Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 2000
Commission File No.: 0-24479
AF BANKSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Federally Chartered 56-2098545
State of Incorporation IRS Employer Number
21 East Ashe Street
West Jefferson, North Carolina 28694
(Address of Principal Executive Offices)
Issuer's telephone, including area code: (336) 246-4344
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Title of Class
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B contained herein or any amendment to this Form
10-KSB. /X/
The revenues for the issuer's fiscal year ended June 30, 2000 are
$11,214,209.
The issuer had 1,049,378 shares of common stock outstanding as of August
31, 2000. The aggregate value of the voting stock held by non-affiliates of the
issuer, computed by reference to the price at which the common stock was sold on
August 31, 2000 was $8.75.
Transitional Small Business Disclosure Format. Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Stockholders for the year ended June 30,
2000 are incorporated by reference into Part I and II of this Form 10-KSB.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-KSB.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS......................................................................1
ITEM 2. PROPERTIES..................................................................................31
ITEM 3. LEGAL PROCEEDINGS...........................................................................32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................32
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.....................................32
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................32
ITEM 7. FINANCIAL STATEMENTS........................................................................32
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................................................33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS................................33
ITEM 10. EXECUTIVE COMPENSATION......................................................................33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................33
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................................................33
SIGNATURES.......................................................................................................35
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
AF Bankshares, Inc. (the "Company") is a federally chartered stock holding
company which owns 100% of the common stock of AF Bank (the "Bank"), formerly
Ashe Federal Bank, AF Insurance Services, Inc. and AF Brokerage, Inc. The
Company has no operations and conducts no business of its own other than
ownership of its subsidiaries and investing in securities. The Bank is a
federally chartered stock savings bank which conducts business from its main
office located in West Jefferson, North Carolina, branches in West Jefferson,
Jefferson and Warrensville, North Carolina operating under the trade name Ashe
Federal Bank; one branch in Alleghany County, North Carolina operating under the
trade name Alleghany First Bank and one branch in Watauga County, North Carolina
operating under the trade name Appalachian First Bank. The Bank was founded in
1939 as a building and loan association. In the early 1980s, the Bank converted
from a North Carolina chartered building and loan to a federally chartered
mutual savings and loan association, and in August of 1995 converted to a
federally chartered mutual savings bank. During fiscal year 1997, the Bank
converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank which is majority owned by AsheCo, M.H.C., a mutual
holding company. On June 16, 1998, the Bank completed its reorganization into a
two-tier mutual holding company and became a wholly owned subsidiary of the
Company. See "Management's Discussion and Analysis -- The Reorganization." The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. At June 30, 2000, the Bank had total assets of $133.4 million,
total deposits of $102.7 million and equity of $12.5 million.
The historical operations of the Company have been that of a portfolio
mortgage lender, providing fixed rate loans for the residents of Ashe County,
North Carolina. Management has recently expanded the market area of the Company
to include Alleghany and Watauga counties and has diversified its product lines
by engaging in non-mortgage lending and offering non-traditional financial
services, such as insurance and brokerage products. More specifically, since
1996, the Company has made a major commitment to small business commercial
lending and consumer lending as a means to increase the yield on its loan
portfolio and attract lower cost deposit accounts. As a result of this
commitment, commercial loans increased by 163.0% and consumer loans have
increased by 109.8% since June 30, 1998. In addition, since July 1997, the
Company has offered traditional property and casualty, life and health insurance
products through AF Insurance Services, Inc., a wholly-owned subsidiary of the
Company, which operates under the trade name AF Ashelande Insurance Service in
West Jefferson, AF Brown Insurance Agency in Wilkesboro, AF Blair Insurance
Agency in Lenoir, AF Insurance Services, Inc. in Sparta, West Jefferson and
Jefferson, and AF Insurance Service Center in Elkin, North Carolina. The Company
also has a brokerage subsidiary, operating as AF Brokerage, Inc., which serves,
Ashe, Alleghany, Wilkes and Watauga counties. AF Brokerage offers various
uninsured investment products, including fixed-rate and variable annuities and
mutual funds. The Company believes that its strategy of expanding its market
area and diversifying its product lines will enhance its franchise value and
strengthen earnings in the future.
The Company's operating results are primarily dependent upon net interest
income, fees and charges and insurance commissions. Net interest income is the
difference between interest earned on loans, investments and interest-earning
deposits at other financial institutions and the interest paid on savings
deposits and borrowings of the company. The primary interest-earning asset of
the Company is its mortgage loan portfolio representing 79.2% of total loans,
with approximately 36.0% of portfolio mortgage loans at fixed rates at June 30,
2000. The net interest income of the Company is affected by changes in economic
conditions that influence market interest rates. This exposure to changes in
interest rates contributes to a moderate degree of interest rate risk because of
the negative impact of increasing rates to the Bank's earnings and to the net
market value of its assets and liabilities. Additionally, the Company receives
fee income primarily from loan origination fees, late loan payment fees,
commissions from the sale of credit life, accident and health insurance,
insurance commissions generated from the insurance agency subsidiary and in
payment for other services provided to the customer by the Company. The major
non-interest costs to the Company include compensation and benefits, occupancy
and equipment and
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data processing costs. Other external factors that affect the operating results
of the Company include changes in government and accounting regulations, costs
of implementing information technology, and changes in the competition's
emphasis within the Company's market.
As of June 30, 2000, $86.2 million, or 79.2% of the Bank's total loan
portfolio consisted of real estate loans. Total loans at June 30, 2000 were
$114.0 million of which $68.8 million or 63.3% were secured by one- to-four
family residences. Total mortgage loans, including construction loans, totaled
$86.2 million as of June 30, 2000. Of that amount, approximately 37.5% were
adjustable rate loans, or had remaining terms of 5 years of less. This change in
the composition of the mortgage loan portfolio results from the Company's
strategy of selling long term, fixed-rate mortgages while retaining the
servicing. The reduction in the level of fixed rate mortgages has served to
reduce the Company's exposure to interest rate risk.
The Bank also invests in consumer loans and commercial loans. As of June
30, 2000, the Bank's consumer loans and commercial loan portfolios were $27.8
million, or 25.6% of total loans. Commercial loans totaled $10.5 million, or
9.6% of the Bank's total loan portfolio. The Bank invests a portion of its
assets in debt and equity securities issued by the FHLB and the Federal Home
Loan Mortgage Corporation (the "FHLMC") and began investing in mortgage-backed
securities during fiscal 1996. Mortgage-backed securities totaled $3.2 million
or 2.4% of total assets at June 30, 2000, and FHLB and FHLMC securities
investments totaled $36.6 million, or 2.7%, of total assets at June 30, 2000.
REORGANIZATION
On October 4, 1996, the Bank reorganized into the mutual holding company
form of organization. Members of the mutual holding company consist of
depositors of the Bank, who have the sole authority to elect the board of
directors of the mutual holding company for as long as it remains in mutual
form. Initially, the mutual holding company's principal assets are the shares of
the Bank's common stock received in the reorganization and on its initial
capitalization of $100,000 in cash. The mutual holding company, which by law
must own in excess of 50% of the stock of the Bank, was issued stock in the
Reorganization resulting in a majority ownership interest of 53.8% of the Bank.
The remaining shares of common stock of the Bank were sold to the depositors and
borrowers of the Bank. By virtue of its ownership of a majority of the
outstanding shares of the Bank, the mutual holding company can generally control
the outcome of most matters presented to the stockholders of the Bank for
resolution by vote except for certain matters related to stock compensation
plans, a vote regarding conversion of the mutual holding company to stock form,
or others matters which require a vote only by the minority stockholders. The
mutual holding company has registered as a savings and loan holding company and
its subject to regulation, examination, and supervision by the Office of Thrift
Supervision (OTS).
On June 16, 1998, the Bank completed its reorganization into a two-tier
mutual holding company, pursuant to the agreement and plan of reorganization
approved by the Bank's shareholders on December 8, 1997. Under the
reorganization, the Bank became the wholly-owned subsidiary of AF Bankshares,
Inc., a newly formed stock holding company (the "Company") and holders of the
Bank's common stock became holders of the Company's common stock, on an equal
share for shares exchange.
MARKET AREA AND COMPETITION
During the year ended June 30, 1998, AsheCo, MHC's ownership of the company
decreased to 51.1% due to shares issued under the recognition and retention
plan. AsheCo, MHC's ownership increased to 51.29% due to the repurchase of
shares held in treasury during the year ended June 30, 1999.
