<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, 1999
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
Wadesboro, North Carolina 28170-0249
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
704-694-2122
------------
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value N/A
- ---------------------------- -------------------------------------------
(Name of each exchange on which registered)
(Title of class)
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 $1,658,000.
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 -- $8,107,414.50 (based on the price at which the
stock was sold on September 21, 1999).
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 21, 1999)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended June 30, 1999
(the "1999 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 30, 1999 (the "Proxy Statement"), are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
- --------------------------------------------------------------------------------
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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, 1999, the Company had total assets of $24,961,000, net loans of
$12,039,000, deposits of $15,256,000, investment securities of $12,092,000 and
stockholders' equity of $9,505,000.
At June 30, 1999, the Company and the Bank had a total of six full-time
employees and one part-time employee.
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
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population of approximately 25, 000 located on the North Carolina/South
Carolina border and Wadesboro is located 50 miles east of Charlotte, North
Carolina.
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 7.8% in 1998. At June 30, 1999, unemployment in Anson County was
6.8%. 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, 1999, the Bank's largest
single outstanding loan had a balance of approximately $400,000. 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.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $12.04 million at June 30, 1999 representing 48.24% of the Bank's
total assets at such date. At June 30, 1999, 91.78% of the Bank's loan
portfolio, before net items, was composed of one-to-four-family residential
mortgage loans. Nonresidential real estate loans represented 6.84% of the
Bank's loan portfolio, before net items, on such date. Construction loans
represented 0.82% of the Bank's loan portfolio, before net items, on such date.
Loans secured by customer deposits represented 0.26% of the Bank's loan
portfolio, before net items, on such date. Installment loans to individuals
represented 0.30% of the Bank's loan portfolio, before net items, on such date.
As of June 30, 1999, less than 1.0%, before net items, of the loans in the
Bank's loan portfolio had adjustable interest rates.
2
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The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
At June 30,
--------------------------------------------------
1999 1998
----------------------- ------------------------
% of % of
Amount Total Amount Total
----------- ---------- ------------ ----------
(Dollars in Thousands)
Principal Balance:
Real estate loans:
One-to-four-family
residential $11,227 93.26 $10,911 94.75
Nonresidential 837 6.95 494 4.29
Secured by deposits 31 0.27 35 0.30
Residential construction
loans 100 0.83 499 4.34
Installment loans to
individuals 37 0.30 ---- ----
-------- ------- ------ -------
12,232 101.61 11,939 103.68
-------- ------- ------ -------
Allowance for loan losses ( 104) ( 0.86) ( 102) ( 0.89)
Undisbursed portion of
construction loans ( 50) ( 0.42) ( 279) ( 2.42)
Net deferred loan
origination fees ( 39) ( 0.33) ( 43) ( 0.37)
-------- ------- ------ -------
Total reductions ( 193) ( 1.61) ( 424) ( 3.68)
-------- ------- ------ -------
Total loans receivable,
net $12,030 100.00% $11.515 100.00%
======= ======= ======= =======
3
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The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at June 30, 1999. 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>
Terms to Repricing at June 30, 1999
---------------------------------------------------------------------------
More Than More Than
Six Months Six Months One Year to Three Years More Than Total
or Less to One Year Three Years to Five Years Five Years
---------------------------------------------------------------------------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans Receivable:
Adjustable rate one-to-four family residential $ 33 $ - $ - $ - $ - $ 33
Fixed rate one-to-four family residential 3 13 278 366 10,635 11,295
Other secured real estate - fixed rate - - 71 447 318 836
Other loans 43 8 - 17 - 68
------ ------- ------- ------- ------- -------
Sub Total 79 21 349 830 10,953 12,232
Less:
Allowance for loan losses - - - - 104 104
------ ------- ------- ------- ------- -------
Total $ 79 $ 21 $ 349 $ 830 $10,849 $12,128
====== ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the dollar amount at June 30, 1999 of
all loans maturing or repricing on or after June 30, 2000 which have fixed or
adjustable interest rates.
Fixed Adjustable
Rates Rates
----- ----------
(In Thousands)
Real estate loans $12,115 $ -
Other loans 17 -
------- --------
Total $12,132 $ -
======= ========
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.
4
<PAGE>
The table below sets forth the Bank's loan origination, purchase and sale
activity and loan portfolio repayment experience during the periods indicated.
Year Ended June 30,
-------------------
1999 1998
---- ----
(In Thousands)
Loans receivable, net, beginning of period $11,515 $11,423
Loan originations:
Residential 1-4 family 2,465 2,339
Nonresidential real estate 843 55
Residential construction 268 499
Installment loans to individuals 113 -
Loans secured by deposits 36 25
------- -------
Total loan originations 3,725 2,918
Loans purchased - -
Principal repayments (3,199) (2,824)
Other changes, net /(1)/ (2) (2)
------- -------
Increase (decrease) in loans receivable 524 92
------- -------
Loans receivable, net, end of period $12,039 $11,515
======= =======
_____________________________
(1) Includes changes in deferred loan fees and the allowance for loan losses.
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, 1999, approximately 91.8% 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.
5
<PAGE>
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, 1999, the Bank had
$837,000 outstanding in loans secured by nonresidential properties, comprising
approximately 6.8% 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."
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, 1999 was approximately $100,000, representing approximately
0.8% of the Bank's loan portfolio, before net items, and included construction
loans in process of approximately $50,000. 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.
6
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7
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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, 1999, such loans totaled $32,000, representing
0.3% 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.
Installment Loans to Individuals. The Bank began offering secured and
unsecured loans to consumers during the year ended June 30, 1999. At June 30,
1999, such loans totaled $37,000, representing 0.30% of the Bank's loan
portfolio, before net items.
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 commitment. As of June 30, 1999, the
Bank had no such unfunded mortgage loan commitments. In addition, on such date
the Bank had $50,000 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
8
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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,
1999, 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.
At June 30,
----------------------
1999 1998
---------- ----------
Accruing loans past due 90 days or more $171,000 $179,000
Total non-performing loans 171,000 179,000
Foreclosed real estate - -
-------- --------
Total nonperforming assets $171,000 $179,000
======== ========
Non-performing assets to total assets 0.69% 0.71%
======== ========
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
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, 1999, the Bank had approximately $171,000 of loans
internally classified as "substandard," no loans classified as "doubtful" and no
loans classified as "loss." Total classified loans as of June 30, 1999 and 1998
were approximately $171,000 and approximately $179,000, 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
9
<PAGE>
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, 1999, there was one loan 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.
Year Ended June 30,
-------------------
1999 1998
---- ----
Balance, beginning of period $102,000 $100,000
-------- --------
Loans Charged off:
Real Estate - -
Other - -
-------- --------
Total loans charged off - -
Recoveries:
Real Estate - -
Other - -
-------- --------
Net loans charged off (recovered) - -
Provision for loan losses 2,000 2,000
-------- --------
Balance at end of period $104,000 $102,000
======== ========
Ratio of net charge-offs (recoveries) to average
loans outstanding during the period 0% 0%
======== ========
10
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11
<PAGE>
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,
--------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
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 $ 84 81.0% $ 91.8 $ 40 39.0% 91.4%
Nonresidential 20 19.0 6.8 20 20.0 4.1
Construction 0 -- 0.8 20 20.0 4.2
---- ----- ------ ---- ----- -----
Total real estate loans $104 100.0% $ 99.4 $ 80 79.0% 99.7%
Other loans:
Loans secured by deposits - - .3 - - .3
Installment loans - - .3 - - -
---- ----- ------ ---- ----- -----
Total other loans - - .6 - - .3
---- ----- ------ ---- ----- -----
Unallocated - - - 22 21.0% -
---- ----- ------ ---- ----- -----
Total allowance for loan losses $104 100.0% 100.0% $102 100.0% 100.0%
==== ===== ====== ==== ===== =====
</TABLE>
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, 1999, the Bank's investment portfolio
totaled approximately $12.09 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, 1999, 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 $285,000, net of
related deferred taxes of $146,000, are reported as a separate component of
equity in its financial statements at June 30, 1999. 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
12
<PAGE>
the specific identification method. Prior to theadoption 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, 1999, the Bank's investment in stock of the FHLB of Atlanta was
$117,000.
