net cash provided by operating activities 5
-------
Cash flows from investing activities:
Initial investment in Anson Savings Bank (2,712)
-------
Net cash used by investing activities (2,712)
-------
Cash flows from financing activities:
Common stock proceeds received from the Conversion, net 5,473
-------
Net cash provided by financing activities 5,473
-------
Net increase in cash 2,765
Cash, Beginning of Period -
-------
Cash, End of Period $ 2,765
=======
Supplemental Disclosure of Noncash Financing Activities:
Stock issuance cost accrued $ 48
=======
</TABLE>
-33-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Executive Officers
Eugene M. Ward
Nancy H. Allen President and CEO Veda H. Edwards
Treasurer and Assistant Secretary Secretary
Directors
Preston A. Burns Chairman
Retired, Corporate Executive
<TABLE>
<S> <C>
W. Kenneth Huntley Emmett S. Patterson
President, Huntley Oil and Gas Company, Inc. General Manager and Executive VP
PeeDee Electric Membership Cooperation
John J. Crawford John R. Potter
Retired, Corporate Executive Retired Government Agent
H. Patrick Taylor, Jr. Eugene M. Ward
Attorney President, Anson Savings Bank
Stock Transfer Agent Annual Meeting
Registrar and Transfer Company The 1998 annual meeting of stockholders of
10 Commerce Drive Anson Bancorp, Inc. will be held at 10:00 a.m.
Cranford, NJ 07016 on November 12, 1998 at the Corporate Office of
the Company at 211 South Greene Street, Wadesboro,
North Carolina.
Special Legal Counsel Form 10-KSB
Brooks, Pierce, McLendon, A copy of Form 10-KSB as filed with the Securities and
Humphrey & Leonard, L.L.P. Exchange Commission will be furnished without charge
2000 Renaissance Plaza to the Company's stockholders for the Company's most
230 North Elm Street recent fiscal year upon written request to Eugene M.
Greensboro, NC 27420 Ward, President, Anson Bancorp, Inc., P.O. Box 249, Wadesboro,
NC 28170
Independent Auditors Corporate Office
Faulkner and Thompson, P.A. 211 South Greene Street
2101 Rexford Road Wadesboro, NC 28170
Charlotte, NC 28211
</TABLE>
-34-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Common Stock Information
On June 19, 1998, the Company issued 585,124 shares of common stock. The
Company's common stock is traded on the over the counter market with quotations
available through the OTC Electronic Bulletin Board under the symbol "ANSN" and
began trading on June 22, 1998. At June 30, 1998, there were approximately 226
stockholders of record, not including the numbers of persons or entities where
stock is held in nominee or "street" name through various brokerage firms or
banks. Based upon information provided to management by certain securities
firms effecting transactions in the common stock, the high and low bids for
common stock for the period ended June 30, 1998 were $12.375 and $12.00,
respectively. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
The Company paid no dividends for the year ended June 30, 1998.
Disclaimer
This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
-35-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from June 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 218 197
<INT-BEARING-DEPOSITS> 5,790 3,844
<FED-FUNDS-SOLD> 425 600
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 433 318
<INVESTMENTS-CARRYING> 6,307 3,939
<INVESTMENTS-MARKET> 0 0
<LOANS> 11,515 11,523
<ALLOWANCE> 102 100
<TOTAL-ASSETS> 25,066 20,720
<DEPOSITS> 15,440 16,791
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 133 173
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 5,425 0
<OTHER-SE> 3,678 3,756
<TOTAL-LIABILITIES-AND-EQUITY> 25,066 20,720
<INTEREST-LOAN> 945 963
<INTEREST-INVEST> 514 478
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 1,459 1,441
<INTEREST-DEPOSIT> 829 819
<INTEREST-EXPENSE> 829 0
<INTEREST-INCOME-NET> 630 622
<LOAN-LOSSES> 2 5
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 466 548
<INCOME-PRETAX> 167 69
<INCOME-PRE-EXTRAORDINARY> 167 69
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 126 50
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 3.09 3.15
<LOANS-NON> 0 0
<LOANS-PAST> 179 240
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 44
<ALLOWANCE-OPEN> 100 95
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 102 100
<ALLOWANCE-DOMESTIC> 102 100
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