Previously, the Bank's market area for deposit gathering and lending has
been concentrated in Ashe County, North Carolina. However, management believes
that the Company must expand its market base to build value for the Company and
its shareholders. In March 1998, the Company opened a branch of AF Bank in
Alleghany County and operates the branch under the trade name Alleghany First
Bank. At the same time, an insurance agency branch of AF Insurance Services,
Inc., was opened in the same location. The staff of Alleghany First came from
the local banking community and is attuned to the needs and habits of Alleghany
citizens. The
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insurance agency personnel direct their attention to the special needs of
Alleghany County citizens as well. On March 1, 1999, the Bank also opened a
branch office in Boone, North Carolina operating under the trade name
Appalachian First Bank. In April 1999, the Company added an insurance agency in
Lenoir, North Carolina operating under the name AF Blair Insurance Agency and,
in December 1999, the Company acquired an agency in Elkin, North Carolina that
operates as AF Insurance Center. Entry into the Boone and Alleghany markets
significantly expands the Company's potential to market its banking, insurance
and noninsured investment products to a larger and more diverse market.
Management now believes that it is delivering the same personalized customer
service to the new markets that it has historically delivered to Ashe County.
Management believes that penetration into other markets increases the
opportunity to deliver products from all of the Company's subsidiaries to a
broader market and will make the insurance and brokerage subsidiaries more
profitable investments by increasing the economies of scale and adding to the
products that are available for delivery to the Company's customers. The Company
continues to seek opportunities to increase its market penetration for its
services.
Management believes that the Company's customers perceive "financial
services" to include five broad categories: funds transfer including checking
accounts; insured savings instruments; credit/lending services; insurance and
securities brokerage. Further, management believes that failure to offer
insurance and brokerage services will impair the Company's growth and make
retention of existing customers more difficult. During the three month period
ending September 30, 1998, the Company established a securities brokerage
subsidiary, AF Brokerage, Inc., which currently conducts brokerage services in
Ashe, Alleghany, Wilkes and Watauga counties. AF Brokerage, Inc. applied to
become a member of the National Association of Securities Dealers, Inc. ("NASD")
in the third quarter of 1998 and was granted membership on October 22, 1999. AF
Brokerage, Inc. commenced operation in the fourth quarter of 2000 as an
independent broker/dealer. Management continues to evaluate acquisitions and
business opportunities that it believes will provide access to customers and
markets that enhance the Company's value and earnings potential in the long
term.
The Bank faces substantial competition for both the deposits it accepts and
the loans it makes. Management believes that the Bank has the second largest
deposit base in Ashe County, and the second largest deposit base in the part of
Ashe County which comprises its primary zip code, 28694. Located within Ashe
County are branches of six other depository institutions, four of which are
commercial banks and two of which are credit unions. The Bank competes for
deposits by offering a variety of customer services and deposit accounts at
competitive interest rates. The Bank, like its competitors, is affected by
general economic conditions, particularly changes in market interest rates, real
estate market values, government policies and regulatory authorities' actions.
Changes in the ratio of the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions which may
have greater resources than the Bank, but which have not generally engaged in
lending activities in the Bank's market area in the past, and from credit unions
that can expand into the Bank's market area and compete for customers without
the level of taxation experienced by the Company. Competition may also increase
as a result of the lifting of restrictions on the interstate operations of
financial institutions. See "--Regulation."
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
mortgage loans. The Bank also makes consumer and commercial loans.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board (the "FRB"), and
legislative tax policies.
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The following table sets forth the composition of the Bank's mortgage and
other loan portfolios in dollar amounts and percentages at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
2000 1999
------------------------------- -------------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family... $ 68,813 63.26% $ 48,433 59.68%
Multi-family.......... 2,277 2.09% 316 0.39%
Non-residential....... 8,577 7.89% 2,068 2.55%
Land.................. 2,440 2.24% 1,258 1.55%
Construction.......... 4,059 3.73% 5,082 6.26%
---------- ------ -------- ------
Total mortgage loans. 86,166 79.21% 57,157 70.43%
---------- ------ -------- ------
Other loans:
Commercial............ 10,456 9.62% 18,261 22.50%
Consumer loans........ 17,376 15.97% 12,144 14.96%
---------- ------ -------- ------
Total other loans.... 27,832 25.59% 30,405 37.46%
---------- ------ -------- ------
Gross loans........... 113,998 104.80% 87,562 107.89%
---------- ------ -------- ------
Less:
Undisbursed loan funds 3,993 3.67% 5,033 6.20%
Deferred loan fees.... 248 0.23% 249 0.31%
Allowance for loan
losses............... 979 0.90% 1,123 1.38%
---------- ------ -------- ------
5,220 4.80% 6,405 7.89%
---------- ------ -------- ------
Loans, net........... $ 108,778 100.00% $ 81,157 100.00%
========== ====== ======== ======
Loans serviced for
others:
One-to four-family and
cooperative apartment. $ 22,613 100.00% $ 20,657 100.00%
---------- ------ -------- ------
Total loans serviced
for others......... $ 22,613 100.00% $ 20,657 100.00%
========== ====== ======== ======
</TABLE>
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Loan Maturity. The following table shows the maturity or period to
repricing of the Bank's loan portfolio at June 30, 2000. Loans that have
adjustable rates are shown using scheduled principal amortization. The table
does not consider estimated prepayments of principal.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
MORTGAGE LOANS
----------------
ONE- TO
FOUR- MULTI- NON- COMMERCIAL CONSUMER TOTAL
FAMILY FAMILY RESIDENTIAL LAND CONSTRUCTION LOANS LOANS LOANS
------- ------ ----------- ---- ------------ ---------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amount due:
One year or less................ $21,641 $ 813 $ 1,257 $ 694 $ 4,059 $ 7,660 $ 3,467 $ 39,591
------- ------ ----------- ----- ------------ ---------- -------- --------
After one year:
One to three years.............. 4,941 358 2,331 290 0 812 7,633 16,365
More than three years to five
years......................... 12,809 190 2,230 467 0 981 3,549 20,226
More than five years to ten
years......................... 8,625 836 1,039 375 0 948 2,218 14,041
More than ten years to
twenty years.................. 17,858 80 1,634 297 0 55 509 20,433
Over twenty years............... 2,939 0 86 317 0 0 0 3,342
------- ------ ----------- ----- ------------ ---------- -------- --------
Total due or repricing after one
year............................ 47,172 1,464 7,320 1,746 0 2,796 13,909 74,407
------- ------ ----------- ----- ------------ ---------- -------- --------
Total amounts due or repricing,
gross........................... $68,813 $ 2,277 $ 8,577 $2,440 $ 4,059 $ 10,456 $17,376 $113.998
======= ====== =========== ===== ============ ========== ======== ========
</TABLE>
The following table sets forth the dollar amounts in each loan category at
June 30, 2000 that are due after June 30, 2001, and whether such loans have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 2001
-----------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
<S> <C> <C> <C>
(IN THOUSANDS)
Mortgage loans:
One- to four-family....................... $ 39,923 $ 7,249 $ 47,172
Multi-family.............................. 1,244 220 1,464
Non-residential........................... 7,320 0 7,320
Land...................................... 812 934 1,746
Commercial loans............................ 919 1,877 2,796
Consumer loans.............................. 13,277 632 13,909
-------- --------- ---------
$ 63,495 $ 10,912 $ 74,407
======== ========= =========
</TABLE>
Origination, Purchase, Sale and Servicing of Loans. The Bank's lending
activities are conducted through its branches in Ashe, Alleghany and Watauga
counties, North Carolina. The Bank originates both adjustable-rate loans and
fixed-rate mortgage loans for portfolio and for sale in the secondary market.
Adjustable-rate mortgage loans carried in portfolio and fixed-rate mortgage
loans carry maximum maturities of 30 years and 15 years, respectively. Fixed
rate loans originated for sale in the secondary market have maximum maturities
of 30 years. Historically, the Bank held for its portfolio all loans it
originated. The Bank now sells all qualified fixed-rate loans to Fannie Mae, but
retains the servicing rights. The determination to sell loans is based upon
management's efforts to reduce interest rate risk. At June 30, 2000, the Bank
serviced approximately $22.6 million of loans for Fannie Mae.
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
adjustable-rate mortgage loans, with maturities up to 30 years, which are
secured by one- to four-family residences, which generally are owner-occupied.