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.
At June 30,
------------------------
1999 1998
----------- -----------
Securities available for sale:
U.S. government and agency securities $ 438,000 $ 433,000
----------- -----------
Securities held to maturity:
U.S. government and agency securities 5,673,000 4,000,000
Mortgage-backed securities 490,000 665,000
----------- -----------
Total securities held to maturity 6,163,000 4,665,000
----------- -----------
Total investment securities 6,601,000 5,098,000
----------- -----------
Interest-earning balances in other banks 5,374,000 7,714,000
Federal Home Loan Bank stock 117,000 143,000
----------- -----------
5,491,000 7,857,000
----------- -----------
Total investments $12,092,000 $12,955,000
=========== ===========
At June 30, 1999, the market value of the Bank's investment securities
available for sale and held to maturity were $438,000 and $6.16 million,
respectively.
13
<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, 1999.
<TABLE>
<CAPTION>
More More More
than Six than One than Five
Months Year Years
Less Than Six to One to Five to Ten
Months Year Years Years
------------------- --------- --------- --------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- --------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Securities available for
sale: $ 438 --% $ -- --% $-- --% $ -- --%
FHLMC Stock
Securities held to
maturity: 3,198 4.95 2,475 4.80 -- -- -- --
U.S. government and
agency securities -- -- -- -- 41 8.04 449 6.53
Mortgage-backed securities
Other:
Interest-earning 5,374 4.05 -- -- -- -- -- --
balances in other banks
Federal Home Loan Bank -- -- -- -- -- -- -- --
stock ------ ----- ------ ------- ------ ------ ----- ------
Total $9,010 4.17% $2,475 4.80% $41 8.04% $449 6.53%
====== ==== ====== ==== === ==== ==== ====
</TABLE>
After Ten Years Total
----------------- ---------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
--------- --------- -------- ---------
Securities available for
sale: $ -- --% $ 438 --%
FHLMC Stock
Securities held to
maturity: -- -- 5,673 4.88
U.S. government and
agency securities -- -- 490 6.66
Mortgage-backed securities
Other:
Interest-earning -- -- 5,374 4.05
balances in other banks
Federal Home Loan Bank 117 4.21 117 4.21
stock ---- ---- ------- -----
Total $117 4.21% $12,092 5.40%
==== ==== ======= =====
14
<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, 1999, 75.28% of the Bank's deposits consisted of certificate accounts,
23.83% consisted of passbook savings accounts and 0.89% 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.
<TABLE>
<CAPTION>
At June 30, 1999 At June 30, 1998
----------------------------- -------------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
------- --------- --------- ------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Demand accounts:
$ 3,627 3.25% 23.83 $ 3,552 3.25% 23.07%
Passbook savings 136 2.68 0.89 93 2.92 .60
Money market deposit
accounts 3,763 3.23% 24.72 3,645 3.24 23.67
-------- -------- --------- -------- -------- ------------
Certificate of accounts with
original maturities of:
6 months 6,007 4.64% 39.47% 3,334 5.05 21.66
12 months 3,465 4.60 22.76 1,511 5.04 9.81
14, 18, 30 and 36 months 1,986 5.40 13.05 6,906 5.62 44.86
-------- -------- --------- -------- -------- ------------
Total certificates
11,458 4.84% 75.28% 11,751 5.38 76.33
-------- -------- --------- -------- -------- ------------
Total deposits $15,221 4.44% 100% $15,396 4.88% 100.00%
======== ======== ========= ======== ======== ============
</TABLE>
15
<PAGE>
The following table presents the maturities and weighted average rates paid
on all certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
Amount Due During the Year Ending June 30,
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 2001 2002 Thereafter Total
---------------- ---------------- ---------------- ---------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Certificates of
$100,000 or more $1,320 5.47% $ 106 4.45% -- -- -- -- $ 1,426 5.45%
Certificates of less than
$100,000 8,153 4.50 1,755 4.90% 125 5.21% -- -- 10,033 4.75
------ ---- ------ ---- ---- ---- ------ ------ ------- -----
Total $9,473 4.78% $1,861 4.87% $125 5.21% -- -- $11,459 4.84%
====== ==== ====== ==== ==== ==== ====== ====== ======= =====
</TABLE>
16
<PAGE>
As of June 30, 1999, the aggregate amount of time certificates of deposit
in amounts greater than or equal to $100,000 outstanding was approximately $1.4
million. The following table presents the maturity of these time certificates
of deposit at such date.
Maturity Amount
- --------------------- -----------
Less than 3 months $ 104,597
3 to 6 months 1,115,106
6 to 12 months 100,000
More than 12 months 106,443
----------
$1,426,146
==========
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, 1999, there
were four FDIC-insured depository institutions with nine offices in Anson
County, North Carolina. Based upon 1997 comparative data, the Bank had 8.7% and
7.5% 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.
17
<PAGE>
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
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 BHCA, the Company is subject to
certain regulations of the Federal Reserve. Under the BHCA, the Company's
activities and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits the Company from
acquiring direct or indirect control of more than 5% of the outstanding voting
stock or substantially all of the assets of any bank or savings bank or merging
or consolidating with another bank holding company or savings bank holding
company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA does not place territorial restrictions on the
activities of such non-banking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become
18
<PAGE>
"undercapitalized" with the terms of anycapital 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. 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 notify the Federal Reserve
Bank of Richmond prior to repurchasing Common Stock in excess of ten percent of
its net worth during a rolling twelve month period unless the Company (i) both
before and after the redemption satisfies capital requirements for "well
capitalized" state member banks, (ii) received a one or two rating in its last
examination, and (iii) is not the subject of any unresolved supervisory issues.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
"Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-
based capital guidelines, the Federal Reserve has adopted a minimum Tier I
capital (leverage) ratio, under which a bank holding company must maintain a
minimum level of Tier I capital to average total consolidated assets of at least
3% in the case of a bank holding company which has the highest regulatory
examination rating and is not contemplating significant growth or expansion.
All other bank holding companies are expected to maintain a Tier I capital
(leverage) ratio of at least 1% to 2% above the stated minimum.
Dividend and Repurchase Limitations. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will
19
<PAGE>
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
20
<PAGE>
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to 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
21
<PAGE>
investments and activities, and general investmentauthority. 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.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) establish certain collateral requirements for losses to
affiliates, (ii) limit the extent to which the Bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such the Bank's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the Bank. Any "interested"
director may not participate in the voting. The Federal Reserve has prescribed
the loan amount (which includes all other outstanding loans to such person), as
to which such prior board of director approval is required, as being the greater
of
22
<PAGE>
$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.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. The SAIF maintains a fund to insure the deposits for most
savings institutions and the BIF maintains a fund to insure the deposits of most
commercial banks. The Bank is a member of the SAIF of the FDIC.