Fixed-rate loans held in the Bank's portfolio have higher interest rates and
shorter terms than those loans sold to Fannie Mae. Most are secured by property
located in Ashe, Alleghany and Watauga counties, North Carolina. Loan
originations are generally obtained from existing or past customers and members
of the local communities. See "--Origination, Purchase, Sale and Servicing of
Loans."
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The Bank offers three to five year call loans, which are either called or
modified based on the Bank's interest rates currently in effect at the call
date. These loans are similar to adjustable rate loans in that the loans
generally amortize over terms of up to 30 years but are not indexed to any
widely recognized rate, such as the one year U.S. Treasury securities rate, and
do not have interest rate caps or floors. Instead, the majority of such loans
are modified at the call date and the rate is adjusted to the Bank's current
rate offered for similar loans being originated on such dates. For purposes of
the tabular presentations throughout this document, such loans are considered to
be adjustable.
In view of its operating strategy, the Bank adheres to its Board approved
underwriting guidelines for loan originations, which, though prudent in approach
to credit risk and evaluation of collateral, allows management flexibility with
respect to documentation of certain matters and certain credit requirements. As
a result, such underwriting guidelines in certain lending situations are less
rigid than comparable Fannie Mae underwriting guidelines. The Bank's loans are
typically originated under terms, conditions and documentation which permit them
to be sold to U.S. government sponsored agencies such as Fannie Mae. The Bank
sells all qualifying fixed-rate loans to Fannie Mae, while retaining servicing
rights. The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan. The Bank offers products with a
higher loan-to-value ratio in conjunction with private mortgage insurance.
Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.
Construction Lending. The Bank originates construction loans primarily to
finance construction of one- to four-family homes to the individuals who will be
the owners and occupants upon completion of construction in the Bank's market
area. At June 30, 2000, that Bank's portfolio contained approximately $4.1
million, or 3.7%, of construction loans. The Bank's policy is to disburse loan
proceeds as construction progresses and as periodic inspections warrant. These
loans are made primarily to the individuals who will ultimately occupy the home,
and are structured to guarantee the permanent financing to the Bank as well.
Thus construction loans typically "roll" into permanent financing. Construction
loans are made for a maximum of 12 months, by which time permanent financing
must be obtained.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost of construction. If the estimate of
construction cost proves to be inaccurate, the Bank may be compelled to advance
additional funds to complete construction.
Non-Residential Mortgage Lending. The Bank originates commercial real
estate mortgage loans that are generally secured by properties used for business
purposes and retail facilities, such as small office buildings and church loans.
The Bank's underwriting procedures provide that non-residential mortgage loans
may be made, based on debt service coverage or in amounts up to the lesser of
(i) 80% of the lesser of the appraised value or purchase price of the property
or (ii) the Bank's current loans-to-one-borrower limit. These loans are
generally originated as three to five year call loans with amortization periods
of up to 15 years. The Bank considers factors such as the borrower's expertise,
credit history, profitability, cash flow, and the value of the collateral while
underwriting these loans. At June 30, 2000, the Bank's non-residential mortgage
loan portfolio was $8.6 million, or 7.9% of total loans outstanding. The largest
non-residential mortgage loan in the Bank's portfolio at June 30, 2000 was
approximately $1.5 million and is secured by a commercial property.
Mortgage loans secured by non-residential properties can be larger and
therefore may involve a greater degree of credit risk than one- to four-family
residential mortgage loans. This risk is attributable to the uncertain
realization of projected income-producing cash flows which are affected by
vacancy rates, the ability to maintain rent levels against competitively-priced
properties and the ability to collect rent from tenants on a timely basis.
Because payments on loans secured by non-residential properties are often
dependent on the successful operation
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or management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks through its underwriting standards, which
require such loans to be qualified on the basis of the property's income and
debt service ratio.
Other Mortgage Lending. The Bank also offers loans secured by land and
multi-family residences. Land loans generally consist of residential building
lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for agricultural use and a
minor amount for speculative purposes. Multi-family loans generally consist of
residential properties with more than four units, typically small apartment
complexes, located in the Bank's primary lending area. At June 30, 2000, the
Bank's total land loan portfolio was $2.4 million or 2.2% of total loans and its
multi-family loan portfolio was $2.3 million or 2.1% of total loans.
The Bank requires appraisals of all mortgage loans. Appraisals are
performed by independent appraisers designated by the Bank. The appraisals of
such properties are then reviewed by the Bank's management. The independent
appraisers used by the Bank are reviewed annually by management and the Board of
Directors.
The Bank originates multi-family residential loans with both fixed and
adjustable interest rates which vary as to maturity. Such loans are typically
income-producing investment loans. Loan to value ratios on the Bank's
multi-family residential loans are generally limited to 80%. As part of the
criteria for underwriting these loans, the Bank's general policy is to require
principals of corporate borrowers to become co-borrowers or to obtain personal
guarantees from the principals of corporate borrowers.
Multi-family residential lending generally entails significant additional
risks as compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand, conditions in the market for
multi-family residential properties as well as to regional and economic
conditions, generally.
Consumer Loans. Subject to the restrictions contained in federal laws and
regulations, the Bank also is authorized to make loans for a wide variety of
personal or consumer purposes. As of June 30, 2000, $17.4 million, or 16.0%, of
the Bank's total loan portfolio consisted of consumer loans (including home
equity credit line loans and second mortgage loans). The primary component of
the Bank's consumer loan portfolio was $9.3 million of auto loans. Consumer
loans are available at fixed or variable interest rates.
Consumer loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness, and
personal bankruptcy. In many cases, any repossessed collateral resulting from a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation and improper repair and
maintenance of the underlying security.
As of June 30, 2000, the Bank had no non-performing consumer loans.
Charge-offs for consumer loans totaled $194,000 and $37,000 for the years ended
June 30, 2000 and 1999, respectively.
The Bank also offers loans secured by savings accounts at the Bank.
Interest rates charged on such loans are tied to the prime rate and are
available in amounts up to 90% of the value of the account. Savings account
loans are reviewed and approved in conformity with standards approved by the
Bank's Board of Directors. At June 30, 2000, the Bank's savings account loan
portfolio totaled $367,000 or 0.32% of the total loans outstanding.
The Bank offers adjustable rate home equity credit lines tied to the prime
interest rate. The home equity portfolio amounted to $4.7 million or 4.1% of the
total loan portfolio as of June 30, 2000. The home equity credit line is
available on any owner-occupied one-to-four family home, townhouse, or
condominium in the Bank's lending area provided the homeowner meets the Bank's
lending criteria. A home equity loan is an adjustable rate mortgage which is
based on the equity in the home, and is generally secured by a first or second
mortgage on the
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residence. The current maximum term is 180 months. The Bank may offer home
equity loans up to 100% of the value of the collateral to certain customers
meeting a higher level of credit criteria.
Commercial Business Loans. The Bank offers commercial business loans that
are generally provided to various types of closely held businesses located in
the Bank's primary market area. Commercial business loans generally have terms
of three years or less and interest rates which float in accordance with the
prime rate although the Bank occasionally originates commercial business loans
with fixed rates of interest. The Bank performs a cash flow analysis in
underwriting these loans. The Bank's commercial loans generally are secured by
equipment, machinery or other corporate assets including real estate and
receivables. The Bank requires principals of corporate borrowers to become
co-borrowers or obtains personal guarantees from the principals of the borrower
with respect to all commercial business loans.
Commercial business lending generally entails significantly greater credit
risk than residential real estate lending. The repayment of commercial business
loans typically is dependent on the successful operations and income of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial business lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
As of June 30, 2000, the Bank had $286,000 of non-performing commercial
business loans. Charge-offs for commercial business loans totaled $115,000 for
the year ended June 30, 2000. The Bank had no charge-offs with respect to
commercial business loans in the year ended June 30, 1999.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank. The Board of Directors has established the
following lending authority: the Bank's Chief Executive Officer and lending
officers may approve loans in amounts within assigned lending limits, and the
Loan Committee, comprised of the Executive Committee of the Board of Directors
may approve loans up to the Bank's loans-to-one-borrower limit. In addition, the
staff loan committee, comprised of the chief executive officer, chief financial
officer, chief lending officer and collection officer meets twice a week to
review all loan applications that meet all lending policy criteria. The staff
loan committee can approve lending relationships up to $750,000. Larger amounts
must be approved by the Executive Committee of the Board of Directors. The
foregoing lending limits are reviewed annually and, as needed, revised by the
Board of Directors. The Board generally ratifies all loans on a monthly basis.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information supporting the borrower's ability to repay is required. An
appraisal performed by a Bank approved independent appraiser is required for all
real property intended to secure the proposed loan. The Board annually approves
the independent appraisers used by the Bank and approves the Bank's appraisal
policy. It is the Bank's policy to obtain title insurance on all real estate
loans of $50,000 or more and hazard insurance on all improved real estate loans.