The Bank is required to pay assessments to the FDIC based on a percentage
of its insured deposits. Under the FDIC's risk-based deposit insurance
assessment system, the assessment rate for an insured depository institution
depends on the assessment risk classification assigned to the institution by the
FDIC, which is determined by the institution's capital level and supervisory
evaluations. Based on the data reported to regulators for the date closest to
the last day of the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups - well capitalized,
adequately capitalized or undercapitalized - using the same percentage criteria
as in the prompt corrective action regulations. See "-- Prompt Corrective
Regulatory Action."
Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The assessment rate for SAIF members had ranged from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995. This assessment fully
capitalized the SAIF. Accordingly, although the special assessment resulted in
a $114,000 one-time charge of the Bank, the recapitalization of the SAIF had the
effect of reducing the Bank's future deposit insurance premiums to the SAIF.
Under the recently enacted legislation, most BIF members will be assessed
approximately 1.3 basis points while the rate for most SAIF members will be
approximately 6.4 basis points until January 1, 2000. At that time, BIF and
SAIF members will begin pro rata sharing of the payment at an expected rate of
2.43 basis points.
Community Reinvestment Act. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of the
CRA is to encourage financial institutions to help meet the credit needs of its
entire community, including the needs of low- and moderate-income neighborhoods.
Financial institutions' compliance with the CRA is regularly evaluated by their
regulatory agencies. Under recently adopted regulations, institutions are first
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the institution is given a
rating of either "outstanding," "high satisfactory," "low satisfactory," "needs
to improve" or "substantial non-compliance." A set of criteria for each rating
has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to its service area should
be considered. The ratings received under the three tests are used to determine
the overall composite CRA rating. The composite ratings are "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
During the Bank's last compliance examination the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
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Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
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, 1999, the
Bank had a leverage ratio of 26.1%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1999, the Bank complied with each of the capital requirements
of the FDIC and the Administrator.
Each federal banking agency is required to establish risk-based capital
standards that take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on multifamily mortgages. On
August 2, 1995, the federal banking agencies issued a joint notice of adoption
of final risk-based capital rules to take account of interest rate risk. The
final regulation required an assessment of the need for additional capital on a
case-by-case basis, considering both the level of measured exposure and
qualitative risk factors. The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.
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
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. Notwithstanding the limits just
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described, savings institutions may make loans-to-one-borrower, for any purpose,
in an amount up to $500,000. A savings institution is also authorized to make
loans-to-one-borrower to develop domestic residential housing units, not to
exceed the lesser of $30 million or 30% of the savings institution's net worth,
provided that (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000, (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the laws comply
with applicable loan-to-value requirements; (iv) the aggregate amount of loans
made under this authority does not exceed 150% of net worth; and (v) the
institution's regulator issues an order permitting the savings institution to
use this higher limit. 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, 1999, the largest aggregate amount of loans which the Bank
had to any one borrower was approximately $400,000. These loans were performing
in accordance with their original terms as of June 30, 1999. The Bank had no
loans outstanding which management believes violate the applicable loans-to-one-
borrower limits. The Bank does not believe that the loans-to-one-borrower limits
will have a significant impact on its business, operations and earnings.
Limitations on Rates Paid for Deposits. Regulations promulgated by the
FDIC place limitations on the ability of insured depository institutions to
accept, renew or roll over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations, "well
capitalized" depository institutions may accept, renew or roll such deposits
over without restriction, "adequately capitalized" depository institutions may
accept, renew or roll such deposits over with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The definitions
of "well capitalized," "adequately capitalized" and "undercapitalized" are the
same as the definitions adopted by the FDIC to implement the corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.
See "--Prompt Corrective Regulatory Action." As of June 30, 1999, the Bank was
considered "well capitalized" and, thus, was not subject to the limitations on
rates payable on its deposits.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1999, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $117,000.
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. Regulation D, promulgated by the Federal Reserve,
imposes reserve requirements on all depository institutions, including savings
banks and savings institutions, which maintain transaction accounts or non-
personal time deposits. Checking accounts, NOW accounts and certain other types
of accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts) at a savings institution. For 1998, a depository
institution must maintain average daily reserves equal to 3% of the first $47.8
million of net transaction accounts, plus 10% of that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances are exempt from the reserve requirements. These
percentages and threshold limits are subject to adjustment by the Federal
Reserve.
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Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of an insured institution without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired, among other things, upon the acquisition of more than 25% of any class
of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is
not required for (i) any offer with a view toward public resale made exclusively
to the Bank or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of the Bank by a corporation whose ownership is or will
be substantially the same as the ownership of the Bank, provided that the offer
or acquisition is made more than one year following the consummation of the
Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second 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, 1999, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 49.5%. At June
30, 1999, the Bank had stable, core-like time deposits of $100,000 or more of
approximately $1.43 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 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. The Deposit Insurance Corporation Act
of 1991 provided the federal banking agencies with broad powers to take
corrective action to resolve problems of insured depository institutions. The
extent of these powers depends upon whether the institutions in question are
"well capitalized," "adequately
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capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%. The Bank is considered to be "well
capitalized" under the rules set forth above.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina
adopted nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States could choose to allow interstate branching prior to June 1, 1997 by
opting-in to a group of states that permitted 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 enacted legislation
permitting branching transactions prior to June 1, 1997, and did not adopt
legislation electing to deny interstate branching.
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.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
Conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution. Under FDIC regulations, stock repurchases may be made by
the Bank only upon receipt of FDIC approval.
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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.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Other North Carolina Regulations. As a North Carolina chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on 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.
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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
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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.
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, 1999. The Bank owns the Wadesboro office.
Net Book Value Deposits
Address of Property (In Thousands)
- -------------------------------------- -------------- --------------
211 South Greene Street $192,000 $15,256
P.O. Box 249
Wadesboro, North Carolina 28170-0249
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, 1999 was
$58,738. 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, 1999, 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, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on the last page of the Company's 1999 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 1999 Annual Report, which section is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company set forth on pages 12
through 34 in the Company's 1999 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 2 -
Election of Directors" beginning on page 28 of the Proxy Statement and
"Executive Officers" on page 30 of the Proxy Statement, which sections are
incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 2 - Election of Directors - Directors Compensation" on page
30 and " - Management Compensation" on pages 30 through 32 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 6
through 7 of the Proxy Statement.
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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.
(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 incorporated by
reference to Exhibit 10(a) of the Company's 1998 Form 10-KSB
10(b) Severance Agreement incorporated by reference to Exhibit 10(b) of
the Company's 1998 Form 10-KSB.
(11) Statement Regarding Computation of Per Share Earnings
(13) Portions of 1999 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 June 30, 1999.
32
<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 27, 1999 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:
Signatures Title Date
- --------------------------- ------------------------------- ------------------
/s/ Eugene M. Ward Director, President and Chief September 27, 1999
- --------------------------- Executive Officer (Principal
Eugene M. Ward Executive Officer)
/s/ Nancy H. Allen Treasurer (Principal Financial September 27, 1999
- --------------------------- and Accounting Officer)
Nancy H. Allen
/s/ Preston A. Burns Chairman of the Board September 27, 1999
Preston A. Burns
- ---------------------------
/s/ John J. Crawford Director September 27, 1999
- ---------------------------
John J. Crawford
/s/ W. Kenneth Huntley Director September 27, 1999
- ---------------------------
W. Kenneth Huntley
/s/ Emmett S. Patterson Director September 27, 1999
- ---------------------------
Emmett S. Patterson
/s/ John R. Potter Director September 27, 1999
- ---------------------------
John R. Potter
/s/ H. Patrick Taylor, Jr. Director September 27, 1999
- ---------------------------
H. Patrick Taylor, Jr.
33
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
11 Statement Regarding Computation of Per Share Earnings
13 Portions of the 1999 Annual Report to Stockholders
27 Financial Data Schedule
34
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The weighted average number of shares outstanding includes all 585,124
shares issued and outstanding.