In connection with a borrower's request for a renewal of a mortgage loan, the
Bank evaluates both the borrower's ability to service the renewed loan applying
an interest rate that reflects prevailing market conditions and the customer's
payment history, as well as the value of the underlying collateral property.
ASSET QUALITY
Non-Performing Loans. Loans are considered non-performing if they are in
foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and period of delinquency. The Bank's policies generally provide that delinquent
mortgage loans be reviewed and that a written late charge notice be mailed no
later than the 17th day of delinquency. The Bank's policies provide that
telephone contact and further written notification will be attempted to
ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
attempts to obtain full payment or work out a repayment schedule with the
borrower to avoid foreclosure.
8
<PAGE>
It is the Bank's general policy to reserve all accrued interest due on all
loans that are 90 days or more past due.
Real Estate Owned. Property acquired by the Bank as a result of foreclosure
on a mortgage loan is classified as real estate owned ("REO"). At June 30, 2000,
the Bank held $289,000 in REO, while non-performing loans, defined as loans that
are 90 days or more delinquent, totaled $411,000. The Bank's REO is initially
recorded at the fair value of the related assets at the date of foreclosure.
Thereafter, if there is a further deterioration in value, the Bank provides an
REO valuation allowance and charges operations for the diminution in value less
cost to sell. It is the policy of the Bank to obtain an appraisal on all real
estate acquired through foreclosure as soon as practicable after it determines
that foreclosure is imminent. The Bank generally reassesses the value of REO at
least annually thereafter. The policy for loans is to establish loss reserves in
accordance with the Bank's asset classification process, based on Generally
Accepted Accounting Principles ("GAAP").
9
<PAGE>
Non-performing Assets. The following table sets forth information regarding
the Bank's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
2000 1999
---- ----
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans:
One- to four-family....................... $ 125 $ 52
Multi-family.............................. -- --
Non-residential........................... -- --
Land...................................... -- --
Construction.............................. -- --
------ ------
Total mortgage loans.................. 125 52
------ ------
Commercial................................ 286 --
Consumer Loans............................ -- 8
------ ------
Total non-accruing loans................ $ 411 $ 60
------ ------
Loans delinquent 90 or more days for which
interest is fully reserved and still
accruing:
One- to four-family....................... $ -- $ --
Multi-family.............................. -- --
Non-residential........................... -- --
Land...................................... -- --
Construction.............................. -- --
------ ------
Total mortgage loans................... -- --
------ ------
Commercial................................ -- --
Consumer Loans............................ -- --
------ ------
Total loans delinquent 90 or more days for
which interest has been fully reserved...... -- --
------ ------
Total non-performing loans.................... $ 411 $ 60
------ ------
Total real estate owned....................... 289 59
------ ------
Total non-performing assets............... $ 700 $ 119
------ ------
Total non-performing loans to loans, gross.... 0.36% 0.07%
Total non-performing assets to total assets... 0.53% 0.11%
</TABLE>
Classified Assets. Federal regulations and the Bank's Classification of
Assets Policy require the Bank to use an internal asset classification system as
a means of reporting problem and potential problem assets. The Bank has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Bank currently classifies problem and potential problem
assets as "Special Mention," "Substandard," "Doubtful" or "Loss" assets. An
asset is considered "Substandard" if it is inadequately protected by the current
equity and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
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
10
<PAGE>
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "Loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets which do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
The Bank's management reviews and classifies the Bank's assets monthly and
reports the results to the Bank's Board of Directors on a monthly basis. The
Bank classifies assets in accordance with the management guidelines described
above. At June 30, 2000, the Bank had $555,000 of assets classified as
Substandard, $40,000 of assets designated as Special Mention, no assets
classified as Loss and no assets classified as Doubtful.
Allowance for Loan Losses. The Allowance for Loan Losses ("ALL") is
established through a provision for loan losses based on management's evaluation
of the risks inherent in the Bank's loan portfolio and the general economy. The
ALL is maintained at an amount management considers adequate to cover loan
losses which are deemed probable and estimable. The allowance is based upon a
number of factors, including asset classifications, economic trends, industry
experience and trends, industry and geographic concentrations, estimated
collateral values, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience, and the Bank's underwriting
policies. At June 30, 2000, the Bank's ALL was $979,000, or 0.9% of total loans,
as compared to $1.1 million or 1.3%, at June 30, 1999. The Bank had
non-performing loans of $411,000 and $60,000 at June 30, 2000 and June 30, 1999,
respectively. The Bank will continue to monitor and modify its ALL as conditions
dictate. Various regulatory agencies, as an integral part of their examination
processes, periodically review the Bank's ALL. These agencies may require the
Bank to establish additional valuation allowances, based on their judgments of
the information available at the time of the examination.
11
<PAGE>
The following table sets forth activity in the Bank's ALL at or for the
dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Total loans outstanding at end of period............ $ 113,998 $ 87,562
Average total loans outstanding..................... 100,228 76,597
Balance at beginning of year........................ 1,123 1,164
----------- -----------
Provision for loan losses........................... 88 20
----------- -----------
Charge-offs:
One- to four-family residential.................. (19) (4)
Multi-family residential......................... -- --
Non-residential and land......................... -- (33)
Construction..................................... -- --
Commercial....................................... (115) --
Consumer loans................................... (194) (37)
----------- -----------
Total charge-offs.............................. (328) (74)
----------- -----------
Recoveries.......................................... 96 13
----------- -----------
Balance at end of year.............................. $ 979 $ 1,123
=========== ===========
Allowance for loan losses to total loans
at end of period.................................. 0.86% 1.28%
=========== ===========
Allowance for loan losses to total non-performing
assets at end of period.......................... 139.86% 943.70%
=========== ===========
Allowance for loan losses to total non-performing
loans at end of period........................... 238.20% 1,871.14%
=========== ===========
Ratio of net charge-offs during the period
To average loans outstanding during period....... 0.23% 0.08%
=========== ===========
</TABLE>
12
<PAGE>
The following table sets forth the Bank's ALL allocated by loan category
and the percent of loans in each category to total loans at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
2000 1999
---- ----
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
ALLOWANCE TO TOTAL TO TOTAL ALLOWANCE TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to
four-family.... $ 559 57.10% 60.37% $ 456 40.61% 55.32%
Multi-family.... 15 1.53% 2.00% 10 0.89% 0.36%
Non-residential
and land....... 60 6.13% 9.66% 61 5.43% 3.80%
Construction.... 19 1.94% 3.56% 14 1.25% 5.80%
Other:
Consumer..... 255 26.05% 9.17% 442 39.36% 13.87%
Commercial... 71 7.25% 15.24% 140 12.46% 20.85%
------ ----------- ---------- --------- ---------- ----------
Total........ $ 979 100.00% 100.00% $1,123 100.00% 100.00%
====== =========== ========== ========= ========== ==========
</TABLE>
INVESTMENT ACTIVITIES
The Bank's investment policy permits it to invest in U.S. government
obligations, certain securities of various government-sponsored agencies and
municipal obligations, including mortgage-backed securities issued/guaranteed by
Fannie Mae, the FHLMC and the Government National Mortgage Association ("GNMA"),
certificates of deposit of insured banks, federal funds, mutual funds and
overnight deposits at the FHLB. At June 30, 2000, the Bank held $9.8 million in
investment securities.
The following table sets forth activity in the Bank's investment
securities portfolio for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
(IN THOUSANDS)
Amortized cost at beginning of period.................. $ 11,464 $ 8,533
Purchases, net......................................... (228) 4,122
Principal payments from mortgage backed securities..... (1,387) (1,333)
Gain on sales.......................................... 95 166
Premium and discount amortization, net................. (62) (24)
---------- ----------
Amortized cost at end of period........................ 9,882 11,464
Net unrealized gain(1)................................. (47) 334
Total securities, net.................................. $ 9,835 $ 11,798
========== ==========
</TABLE>
(1) The net unrealized gain at June 30, 2000 and relates to available for sale
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115. The net unrealized gain is presented in order to
reconcile the "Amortized Cost" of the Bank's securities portfolio in the
"Carrying Cost," as reflected in the Statements of Financial Condition.
13
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
2000 1999
---- ----
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Mortgage-backed securities:
Fannie Mae and Government
National Mortgage Association... $ 3,205 $ 3,155 $ 4,626 $ 4,672
-------- -------- ------- -------
Other debt securities:
U.S. Treasury and Agency........ 4,515 4,428 4,624 4,589
Other........................... 382 370 480 459
-------- -------- ------- -------
Total debt securities............. 4,897 4,798 5,104 5,048
-------- -------- ------- -------
Equity securities(1).............. 1,004 1,106 1,210 1,554
Federal Home Loan Bank Stock...... 776 776 524 524
Net unrealized gain (loss)(2)..... (47) -- 334 --
-------- -------- ------- -------
Total securities, net............. $ 9,835 $ 9,835 $11,798 $11,798
======== ======= ======= =======
</TABLE>
-----------------------
(1) Equity securities consist of FHLMC common stock.
(2) The net unrealized gain (loss) at June 30, 2000 and 1999 relates to
available for sale securities in accordance with SFAS No.115. The net
unrealized gain is presented in order to reconcile the "Amortized Cost" of
the Bank's securities portfolio in the "Carrying Cost," as reflected in the
Statements of Financial Condition.
The following table sets forth the amortized cost and fair value of the
Bank's securities, by accounting classification and by type of security, at the
dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
2000 1999 1998
---- ---- ----
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Held to Maturity
Other debt securities............. $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
------ ------- ------ ------- ------ ------
Total held to maturity...... 100 100 100 100 100 100
------ ------- ------ ------- ------ ------
Available-for-Sale:
Mortgage-backed securities........ 3,205 3,155 4,626 4,672 2,174 2,235
Other debt securities:............ 4,698 4,599 4,806 4,750 5,430 5,422
Equity securities................. 1,004 1,106 1,210 1,554 7 438
Net unrealized gain (loss) (1).... (47) -- 334 -- 484 --
------ ------- ------ ------- ------ ------
Total available-for-sale.... 8,860 8,860 10,976 10,976 8,095 8,095
------ ------- ------ ------- ------ ------
Certificates of deposit.............. 99 99 198 198 198 198
------ ------- ------ ------- ------ ------
Federal Home Loan Bank Stock......... 776 776 524 524 624 624
------ ------- ------ ------- ------ ------
Total securities, net............. $9,835 $9,835 $11,798 $11,798 $9,017 $9,017
====== ====== ======= ======= ====== ======
</TABLE>
(1) The net unrealized gains (loss) at June 30, 2000, 1999 and 1998 relate to
available for sale securities in accordance with SFAS No. 115. The net
unrealized gain (loss) is presented in order to reconcile the "Amortized
Cost" of the Bank's securities portfolio in the "Carrying Cost," as
reflected in the Statements of Financial Condition.
14
<PAGE>
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Bank's debt securities at
June 30, 2000, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no effect
has been given to periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
----------------
HELD-TO-MATURITY AVAILABLE FOR SALE
---------------- ------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Debt Securities
Mortgaged-backed securities:
Due within 1 year...................... $ -- $ -- --% $ -- $ -- --%
Due after 1 year but within 5 years.... -- -- -- 64 65 7.29
Due after 5 years but within 10 years.. -- -- -- -- -- --
Due after 10 years..................... -- -- -- 3,141 3,090 6.71
---- ---- ------ ------
Total........................... -- -- -- 3,205 3,155 6.72
---- ---- ------ ------
U.S. Treasury and Agency:
Due within 1 year...................... -- -- -- -- -- --
Due after 1 year but within 5 years.... 100 100 5.50 3,270 3,220 5.77
Due after 5 years but within 10 years.. -- -- -- 500 492 7.55
Due after 10 years..................... -- -- -- 645 616 5.85
---- ---- ------ ------
Total........................... 100 100 5.50 4,415 4,328 5.99
---- ---- ------ ------
Corporate & Other:
Due within 1 year...................... -- -- -- -- -- --
Due after 1 year but within 5 years.... 99 99 7.25 -- -- --
Due after 5 years but within 10 years.. -- -- -- -- -- --
Due after 10 years..................... -- -- -- 283 271 4.60
---- ---- ------ ------
Total........................... 99 99 7.25 283 271 4.60
---- ---- ------ ------
Equity Securities........................ -- -- -- 1,004 1,106 --
---- ---- ------ ------
Total:
Due within 1 year...................... -- -- -- -- -- --
Due after 1 year but within 5 years.... 199 199 6.37 3,334 3,285 5.80
Due after 5 years but within 10 years.. -- -- -- 500 492 7.55
Due after 10 years..................... -- -- -- 4,069 3,977 6.45
Equity Securities...................... -- -- -- 1,004 1,106 --
---- ---- ------ ------
199 199 6.37 8,907 8,860 6.23
---- ---- ------ ------
Federal Home Loan Bank Stock........... 776 776 -- -- -- --
---- ---- ------ ------
Total........................... $975 $975 6.37% $8,907 $8,860 6.23%
==== ==== ====== ======
</TABLE>
15
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan and security repayments and prepayments, proceeds
of refinanced loans sold to Fannie Mae and cash flows generated from operations
are the primary sources of the Bank's funds for use in lending and for other
general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of regular (passbook)
savings accounts, checking accounts, money market deposit accounts, statement
savings accounts, IRAs and certificates of deposit. In recent years, the Bank
has offered certificates of deposit with maturities of up to 48 months. At June
30, 2000, the Bank's core deposits (which the Bank considers to consist of
checking accounts, regular savings accounts and statement savings accounts)
constituted 44.4% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Bank's deposits are obtained
predominantly from Ashe, Alleghany and Watauga counties. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect the Bank's
ability to attract and retain deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
---------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Total deposits at beginning of period,
including accrued interest....................... $ 93,106 $ 82,488
Net increase before interest credited.............. 5,505 6,848
Interest credited.................................. 4,069 3,770
--------- ---------
Total deposits at end of period.................... $ 102,680 $ 93,106
========= =========
</TABLE>
At June 30, 2000, the Bank had approximately $17.1 million in Jumbo
certificate of deposits (accounts in amounts over $100,000) maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturity Period
Within three months....................... $ 5,568 5.81%
After three but within six months......... 4,749 5.99%
After six but within 12 months............ 4,720 6.08%
After 12 months........................... 2,044 5.58%
--------- -----
Total...................... $ 17,081 5.89%
========= =====
</TABLE>
16
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
2000 1999
---- ----
PERCENT WEIGHTED PERCENT
OF TOTAL AVERAGE OF TOTAL
DEPOSITS RATE AMOUNT DEPOSITS AMOUNT
-------- ---- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
checking accounts......... $ 3,960 3.86% 0.00% $ 3,914 4.20% --%
Interest bearing checking/
Money Market accounts..... 18,589 18.10% 1.92% 15,425 16.57% 2.28%
Savings................... 23,032 22.43% 3.83% 21,841 23.46% 3.05%
Certificates of deposit... 56,937 55.45% 5.71% 51,788 55.62% 4.94%
Accrued interest.......... 162 0.16% 0.00% 38 0.15% --%
-------- ------- ----- -- ----- ----
Totals $102,680 100.00% 4.34% $93,106 100.00% 4.29%
======== ====== ===== ======= ====== ====
</TABLE>
The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at June 30, 2000 and the period to maturity.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT JUNE 30, 2000
-----------------------------------
LESS THAN ONE TO FOUR TO
INTEREST RATE RANGE ONE YEAR THREE YEARS FIVE YEARS TOTAL
------------------- -------- ----------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
4.00% to 5.99% $33,438 $5,261 $224 $38,923
6.01% to 7.99%.................. 14,523 3,344 147 18,014
------- ------ ---- -------
Total............. $47,961 $8,605 $371 $56,937
======= ====== ==== =======
</TABLE>
Borrowings. The Bank historically has not used borrowings as a source of
funds. However, the Bank may obtain advances from the FHLB as an alternative to
retail deposit funds and may do so in the future as part of its operating
strategy. These advances would be collateralized primarily by certain of the
Bank's mortgage loans and secondarily by the Bank's investment in capital stock
of the FHLB. See "Regulation--Regulation of Federal Savings Banks--Federal Home
Loan Bank System." Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. As of June 30, 2000, the maximum
amount of FHLB advances available to the Bank was $46.6 million. The Bank had
short term advances of $15.5 million at June 30, 2000 from the FHLB. Interest is
payable at rates ranging from 6.13% to 6.95%. $4,000,000 of the advances are due
in June 2001, $862,500 are due by August 2002, $150,507 are due January 2007,
$5,000,000 are due August 2009, and $3,00,000 is due September 2009. The
remaining $2,500,000 is an advance borrowed under the Daily Rate Credit Program
at the FHLB and has no maturity date.