Net income for the period from June 30, 1998 to June 30, 1999: $204,778
Weighted average number of shares outstanding: 585,124
Earnings per share: $ 0.35
<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 connection with the 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.
As noted later in the "Management's Discussion and Analysis" and in Note 16,
subsequent to year-end, Anson Bancorp, Inc. entered into an agreement to sell
the Company to Uwharrie Capital Corporation. The sale is contingent upon
regulatory and shareholder approval.
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.
-3-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 1999, 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.
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.
Operating Strategy
The primary goals of 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,
1999, approximately 92% of its loan portfolio, before net items, was composed of
permanent one-to-four family residential loans. As of such date, an additional
7% of its loan portfolio, before net items, was composed of nonresidential
loans, 1% of its loan portfolio before net items was composed of construction
loans and 0.26% of the Bank's loans were secured by deposits and 0.30% of the
Bank's loans were installment loans to individuals. 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, 1999, the Bank's ratio of
nonperforming assets to total assets was 0.69%. 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, 1999 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. 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 2.27%.
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 decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
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 or 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, 1999 was a negative 4.65%. At June 30, 1999, the
Bank's three year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were negative 13.57% and negative
10.07%, respectively. At June 30, 1999, the interest rate sensitivity gap was
fairly comparable to the prior year.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 which are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or 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 prepayment rates and deposit decay rates
have been used for any other interest-earning assets or interest-bearing
liabilities. In addition, the table does not reflect scheduled principal
payments which will be received throughout the lives of the loans. The interest
rate sensitivity of the 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, 1999
----------------------------------------------------------------------------
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 Total
---------- ----------- ----------- ------------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans Receivable:
Adjustable rate one-to-four family residential $ 33 $ -- $ -- $ -- $ -- $ 33
Fixed rate one-to-four family residential 3 13 278 366 10,620 11,280
Other secured real estate - fixed rate -- -- 71 447 338 856
Other loans 43 8 -- 17 -- 68
Interest-bearing deposits 3,874 -- -- -- -- 3,874
Investments 5,137 2,475 19 22 448 8,101
FHLB common stock -- -- -- -- 117 117
------ ------ ------ ------ ------ ------
Total interest-earning assets $ 9,090 $ 2,496 $ 368 $ 852 $11,523 $24,329
====== ====== ====== ====== ====== ======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts 3,626 -- -- -- -- 3,626
Money market deposit accounts 136 -- -- -- -- 136
Certificate accounts 5,332 3,623 2,539 -- -- 11,494
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities $ 9,094 $ 3,623 $ 2,539 $ -- $ -- $15,256
====== ====== ====== ====== ====== ======
INTEREST SENSITIVITY GAP PER PERIOD (4) (1,127) (2,171) 852 11,523 9,073
CUMULATIVE INTEREST SENSITIVITY GAP (4) (1,131) (3,302) (2,450) 9,073 9,073
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (0.02) % (4.65) % (13.57) % (10.07) % 37.29 % 37.29 %
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING
LIABILITIES 100 % 91 % 78 % 84 % 159 % 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, 1999 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 years ended June
30, 1999 and 1998. 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, 1999 Year Ended June 30, 1999
------------------------- ---------------------------------------
Average Average Average
Balance Yield/Cost Balance Interest Rate
----------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing balances $ 3,874 4.48 % $ 4,274 $ 173 4.05 %
Investments 8,218 5.84 % 8,332 480 5.76 %
Loans 12,039 7.64 % 11,711 920 7.86 %
---------- ---------- ---------
Total interest-earning assets 24,131 6.52 % 24,317 1,573 6.47 %
Other assets 830 608
---------- ----------
Total assets $ 24,961 $ 24,925
========== ==========
Interest-bearing liabilities:
Deposits $ 15,256 4.69 % $ 15,211 715 4.70 %
Other liabilities 200 193
Equity 9,505 9,521
---------- ---------- ---------
Total liabilities and retained earnings $ 24,961 $ 24,925
========== ==========
=========
Net interest income and interest rate spread 1.83 % $ 858 1.77 %
=========
Net yield on average interest-earning assets 3.44 %
Ratio of average interest earning assets to
average interest bearing liabilities 160 %
<CAPTION>
Year Ended June 30, 1998
-------------------------------------
Average Average
Balance Interest Rate
----------- --------- -------
<S> <C> <C> <C>
Interest earning assets:
Interest-bearing balances $ 5,485 $ 299 5.45 %
Investments 3,442 215 6.24 %
Loans 11,484 945 8.23 %
---------- --------
Total interest-earning assets 20,411 1,459 7.15 %
Other assets 725
----------
Total assets $ 21,136
==========
Interest-bearing liabilities:
Deposits $ 16,847 829 4.92 %
Other liabilities 316
Equity 3,973
---------- --------
Total liabilities and retained earnings $ 21,136
==========
Net interest income and interest rate spread $ 630 2.23 %
========
Net yield on average interest-earning assets 3.09 %
Ratio of average interest earning assets to
average interest bearing liabilities 121 %
</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 (i) changes attributable to
volume (changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
and (iii) net change (the sum of the previous columns). The change attributable
to both rate and volume (changes in rate multiplied by changes in volume) has
been allocated equally to both the changes attributable to volume and the
changes attributable to rate.
Year Ended June 30, 1999 vs. 1998
---------------------------------
Increase (Decrease) Due To
---------------------------------
Volume Rate Total
-------- --------- ---------
(In Thousands)
Interest income
Interest-bearing balances $( 23) $( 110) $( 133)
Investments 256 7 263
Loans 26 ( 47) ( 21)
----
Total interest income 259 ( 150) 109
Interest expense
Deposits 74 45 119
---- ----- -----
Net interest income $ 333 $( 105) $ 228
===== ===== =====
Comparison of Financial Condition
The Bank has experienced a slight decline in its asset base. Total assets were
$24.96 million at June 30, 1999 compared to $25.07 million at June 30, 1998. Net
loans receivable at these dates increased slightly, $12.04 million at June 30,
1999 compared to $11.52 million at June 30, 1998. The Bank's deposits decreased
approximately 1% from $15.44 million at June 30, 1998 compared to $15.26 million
at June 30, 1999. During the same period, investments also decreased
approximately 6% from $12.9 million at June 30, 1998 compared to $12.1 million
at June 30, 1999. Equity totaled $9.38 million and $9.50 million at June 30,
1998 and June 30, 1999, respectively.
The principal category of earnings assets is loans receivable which amounted to
$12.04 million and $11.52 million, at June 30, 1999 and 1998, respectively. Loan
originations for the year ended June 30, 1999 totaled $3.72 million and
principal repayments for 1999 totaled $3.20 million. Management believes
competitive rates within its community contributed to the increased loan demand
in 1999. Anson maintains underwriting and credit standards designed to maintain
the quality of the loan portfolio. Nonperforming loans at June 30, 1999 and 1998
totaled $171,000 and $179,000, respectively and were 1.42% and 1.55% 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, 1999 and 1998 totaled $12.09
million and $12.96 million, respectively. The decrease in investments is
primarily attributed to funding additional lending during the fiscal year as
lower interest rates spurred mortgage lending.