SUBSIDIARY ACTIVITIES
AF Insurance Services, Inc., a wholly owned subsidiary of the Company, was
formed in July 1997 upon the purchase of two independent insurance agencies for
the sole purpose of selling traditional property and casualty, life and health
insurance. Additional insurance agencies were purchased in April of 1999 and
December 1999. AF
17
<PAGE>
Insurance Services, Inc. offers these services in a segregated location at the
Bank's executive offices, Sparta, Lenoir, Jefferson, North Wilkesboro and Elkin,
North Carolina.
AF BROKERAGE, INC.
AF Brokerage, Inc., a wholly owned subsidiary of the Company, was formed in
August 1998 for the purpose of selling brokerage and investment products through
a third-party vendor. During the 2000 fiscal year, AF Brokerage, Inc.'s
application for registration was accepted by the NASD and the brokerage company
began selling investment products directly. AF Brokerage, Inc. offers these
services in a segregated location at the Bank's executive offices and branch
locations.
PERSONNEL
As of June 30, 2000, the Company had 81 full-time employees. The employees
are not represented by a collective bargaining unit and the Company considers
its relationship with its employees to be good. See "Executive Compensation" for
a description of certain compensation and benefit programs offered to the Bank's
employees.
REGULATION
GENERAL
The Company and the Bank are subject to extensive regulation, examination
and supervision by the OTS, as their chartering agency. The Bank's deposit
accounts are insured up to applicable limits by the FDIC and it is a member of
the FHLB of Atlanta. The Bank must file reports with the OTS concerning its
activities and financial condition and it must obtain regulatory approvals prior
to entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions. The OTS conducts periodic examinations to assess
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings institution can engage and is intended primarily for the protection of
the insurance fund and depositors. The Company and the Holding Company, as
savings and loan holding companies, are required to file certain reports with,
and otherwise comply with, the rules and regulations of the OTS.
The OTS has significant discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the
OTS or the Congress, could have a material adverse impact on the Holding
Company, the Company or the Bank.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings institutions and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
REGULATION OF FEDERAL SAVINGS BANKS
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act ("HOLA") and the regulations of the OTS
thereunder. Under these laws and regulations, the Bank may invest in mortgage
loans secured by residential and non-residential real estate, commercial and
consumer loans, certain types of debt securities and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(f) a limit of
18
<PAGE>
the greater of 5% of assets or an association's capital on certain construction
loans made for the purpose of financing what is or is expected to become
residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings institution may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not exceeding 10% of the association's unimpaired capital and surplus, if
such loans and extensions of credit are fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. At June 30,
2000, the Bank's limit on loans to one borrower was approximately $1.6 million.
At June 30, 2000, the Bank's largest aggregate amount of loans to one borrower
was $1.5 million and is secured by a mix of one- to four-family and multifamily
properties. The second largest borrower had an aggregate balance of
approximately $1.4 million, secured by an multifamily complex. At June 30, 2000,
all of the loans in both of these lending relationships were performing in
accordance with their terms.
QTL Test. HOLA requires a savings institution to meet a Qualified Thrift
Lender ("QTL") test. A savings institution may satisfy the QTL test by
maintaining at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least 9 months of the most recent 12-month period. "Portfolio
assets" means, in general, an association's total assets less the sum of (a)
specified liquid assets up to 20% of total assets, (b) certain intangibles,
including goodwill and credit card and purchased mortgage servicing rights and
(c) the value of property used to conduct the association's business. The term
"qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
an association's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans, and small business loans. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal Revenue Code of 1986. At June 30, 2000, the Bank
maintained 71.6% of its portfolio assets in qualified thrift investments. The
Bank had also satisfied the QTL test in each of the prior 12 months and,
therefore, was a qualified thrift lender.
A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB and (d)
establishing any new branch in a location not permissible for a national bank in
the association's home state. In addition, within one year of the date a savings
institution ceases to meet the QTL test, any company controlling the association
would have to register under, and become subject to the requirements of, the
Bank Holding Company Act of 1956, as amended ("BHC Act"). If the savings
institution does not requalify under the QTL test within the three-year period
after it failed the QTL test, it would be required to terminate any activity and
to dispose of any investment not permissible for a national bank and would have
to repay as promptly as possible any outstanding advances from an FHLB. A
savings institution that has failed the QTL test may requalify under the QTL
test and be free of such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets and a risk-based
capital ratio requirement of 8% of core and supplementary capital to total
risk-weighted assets. The OTS and the federal banking regulators have proposed
amendments to their minimum capital regulations to provide that the minimum
leverage capital ratio for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Ratings
System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. In determining compliance with the risk-based capital requirement,
a savings association must compute its risk-weighted assets by multiplying its
assets and certain off-balance sheet items by risk-weights, which range from 0%
for cash and obligations issued by the United States Government or
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its agencies to 100% for consumer and commercial loans, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the assets.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. The
allowance for loan and lease losses includable in supplementary and capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The federal banking agencies, including the OTS, have adopted regulations
to require an assessment of an institution's exposure to declines in the
economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include:
o the quality of the bank's interest rate risk management process;
o the overall financial condition of the bank; and
o the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at June 30, 2000:
<TABLE>
<CAPTION>
CAPITAL EXCESS
AMOUNT REQUIREMENTS CAPITAL
------ ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Core capital........................... $11,717 $5,270 $6,447
Risk-based capital..................... 11,688 8,427 4,151
</TABLE>
A reconciliation between regulatory capital and GAAP capital at June 30,
2000 in the accompanying financial statements is presented below:
<TABLE>
<CAPTION>
RISK-
CORE BASED
CAPITAL CAPITAL
------- -------
<S> <C> <C>
GAAP capital.......................................... $11,688 $11,668
Net unrealized loss on available for
sale investment securities, net of tax.............. 29 29
Allowance for loan losses included as
supplementary capital............................... -- 979
Equity investment and other assets.................... -- (118)
------- -------
Regulatory capital.................................... $11,717 $12,578
======= =======
</TABLE>
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<PAGE>
Limitation on Capital Distributions. Effective April 1, 1999, the OTS
amended its capital distribution regulations to reduce regulatory burdens on
savings associations. The regulations being replaced, which were effective
throughout 1998, established limitations upon capital distributions by savings
associations, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to shareholders of another institution in a cashout
merger, and other distributions charged against capital. At least 30-days
written notice to the OTS was required for a proposed capital distribution by a
savings association, and capital distributions in excess of specified earnings
or by certain institutions were subject to approval by the OTS. An association
that had capital in excess of all fully phased in regulatory capital
requirements before and after a proposed capital distribution and that was not
otherwise restricted in making capital distributions, could, after prior notice
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (a) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by half its "surplus
capital ratio" (the excess capital over its fully phased in capital
requirements) at the beginning of the calendar year, or (b) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. Under the amendments adopted by the OTS,
certain savings associations will be permitted to pay capital distributions
during a calendar year that do not exceed the association's net income for that
year plus its retained net income for the prior two years, without notice to, or
the approval of, the OTS. However, a savings association subsidiary of a savings
and loan holding company, such as the Bank, will continue to have to file a
notice unless the specific capital distribution requires an application. In
addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to meet its minimum capital requirements, as described above.
See "--Prompt Corrective Regulatory Action."
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
for the month ended June 30, 2000 was approximately 11.8% which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Assessments. The OTS has adopted amendments to its regulations, effective
January 1, 1999, that are intended to assess savings associations on a more
equitable basis. The new regulations will base the assessment for an individual
savings association on three components: the size of the association, on which
the basic assessment would be based; the association's supervisory condition,
which would result in an additional assessment based of a percentage of the
basic assessment for any savings institution with a composite rating of 3, 4 or
5 in its most recent safety and soundness examination; and the complexity of the
association's operations, which would result in an additional assessment based
of a percentage of the basic assessment for any savings association that managed
over $1.0 billion in trust assets, serviced for others loans aggregating more
than $1.0 billion, or had certain off-balance sheet assets aggregating more than
$1.0 billion. In order to avoid a disproportionate impact on the smaller savings
institutions, which are those whose total assets never exceeded $100.0 million,
the new regulations provide that the portion of the assessment based on asset
size will be the lesser of the assessment under the amended regulations or the
regulations before the amendment. Management believes that any change in its
rate of OTS assessments under the amended regulations will not be material.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings institutions to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
institutions located in another state and (b) to an association that either
satisfies the "QTL" test for a qualified thrift lender or qualifies as a
"domestic building and loan association" under the Internal Revenue Code of 1986
(the "Code"), which imposes qualification
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<PAGE>
requirements similar to those for a "qualified thrift lender" under HOLA. See
"--QTL Test." The authority for a federal savings institution to establish an
interstate branch network would facilitate a geographic diversification of the
association's activities. This authority under HOLA and the OTS regulations
preempts any state law purporting to regulate branching by federal savings
institutions.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination on January 20, 1998.
The CRA regulations establish an assessment system that bases an
association's rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b)
an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefitting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs, and
other offices.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings institution (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (a) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. In addition, extensions of credit in excess of certain
limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of
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<PAGE>
fiduciary duty or certain other wrongful actions that causes or is likely to
cause a more than a minimal loss or other significant adverse effect on an
insured savings institution. Civil penalties cover a wide range of violations
and actions and range from $5,000 for each day during which violations of law,
regulations, orders, and certain written agreements and conditions continue, up
to $1 million per day for such violations if the person obtained a substantial
pecuniary gain as a result of such violation or knowingly or recklessly caused a
substantial loss to the institution. Criminal penalties for certain financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to take
enforcement action against an institution that fails to comply with its
regulatory requirements, particularly with respect to its capital requirements.
Possible enforcement actions range from the imposition of a capital plan and
capital directive to receivership, conservatorship, or the termination of
deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to
the Director of OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director of the
OTS, the FDIC has authority to take such action under certain circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the
Riegle Community Development and Regulatory Improvement Act of 1994 ("Community
Development Act"), the OTS, together with the other federal bank regulatory
agencies, adopted a set of guidelines prescribing safety and soundness
standards. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings standards, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. The OTS and the other agencies determined
that stock valuation standards were not appropriate. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings institution to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Banks are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value limitations so
long as such exceptions are reviewed and justified appropriately. The guidelines
also list a number of lending situations in which exceptions to the
loan-to-value standards are justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings institutions. For
this purpose, a savings institution would be placed in one of five categories
based on the association's capital. Generally, a savings institution is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings institution will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the CAMEL financial institutions rating system). A savings institution
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial
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<PAGE>
institutions rating system) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital of less than 6.0% or a Tier 1
risk-based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements." At
June 30, 2000, the Bank met the criteria for being considered
"well-capitalized."
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts. The Bank is a member of the SAIF, and the
Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains
another insurance fund, the Bank Insurance Fund (the "BIF"), which primarily
insures the deposits of banks and state chartered savings banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the reporting period ending seven months before the
assessment period. The three capital categories consist of (a) well capitalized,
(b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subcategories within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds
Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the
reserve ratio requirement. If the FDIC determines that assessment rates should
be increased, institutions in all risk categories could be affected. The FDIC
has exercised this authority several times in the past and could raise insurance
assessment rates in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.
The Funds Act also amended the FDIA to expand the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the assessment base for
the FICO bonds included the deposits of both BIF- and SAIF-insured institutions.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
assessment for the payments on the FICO bonds for the fiscal year 2000 was
$36,365.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Atlanta,
which is one of the regional FHLBs composing the FHLB System. Each FHLB provides
a central credit facility primarily for its member institutions. The Bank, as a
member of the FHLB of Atlanta, is required to acquire and hold shares of capital
stock in the FHLB of Atlanta in an amount equal to 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations, but not less than $500. The Bank was
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<PAGE>
in compliance with this requirement with an investment in FHLB of Atlanta stock
at June 30, 2000, of $776,000. Any advances from a FHLB must be secured by
specified types of collateral, and all long-term advances may be obtained only
for the purpose of providing funds for residential housing finance.
For the fiscal years ended June 30, 2000, 1999 and 1998, dividends from the
FHLB of Atlanta to the Bank amounted to $46,000, $45,000 and $43,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely also be reduced.
Federal Home Loan Bank System Modernization Act of 1999. Title 6 of the
Gramm-Leach-Bliley Act, entitled the Federal Home Loan Bank System Modernization
Act of 1999 (FHLB Modernization Act), has amended the FHLB Act by allowing for
voluntary membership and modernizing the capital structure and governance of the
FHLB system. The new capital structure established under the FHLB Modernization
Act sets forth new leverage and risk-based capital requirements based on
permanence of capital. It also requires some minimum investment in FHLB stock of
all member entities. Capital will include retained earnings and two forms of
stock: Class A stock redeemable within six months, written notice and Class B
stock redeemable within five years, written notice. The FHLB Modernization Act
provides a transition period to the new capital regime, which will not be
effective until the FHLB enacts implementing regulations. The FHLB Modernization
Act also reduces the period of time in which a member exiting the FHLB system
must stay out of the system.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depositary institutions may be required
to maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $46.5 million. The amount of
aggregate transaction accounts in excess of $46.5 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.9 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
REGULATION OF THE HOLDING COMPANY
General. The Holding Company and the Company are holding companies
chartered pursuant to Section 10(o) of the HOLA. As such, the Holding Company
and the Company are registered with and subject to OTS examination and
supervision as well as certain reporting requirements. In addition, the OTS has
enforcement authority over the Company and the Holding Company and any of its
non-savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness, or stability of a subsidiary savings
institution. Unlike bank holding companies, federal mutual holding companies are
not subject to any regulatory capital requirements or to supervision by the
Federal Reserve System.
Restrictions Applicable to Activities of Mutual Holding Companies. Pursuant
to Section 10(o) of the HOLA, a mutual holding company may engage only in the
following activities: (i) investing in the stock of a savings institution; (ii)
acquiring a mutual association through the merger of such association into a
savings institution subsidiary of such holding company or an interim savings
institution subsidiary of such holding company; (iii) merging with or acquiring
another holding company, one of whose subsidiaries is a savings institution;
(iv) investing in a corporation the capital stock of which is available for
purchase by a savings institution under federal law or under the law of any
state where the subsidiary savings institution or associations have their home
offices; (v) furnishing or performing management services for a savings
institution subsidiary of such holding company;
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<PAGE>
(vi) holding, managing, or liquidating assets owned or acquired from a savings
institution subsidiary of such company; (vii) holding or managing properties
used or occupied by a savings institution subsidiary of such company; (viii)
acting as trustee under a deed of trust; (ix) any other activity (a) that the
FRB, by regulation, has determined to be permissible for bank holding companies
under Section 4(c) of the BHC Act, unless the Director of the OTS, by
regulation, prohibits or limits any such activity for savings and loan holding
companies, or (b) in which multiple savings and loan holding companies were
authorized by regulation to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such holding company
is approved by the Director of the OTS. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed above, and it has a period of two years to cease any
non-conforming activities and divest any non-conforming investments.
Restrictions Applicable to All Savings and Loan Holding Companies. The HOLA
prohibits a savings and loan holding company, including a federal mutual holding
company, directly or indirectly, from acquiring (i) control (as defined under
HOLA) of another savings institution (or a holding company parent thereof)
without prior OTS approval; (ii) more than 5% of the voting shares of another
savings institution (or holding company parent thereof) that is not a
subsidiary, subject to certain exceptions; (iii) through merger, consolidation,
or purchase of assets, another savings institution or a holding company thereof,
or acquiring all or substantially all of the assets of such institution (or a
holding company thereof) without prior OTS approval; or (iv) control of any
depository institution not insured by the FDIC (except through a merger with and
into the holding company's savings institution subsidiary that is approved by
the OTS).
A savings and loan holding company may not acquire as a separate subsidiary
an insured institution that has a principal office outside of the state where
the principal office of its subsidiary institution is located, except (i) in the
case of certain emergency acquisitions (as defined under HOLA) approved by the
FDIC; (ii) if such holding company controls a savings institution subsidiary
that operated a home or branch office in such additional state as of March 5,
1987, and (iii) if the laws of the state in which the savings institution to be
acquired is located specifically authorize a savings institution chartered by
that state to be acquired by a savings institution chartered by the state where
the acquiring savings institution or savings and loan holding company is located
or by a holding company that controls such a state chartered association. The
conditions imposed upon interstate acquisitions by those states that have
enacted authorizing legislation vary. Some states impose conditions of
reciprocity, which have the effect of requiring that the laws of both the state
in which the acquiring holding company is located (as determined by the location
of its subsidiary savings institution) and the state in which the association to
be acquired is located, have each enacted legislation allowing its savings
institutions to be acquired by out-of-state holding companies on the condition
that the laws of the other state authorize such transactions on terms no more
restrictive than those imposed on the acquirer by the state of the target
association. Some of these states also impose regional limitations, which
restrict such acquisitions to states within a defined geographic region. Other
states allow full nationwide banking without any condition of reciprocity. Some
states do not authorize interstate acquisitions of savings institutions. In
evaluating an application by a holding company to acquire a savings institution,
the OTS must consider the financial and managerial resources and future
prospects of the company and savings institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community, and competitive factors.