Anson Savings has experienced a slight decline in savings deposits. At June 30,
1999 and June 30, 1998, the Bank's deposits amounted to $15.26 million and
$15.44 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.
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 $9.50 million and $9.38 million at June 30, 1999 and 1998,
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 at June 30, 1999 and 1998 amounted to
$285,000 and $279,000, 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, 1999 and 1998
Net Income. The Bank's net income for the years ended June 30, 1999 and 1998 was
$205,000 and $126,000, respectively. Net income was positively affected in 1999
by an $82,000 gain on the sale of securities.
Net Interest Income. Net interest income for the fiscal year ended June 30, 1999
increased 36% from the fiscal year ended June 30, 1998 from $630,000 to
$858,000. This increase in net interest income is primarily due to the influx of
capital received in June 1998.
Provision for Loan Losses. The provision for loan losses was $2,000 for both
years ended June 30, 1999 and 1998. For the years ended June 30, 1999 and 1998,
the Company's loan loss allowances totaled $104,000 and $102,000, respectively,
representing 61% and 57%, respectively, of nonperforming loans at such dates.
Anson Savings experienced no loan charge-offs during the years ended June 30,
1999 and 1998.
Noninterest Income. Noninterest income consists primarily of fees related to
safe deposit boxes and other miscellaneous items and amounted to $2,500 and
$4,000 for the years ended June 30, 1999 and 1998, respectively. Additionally,
the Bank realized a gain on securities sold during the year ended June 30, 1999
of $82,000.
Noninterest Expense. Noninterest expense for the years ended June 30, 1999 and
1998 was $626,000 and $466,000, respectively. This increase is largely due to
increased compensation expenses as the Bank added an employee, increased
administrative cost related to being a public company and depreciation and other
expenses related to updating the Company's computers and software.
Income Taxes. Income tax expense increased to $110,000 in the fiscal year ended
June 30, 1999 from $41,000 in the fiscal year ended June 30, 1998. The
fluctuations were primarily attributable to corresponding fluctuations in income
before income taxes and to the effects of graduated income tax returns.
-9-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Year 2000
The "Year 2000" issue confronting the Company and its customers, suppliers,
customers' suppliers and competitors centers on the potential inability of
computer systems to recognize the Year 2000. If not adequately addressed, the
Year 2000 matter could result in a significant adverse impact on products,
services and the competitive condition of the Company.
Financial institution regulators have recently increased their focus on Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to examine
the Year 2000 implications of reliance on vendors, data exchange and potential
impact on customers, suppliers and borrowers. These statements also require each
federally regulated financial institution to survey its exposure, measure its
risk and prepare a plan in order to solve the Year 2000 issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any Year 2000 problems. The federal banking agencies have asserted
that Year 2000 testing and certification is a key safety and soundness issue in
conjunction with regulatory exams, and thus an institution's failure to address
appropriately the Year 2000 issue could result in supervisory action, including
such enforcement actions as the reduction of the institution's supervisory
ratings, the denial of applications for approval of a merger or acquisition, or
the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential adverse
impact, the Company has undertaken a substantial multi-phased effort to identify
areas that will be affected by the Year 2000, assess their potential impact on
operations, monitor the progress of their party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems. The plan is divided into the five phases: (1)
awareness, (2) assessment, (3) renovation, (4) validation, and (5)
implementation.
The Company has substantially completed the first four phases of the plan and
has made significant progress in the final phase. The Company outsources its
data processing operations to a service provider. Year 2000 compliance is being
closely coordinated with that of the service provider. The Company has in place
a Detailed Contingency Plan should any business disruption occur.
Further, The Company is undertaking efforts to ensure that significant vendor
and customer relationships are or will be Year 2000 compliant. There can be no
guarantee that the systems of other entities on which the company either
directly or indirectly relies will be timely converted, or that a failure to
convert by another entity, or a conversion that is incompatible with the
company's systems, would not have a material adverse effect on the Company in
future periods.
The Company has incurred Year 2000 compliance costs of approximately $20,000,
all of which has been charged to operations and anticipates future costs to be
immaterial. In addition to the estimated costs of its Year 2000 compliance, the
Company has recently made substantial investments in technology in its efforts
to improve customer services and to efficiently manage its product and service
delivery systems.
-10-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 1999,
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 June, 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities " as amended by SFAS No. 137, 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,
2000 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.
Sale of the Company
On August 3, 1999, Anson Bancorp, Inc. and Uwharrie Capital Corporation
(Uwharrie) announced that Uwharrie will acquire Anson Bancorp, Inc., which is
the holding company for Anson Savings Bank, in a cash transaction. The parties'
agreement provides for each share of Anson Bancorp's common stock to be
exchanged for $17.30 in cash.
This transaction is contingent upon receiving approval from regulatory
authorities and from Anson Bancorp's stockholders. A special meeting of Anson
stockholders is planned after required regulatory approvals are received. It is
anticipated that the transactions will be completed no later than January 31,
2000.
Curtailment of Pension Plan
Subsequent to the year ended June 30, 1999, the Board of Directors elected to
cease future benefit accruals under the Company's defined benefit plan effective
August 15, 1999. It is estimated that the cost to curtail the plan will be
approximately $200,000 and the charge will effect the earnings of the Company
during the fiscal year 2000.
-11-
<PAGE>
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, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Anson
Bancorp, Inc. and Subsidiary as of June 30, 1999 and 1998 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
July 23, 1999 (except for Note 16
for which the date is August 3, 1999)
Charlotte, North Carolina
-12-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing deposits and cash $ 374,949 $ 218,494
Interest earning deposits 3,299,133 5,790,071
Federal funds sold 575,000 425,000
----------- -----------
4,249,082 6,433,565
Investment securities
Held to maturity (fair value at June 30, 1999
and 1998 of $7,793,545 and $6,322,544, respectively) 7,779,733 6,307,425
Available for sale 438,480 433,000
Loans receivable, net 12,039,041 11,515,484
Premises and equipment, net 251,398 207,665
Interest receivable 107,445 100,158
Other assets 95,648 68,985
----------- -----------
$24,960,827 $25,066,282
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings deposits, plus accrued interest thereon $15,256,038 $15,439,963
Accounts payable and accrued expenses 72,878 133,066
Deferred income taxes 127,000 111,000
----------- -----------
15,455,916 15,684,029
COMMITMENTS AND CONTINGENCIES - Notes 4, 12 and 16
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 5,424,815 5,424,815
Retained earnings - substantially restricted 3,795,018 3,678,008
Accumulated other comprehensive income 285,078 279,430
----------- -----------
9,504,911 9,382,253
----------- -----------
$24,960,827 $25,066,282
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-13-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 919,885 $ 945,474
Interest on investments and deposits in other banks 653,667 513,734
---------- ----------
Total interest income 1,573,552 1,459,208
INTEREST EXPENSE
Interest on savings deposits 715,257 828,958
---------- ----------
Net interest income 858,295 630,250
PROVISION FOR LOAN LOSSES 2,000 2,000
---------- ----------
Net interest income after provision for loan losses 856,295 628,250
NONINTEREST INCOME
Gain on sale of securities available for sale 82,247 --
Other income 2,521 4,449
---------- ----------
84,768 4,449
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 338,315 266,627
Federal insurance premiums 9,314 10,375
Data processing 44,538 34,307
Examinations and audit 36,095 34,062
Occupancy including depreciation 21,130 21,981
Other 176,893 98,781
---------- ----------
Total noninterest expense 626,285 466,133
---------- ----------
Income before income taxes 314,778 166,566
INCOME TAXES
Current expense 94,000 46,000
Deferred expense (benefit) 16,000 (5,000)
---------- ----------
110,000 41,000
---------- ----------
Net income $ 204,778 $ 125,566
========== ==========
Basic earnings per share $ 0.35 $ --
========== ==========
Diluted earnings per share $ 0.35 $ --
========== ==========
Cash dividends per share $ 0.15 $ --
========== ==========
Weighted average shares outstanding 585,124 N/A
========== ==========
</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, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Earnings - Other Total
Common Substantially Comprehensive Stockholders'
Stock Restricted Income Equity
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 1997 $ -- $ 3,552,442 $ 204,000 $ 3,756,442
Comprehensive income
Net income -- 125,566 -- 125,566
Other comprehensive income
Unrealized gain on securities
available for sale, net of tax -- -- 75,430 75,430
-----------
Total comprehensive income 200,996
-----------
Net proceeds from issuance of common stock 5,424,815 -- -- 5,424,815
----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1998 5,424,815 3,678,008 279,430 9,382,253
Comprehensive income
Net income -- 204,778 -- 204,778
Other comprehensive income
Unrealized gain on securities available
for sale, net of reclassification for
gains included in net income of $54,283,
net of tax -- -- 5,648 5,648
-----------
Total comprehensive income 210,426
-----------
Dividends paid -- (87,768) -- (87,768)
----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1999 $ 5,424,815 $ 3,795,018 $ 285,078 $ 9,504,911
=========== =========== =========== ===========
</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, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 204,778 $ 125,566
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 2,000 2,000
Provision for depreciation 21,410 14,460
Deferred income taxes 16,000 (5,000)
Gain on sale of securities available for sale (82,247) --
Changes in assets and liabilities
Interest receivable (7,287) (40,182)
Other assets (26,663) (10,515)
Accounts payable and accrued expenses (60,188) 96,442
----------- -----------
Net cash provided by operating activities 67,803 182,771
----------- -----------
INVESTING ACTIVITIES
Increase in loans receivable (525,557) (94,592)
Purchases of securities held to maturity (5,101,299) (4,550,370)
Proceeds from maturities of securities held
to maturity 3,627,678 2,181,469
Purchases of premises and equipment (65,143) --
Proceeds from sale of securities held for sale 83,728 --
----------- -----------
Net cash used for investing activities (1,980,593) (2,463,493)
----------- -----------
FINANCING ACTIVITIES
Net decrease in savings deposits (183,925) (1,351,138)
Net proceeds from issuance of common stock -- 5,424,815
Dividends paid (87,768) --
----------- -----------
Net cash provided by (used for) financing activities (271,693) 4,073,677
----------- -----------
Increase (decrease) in cash and cash equivalents (2,184,483) 1,792,955
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,433,565 4,640,610
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,249,082 $ 6,433,565
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 724,417 $ 850,185
=========== ===========
Cash paid during the year for income taxes $ 94,434 $ 5,382
=========== ===========
Supplemental Disclosure of Noncash Investing Activities:
Change in unrealized gain on securities available for sale $ 5,648 $ 75,430
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and surrounding counties. 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 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 for the year ended June 30, 1998 include the operations
of the Company for the period subsequent to June 19, 1998. 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
- --------------------------------------------------------------------------------
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 net of
deferred income taxes in other comprehensive income. 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, 1999 or 1998.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, the undisbursed portion of construction loans, and net
deferred loan-origination fees and costs. The Bank's loan portfolio consists
principally of mortgage loans collateralized by first deeds of trust
primarily on single family residences, other residential property, commercial
property and land.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries) based on the Bank's evaluation of the
potential and inherent risk of losses in its loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions. While
management uses the best information available to make evaluations, future
adjustments may be necessary, if economic or other conditions differ or
change substantially from the assumptions used.
Impaired Loans
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 the 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 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 amount
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, 1999 and
1998, the Company had no impaired loans.
-18-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Interest Income
The Bank recognizes interest income on loans using the interest method over
the contractual lives of the loans. The Bank does not record interest on
loans delinquent 90 days or more unless in the opinion of management,
collectibility is assured. Interest collected while the loan is in such
status is credited to income in the period received. If the loan is brought
to a status in which it is no longer delinquent 90 days, the reserve for
uncollected interest is reversed and interest income is recognized.
Loan-Origination Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the
interest method over the contractual lives of the loans, adjusted for actual
prepayments.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Land is carried at cost 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 which range from
three to forty years. Additions and major replacements or improvements which
extend the useful lives of premises and equipment are capitalized.
Maintenance, repairs and minor improvements are expensed as incurred.
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
Basic earnings per share excludes dilution and it is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the year. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. For the year ended June 30, 1999, basic and diluted earnings per
share are the same amounts. Earnings per share for the eleven days, June 19,
1998 to June 30, 1999, were not significant.
Reclassifications
Certain 1998 balance sheet accounts have been reclassified to conform to the
1999 presentation. This reclassification had no effect on net income or
stockholder equity.
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 consolidated statement of financial condition, when it is practical to
estimate the fair value. In cases when quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. SFAS 107 defines a financial instrument as cash
-19-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. Accordingly, the aggregate fair
value amounts presented do not represent the underlying market value nor
liquidation values of the Company.
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.
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.
Comprehensive Income
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
stockholders' equity. SFAS No. 130 requires unrealized gains or losses on
the Company's available for sale securities,
-20-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
which prior to adoption were reported separately in stockholders' equity,
to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS
No. 130.
NOTE 2 - INVESTMENT SECURITIES
Investment securities are as follows:
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------
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 $5,673,420 $ 11,017 $ 1,065 $5,683,372
---------- ---------- ---------- ----------
Government National Mortgage
Association Securities:
Due after one year through five years 40,658 1,925 -- 42,583
Due after five years through
ten years 448,855 2,314 379 450,790
---------- ---------- ---------- ----------
489,513 4,239 379 493,373
---------- ---------- ---------- ----------
Federal Home Loan Bank stock 116,800 -- -- 116,800
---------- ---------- ---------- ----------
Fixed-rate, fixed-term deposits 1,500,000 -- -- 1,500,000
---------- ---------- ---------- ----------
Total $7,779,733 $ 15,256 $ 1,444 $7,793,545
========== ========== ========== ==========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 7,403 $ 431,077 $ -- $ 438,480
========== ========== ========== ==========
</TABLE>
-21-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<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>
An analysis of the unrealized holding gains on the securities available for sale
and the related income tax effects as of and for the years ended June 30, 1999
and 1998 is as follows:
Accumulated
Deferred Other
Unrealized Income Tax Comprehensive
Holding Gain Liability Income
------------ ----------- -------------
Balance, June 30, 1997 $ 308,638 $(104,638) $ 204,000
Increase in valuation allowance 115,479 (40,049) 75,430
----------- -------- -----------
Balance, June 30, 1998 424,117 (144,687) 279,430
Increase in valuation allowance 6,961 (1,313) 5,648
----------- -------- -----------
Balance, June 30, 1999 $ 431,078 $(146,000) $ 285,078
=========== ======== ===========
-22-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Results from sales of securities available for sale for the years ended June
30, 1999 and 1998 are as follows:
June 30,
---------------
1999 1998
------- ------
Gross proceeds from sales $83,728 $ -
======= ======
Realized gain on sale of securities available for sale $82,247 $ -
======= ======
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,
--------------------------------------------------
1999 1998
----------------------- -----------------------
% of % of
Amount Total Amount Total
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Principal Balances:
Real estate loans
One-to-four family residential $ 11,227,246 93.26% $ 10,911,199 94.75%
Nonresidential 836,763 6.95 494,226 4.29
Secured by deposits 31,594 0.27 34,790 0.30
Residential construction loans 100,000 0.83 499,247 4.34
Installment loans to individuals 36,819 0.30 -- --
------------ ------ ------------ ------
12,232,422 101.61 11,939,462 103.68
------------ ------ ------------ ------
Allowance for loan losses (104,000) (0.86) (102,000) (0.89)
Undisbursed portion of construction
loans (50,019) (0.42) (278,928) (2.42)
Net deferred loan origination fees (39,362) (0.33) (43,050) (0.37)
------------ ------ ------------ ------
(193,381) (1.61) (423,978) (3.68)
------------ ------ ------------ ------
$ 12,039,041 100.00% $ 11,515,484 100.00%
============ ====== ============ ======
</TABLE>
Loan commitments outstanding were $136,200 and $0 at June 30, 1999 and 1998,
respectively. At June 30, 1999 and 1998, there were no loans that were in a
nonaccrual status and there were no loans which terms had been modified in
troubled debt restructuring.
-23-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Set forth below is an analysis of the allowance for loan losses:
For the years ended June 30,
----------------------------
1999 1998
------------- -------------
Balance, beginning of year $ 102,000 $ 100,000
Loans charged-off - -
Recoveries of loans charged-off - -
Provision for loan losses 2,000 2,000
------------- -------------
Balance, end of year $ 104,000 $ 102,000
============= =============
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure", requires that the Bank establish a specific
allowance on impaired loans and disclosure of the Bank's method of accounting
for interest income on impaired loans. The Bank assesses all loans delinquent
more than 90 days for impairment and such loans amounted to approximately
$171,000 and $179,000 at June 30, 1999 and 1998, respectively. These loans are
collateral dependent and management had determined that the underlying
collateral value is in excess of the carrying amount. As a result, the Bank
determined that specific allowance on these loans is not required.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
June 30,
----------------------
1999 1998
--------- ---------
Land $ 30,808 $ 30,808
Land improvements 2,774 2,774
Building 562,545 562,545
Furniture and equipment 292,733 227,590
--------- ---------
888,860 823,717
Less allowances for depreciation 637,462 616,052
--------- ---------
$ 251,398 $ 207,665
========= =========
NOTE 6 - INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
June 30,
----------------------
1999 1998
--------- ---------
Accrued interest on interest bearing
deposits and investments $ 98,081 $ 92,441
Accrued interest on loans receivable 9,364 7,717
--------- ---------
$ 107,445 $ 100,158
========= =========
-24-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - COMPOSITION OF SAVINGS DEPOSITS
The composition of savings deposits by interest rate is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1999 1998
--------------------- ---------------------
% of % of
Amount Total Amount Total
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
3.25% passbook $ 3,626,532 23.77% $ 3,551,896 23.01%
Term certificates, 3.25% 31,550 .20 31,291 .20
Term certificates, 4.4% - 5.35% 9,352,383 61.96 6,736,363 43.63
Term certificates, 5.6% - 6.1% 649,060 6.22 4,335,182 28.08
Money market, 3.1% 135,781 .89 93,036 .60
Deposits greater than $100,000,
4.4 - 6.1% 1,426,146 6.73 648,450 4.20
------------ ------ ------------ ------
15,221,452 99.77 15,396,218 99.72
Accrued interest payable on
deposits 34,586 .23 43,745 .28
------------ ------ ------------ ------
$ 15,256,038 100.00% $ 15,439,963 100.00%
============ ====== ============ ======
</TABLE>
Scheduled maturities of certificate accounts are as follows at June 30, 1999:
June 30,
---------
2000 $ 9,472,426
2001 1,861,404
2002 125,309
-----------
$11,459,139
===========
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 at June 30, 1999 is as follows:
Maturity Amount
------------------- ----------
Less than 3 months $ 104,597
3 to 6 months 1,115,106
6 to 12 months 100,000
More than 12 months 106,443
----------
$1,426,146
==========
-25-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Interest expense on savings deposits consists of the following components for
the years ended June 30:
1999 1998
--------- ---------
Passbook accounts $ 115,623 $ 125,252
Money market accounts 3,060 3,041
Certificate accounts 596,574 700,665
--------- ---------
$ 715,257 $ 828,958
========= =========
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:
June 30,
--------------------
1999 1998
--------- --------
Income tax expense at federal
statutory rate of 34% $ 110,000 $ 57,000
Effect of graduated income
tax rates - (11,000)
Other - (5,000)
--------- --------
$ 110,000 $ 41,000
========= ========
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 and deferred tax liabilities are as follows:
June 30,
-----------------------
1999 1998
----------- ----------
Deferred tax assets:
Deferred revenue $ 14,000 $ 19,000
Loan loss reserve 35,000 40,000
---------- ----------
Total deferred income tax assets 49,000 59,000
---------- ----------
Deferred tax liabilities:
Unrealized gain on investments 146,000 143,000
Book basis versus tax basis for premises
and equipment 12,000 9,000
Prepaid pension 18,000 18,000
---------- ----------
Total deferred income tax liabilities 176,000 170,000
---------- ----------
Net deferred income tax liability $ (127,000) $ (111,000)
========== ==========
-26-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1998,
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.
For state tax purposes, the Company has generated a net operating loss
carryover of approximately $990,000 as interest earned from U.S.
governmental sources is not taxable by the state. No provision for deferred
state taxes has been accrued due to the significant loss carryover and also
because the state tax losses are expected to continue in the future.
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, 1999 and 1998, was approximately
$39,000 and $43,000, respectively. The components of pension expense are
as follows:
June 30,
-------------------
1999 1998
-------- --------
Service costs $ 36,000 $ 37,000
Interest cost on projected benefit obligation 30,000 26,000
Return on plan assets (31,000) (27,000)
Amortization 4,000 7,000
-------- --------
Net period pension cost $ 39,000 $ 43,000
======== ========
A summary of the Plan's funded status and the pension liability recognized
in the Bank's financial statements at June 30, 1999 and 1998 is as follows:
June 30,
--------------------
1999 1998
--------- ---------
Accumulated benefit obligation $ 415,000 $ 353,000
========= =========
Plan assets at fair value $ 436,000 $ 367,000
========= =========
-27-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30,
------------------------
1999 1998
----------- ----------
Projected benefit obligation for
service rendered to date:
Vested $ (373,000) $ (328,000)
Additional benefits based on estimated
future salary levels (67,000) (64,000)
---------- ----------
(440,000) (392,000)
---------- ----------
Projected benefit obligation in excess
of plan assets (4,000) (25,000)
Unrecognized net transition liability 46,000 49,000
Unrecognized net prior service cost gain (58,000) (63,000)
Unrecognized net loss 92,000 106,000
---------- ----------
Prepaid pension cost $ 76,000 $ 67,000
========== ==========
Assumptions used in the actuarial calculation at June 30, 1999 and 1998 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, 1999 and 1998, 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.
-28-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following provides a comparison of carrying amounts and the estimated fair
value of the Bank's financial instruments at:
<TABLE>
<CAPTION>
June 30
--------------------------------------------------
1999 1998
------------------------ ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash, interest bearing deposits,
and federal funds sold $ 4,249,082 $ 4,249,082 $ 6,433,565 $ 6,433,565
Investments:
Securities available for sale 438,480 438,480 433,000 433,000
Securities held to maturity 7,779,733 7,793,545 6,307,425 6,322,544
Loans receivable 12,143,041 12,223,174 11,617,484 11,912,570
Interest receivable 107,445 107,445 100,158 100,158
Financial Liabilities:
Savings deposits plus accrued interest 15,256,038 15,291,680 15,439,963 15,465,000
Unrecognized Financial
Instruments:
Commitments to extend credit 136,200 136,200 - -
</TABLE>
Interest Rate Risk
The Bank assumes interest rate risk (the risk that general interest
rate levels will change) as a result of its normal operations. As a
result, fair values of the Bank's financial instruments will change
when interest rate levels change and that change may be either
favorable or unfavorable to the Bank. Management attempts to match
maturities of assets and liabilities to the extent believed necessary
to minimize interest rate risk. However, borrowers with fixed rate
obligations are more likely to prepay in a falling rate environment and
less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to
do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing
in securities with terms that mitigate the Bank's overall interest rate
risk.
NOTE 11 - RELATED PARTIES
The Bank has entered into transactions with its officers and directors. The
Bank had related party deposits of $305,398 and $199,502 at June 30, 1999 and
1998, respectively. The aggregate amount of loans to such related parties at
June 30, 1999 and 1998 was $12,000 and $0, 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.
-29-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Detail of the loan activity for fiscal year ended June 30, 1999 is as follows:
Balance at June 30, 1998 $ -
New loans 87,000
Repayment on loans (75,000)
---------
Balance at June 30, 1999 $ 12,000
=========
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 creditworthiness of the borrower. Outstanding
commitments at June 30, 1999 and 1998 were $136,200 and $0, respectively.
Collateral held is obtained based on management's credit evaluation of the
customer and generally includes either real property or savings deposits.
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 CAMELS rating system) established by the Federal Financial Institutions
Examination Council. All other institutions which do not meet the
aforementioned standards are
-30-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999 the Bank complied with all the capital
requirements described above and the Bank also met 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 $ 9,504,911 $ 9,504,911 $ 9,504,911 $ 9,504,911
Separate equity of Anson
Bancorp, Inc. (2,698,117) (2,698,117) (2,698,117) (2,698,117)
Unrealized gain on securities (285,078) (285,078) (285,078) (285,078)
Loan loss allowance - - 104,000 104,000
---------- ---------- ---------- ----------
Regulatory capital 6,521,716 6,521,716 6,625,716 6,625,716
Minimum capital requirement 665,000 379,000 758,000 1,113,000
---------- ---------- ---------- ----------
Excess regulatory capital $ 5,856,716 $ 6,142,716 $ 5,867,716 $ 5,512,716
========== ========== ========== ==========
Total Bank-only assets at June 30, 1999 $22,265,000
Average Bank-only assets for the
quarter ended June 30, 1999 $22,165,000
Risk weighted Bank-only assets
at June 30, 1999 $ 9,480,000 $ 9,480,000
</TABLE>
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.
-31-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 stockholders' 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, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137, 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, 2000 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 as the Company has no investments in derivative
instruments.
-32-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - 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, 1999:
Condensed Statement of Financial Condition
June 30, 1999
(In Thousands)
Assets:
Cash and cash equivalents $ 1
Investments held to maturity 2,654
Interest receivable 41
Dividends receivable from bank subsidiary 35
Investment in Anson Savings Bank, Inc. 6,788
-------
$ 9,519
=======
Liabilities and Stockholders' Equity:
Liabilities - accounts payable $ 14
Stockholders' equity
Common stock 5,425
Retained earnings 3,795
Unrealized gain on available for sale securities, net of tax 285
-------
$ 9,519
=======
Condensed Statement of Income
For the Year Ended June 30, 1999
(In Thousands)
Equity in earnings of subsidiary $ 153
Interest income 138
Operating expenses (61)
-------
Net income before taxes 230
Income taxes 25
-------
Net income $ 205
=======
-33-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Condensed Statement of Cash Flows
For the Year Ended June 30, 1999
(In Thousands)
Cash flows from operating activities:
Net income $ 205
Equity in earnings of Anson Savings Bank (153)
Changes in assets and liabilities
Interest and dividend receivable (41)
Accounts payable (33)
------
Net cash used for operating activities (22)
------
Cash flows from investing activities:
Purchase of securities (2,654)
------
Net cash used for investing activities (2,654)
------
Cash flows from financing activities:
Dividends paid (88)
------
Net cash used for financing activities (88)
------
Net decrease in cash (2,764)
Cash, Beginning of Year 2,765
------
Cash, End of Year $ 1
======
NOTE 16 - SUBSEQUENT EVENTS
Proposed Sale of the Company
On August 3, 1999, Anson Bancorp, Inc. entered into an agreement to sell the
Company to Uwharrie Capital Corporation in a cash transaction for $17.30 per
share of Anson Bancorp, Inc. stock. The sale is contingent upon regulatory
and stockholder approval and is anticipated to be completed no later than
January 31, 2000.
Curtailment of Defined Benefit Plan
On August 3, 1999, the Board of Directors elected to cease future benefit
accruals under the Company's defined benefit plan. The curtailment will be
performed in accordance with ERISA standards and all participants will be
100% vested. It is estimated that the cost to curtail the plan will be
approximately $200,000 and this charge will effect the earnings of the
Company during the fiscal year 2000.
-34-
<PAGE>
ANSON BANCORP, INC. AND SUBSIDIARY
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
-35-
<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, 1999, there were approximately 234
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 table below gives the high
and low bids for common stock for each quarter of the Company's fiscal year
ended June 30, 1999.
July 1, 1998 to June 30, 1999 High Bid Low Bid
----------------------------- --------- --------
First Quarter $ 12.3750 $ 10.625
Second Quarter $ 10.9375 $ 9.750
Third Quarter $ 11.0000 $ 9.750
Fourth Quarter $ 11.0000 $ 9.250
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions. The Company paid
dividends of $ 0.15 per share for the year ended June 30, 1999.
Disclaimer
This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
-36-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 375 218
<INT-BEARING-DEPOSITS> 3,299 5,790
<FED-FUNDS-SOLD> 575 425
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 438 433
<INVESTMENTS-CARRYING> 7,780 6,307
<INVESTMENTS-MARKET> 0 0
<LOANS> 12,143 11,617
<ALLOWANCE> 104 102
<TOTAL-ASSETS> 24,961 25,066
<DEPOSITS> 15,256 15,440
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 200 244
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 5,425 5,425
<OTHER-SE> 3,795 3,678
<TOTAL-LIABILITIES-AND-EQUITY> 24,961 25,066
<INTEREST-LOAN> 919 945
<INTEREST-INVEST> 654 514
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 1,573 1,459
<INTEREST-DEPOSIT> 715 829
<INTEREST-EXPENSE> 715 829
<INTEREST-INCOME-NET> 858 630
<LOAN-LOSSES> 2 2
<SECURITIES-GAINS> 82 0
<EXPENSE-OTHER> 626 466
<INCOME-PRETAX> 315 167
<INCOME-PRE-EXTRAORDINARY> 315 167
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 205 126
<EPS-BASIC> 0.35 0
<EPS-DILUTED> 0.35 0
<YIELD-ACTUAL> 3.44 3.09
<LOANS-NON> 0 0
<LOANS-PAST> 171 179
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 102 100
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 104 102
<ALLOWANCE-DOMESTIC> 104 102
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