If the savings institution subsidiary of a federal mutual holding company
fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS, the holding company must register with the FRB as a bank
holding company under the BHC Act within one year of the savings institution's
failure to so qualify. For additional information in this regard, see "--
Regulation of Federal Savings Banks -- QTL Test."
For a description of certain restrictions on transactions between the Bank
and its affiliates, including, without limitation, the Holding Company, see "--
Regulation of Federal Savings Banks -- Transactions with Related Parties."
26
<PAGE>
REGULATION OF INSURANCE ACTIVITIES
The Company offers various insurance products through AF Insurance
Services, Inc., a wholly owned subsidiary of the Company. AF Insurance Services,
Inc. is licensed and regulated by the North Carolina Department of Insurance
(the "Department"). As such AF Insurance Services, Inc. is subject to the
supervision, examination and reporting requirements of the Department and its
activities are governed by the laws and regulations of the State of North
Carolina.
REGULATION OF SECURITIES BROKERAGE ACTIVITIES
The Company offers brokerage and investment products through AF Brokerage,
Inc., a wholly owned subsidiary of the Company. AF Brokerage, Inc. is a North
Carolina corporation which is registered as a broker-dealer under Section 15 of
the Securities Exchange Act of 1934, as amended, and is a member of the National
Association of Securities Dealers, Inc. (the "NASD"). As such, AF Brokerage,
Inc. is subject to the supervision, examination and reporting requirements of
the SEC, the NASD and the various states in which it conducts business.
FEDERAL SECURITIES LAWS
The Common Stock of the Company is registered with the SEC under the
Exchange Act. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following discussion is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Bank, Mutual Company or Stock Company. The Bank has not been audited for the
last eight years.
For federal income tax purposes, the Bank reports its income on the basis
of a taxable year ending June 30, using the accrual method of accounting, and is
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's tax reserve for bad debts,
discussed below. The Bank and Stock Company constitute an affiliated group of
corporations and, therefore, are eligible to report their income on a
consolidated basis. Because the Mutual Company will own less than 80% of the
Common Stock, it will not be a member of such affiliated group and will report
its income on a separate return.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
June 30, 1996. Since the Bank has already provided a deferred tax liability
equal to the amount of such recapture, the recapture will not adversely impact
the Bank's financial condition or results of operations.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., its reserve as of
June 30, 2000, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
constitute non-dividend distributions and, therefore, will not be included in
the Bank's income.
27
<PAGE>
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired, under
current Administration proposals, such tax will be retroactively reinstated for
taxable years beginning after December 31, 1996 and before January 2008.
Elimination of Dividends; Dividends Received Deduction. The Stock Company
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. Because, following completion of
the Reorganization, Mutual Company will not be a member of such affiliated
group, it will not qualify for such 100% dividends exclusion, but will be
entitled to deduct 80% of the dividends it receives from Stock Company so long
as it owns more than 20% of the Common Stock.
STATE TAXATION
Under North Carolina law, the corporate income tax is 7.0% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of .0015 applied
to the greatest of the institution's (i) capital stock, surplus and undivided
profits, (ii) investment in tangible property in North Carolina or (iii) 55% of
the appraised valuation of property in North Carolina.
28
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through its main office, located in West
Jefferson, North Carolina, and its branches located in Warrensville, Jefferson,
Sparta, Wilkesboro, Elkin, Lenoir and Boone, North Carolina. The Company owns
the main office, corporate offices and the Jefferson Branch. Management believes
that the Bank's current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Holding Company.
<TABLE>
<CAPTION>
DATE LEASE NET BOOK
LEASED OR LEASED OR EXPIRATION VALUE AT
OWNED ACQUIRED DATE JUNE 30, 2000
----- -------- ---- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Corporate Offices................ Owned 06/15/00 -- $ 1,700
21 East Ashe Street
West Jefferson, NC 28694
Insurance and Brokerage Offices.. Owned 06/30/97 -- 599
206 S. Jeferrson Avenue
West Jefferson, NC 28694
West Jefferson Branch............ Owned 06/30/63 -- 195
205 S Jefferson Avenue
West Jefferson, NC 28694
Jefferson Branch................. Owned 05/18/94 -- 519
840 E. Main Street
Jefferson, NC 28640
Warrensville Branch.............. Leased 08/31/98 08/31/2000* --
4951 NC Hwy. 88 West
Warrensville, NC 28693
Alleghany First.................. Leased 01/09/98 12/31/2000** --
403 South Main Street
Sparta, NC 28675
Appalachian First................ Leased 02/26/99 02/26/2003*** --
285 Hwy 105 Ext.
Boone, NC 28607
AF Brown Insurance............... Leased 09/01/97 08/31/1999**** --
315 Main Street
North Wilkesboro, NC 28659
AF Blair......................... Leased 04/01/99 03/31/2004 --
324 Morganton Blvd., SW
Lenior, NC 28645
AF Insurance Center of Elkin..... Leased 12/01/99 11/30/2002** --
277 A West Main Street
Elkin, NC 28621
</TABLE>
-------------
* Option to renew for two additional five-year periods.
** Option to renew for an additional three-year period.
*** Option to renew two additional one-year periods.
**** Option to renew for three additional one-year periods.
29
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2000, there were no material legal proceedings to which the
Company or any of its subsidiaries was a party or to which any of its property
was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Common Stock" and "Market for the
Common Stock" in the Registrant's 2000 Annual Report to Stockholders on page 56,
and is incorporated herein by reference.
Information relating to the payment of dividends by the Registrant appears
under "Common Stock" and "Market for the Common Stock" in the Registrant's 2000
Annual Report to Stockholders on page 56, and is incorporated herein by
reference. A dividend declared by the Board of Directors of the Bank is
considered a capital distribution from the Bank to the stockholders, including
AsheCo, M.H.C., its mutual holding company. Under the requirements of the OTS,
there are certain restrictions on the ability of the Bank to pay a capital
distribution. See "Regulation--Limitation on Capital Distributions."
The Company paid cash dividends totaling $.20 per share during each of the
years ended June 30, 2000 and 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain of the above-captioned information appears under "Selected
Financial and Other Data of the Company" "Management's Discussion and Analysis"
and in the Registrant's 2000 Annual Report to Stockholders on pages 1 through 2,
and 5 through 18 and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of AF Bankshares, Inc., together with the report
thereon by McGladrey & Pullen, LLP appears in the Registrant's 2000 Annual
Report to Stockholders on pages 19 through 53 and are incorporated herein by
reference.
<TABLE>
<CAPTION>
Page(s) in
Annual Report
------------------
<S> <C>
o Independent Auditor's Report......................................... 19
o Consolidated Statements of Financial Condition,
June 30, 2000 and 1999............................................ 20
o Consolidated Statements of Income
Years Ended June 30, 2000 and 1999................................. 21
o Consolidated Statements of Stockholders' Equity,
Years Ended June 30, 2000 and 1999................................. 22
o Consolidated Statements of Cash Flows,
Years Ended June 30, 2000 and 1999................................. 24
o Notes to Consolidated Financial Statements............................ 26
</TABLE>
30
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information relating to Directors and Executive Officers of the Company
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on November 6, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein
by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 6, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on November 6, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on November 6, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
2.1 Agreement and Plan of Reorganization dated September
15, 1997 by and among Ashe Federal Bank, AF
Bankshares, Inc. and Ashe Interim Savings Bank
(incorporated by reference to the Registration
Statement on Form 8-A, as filed with the SEC on June
16, 1998 (the "Form 8-A")).
3.1 Federal Stock Charter of the Company (Incorporated
by reference to Exhibit 3.1 of the Form 8-A).
3.2 Bylaws of the Company (Incorporated by reference to
Exhibit 3.2 of the Form 8-A).
4.1 Common Stock Certificate of the Company
(Incorporated by reference to Exhibit 4.3 of the
Form 8-A).
10.1 Employment Agreement with James A. Todd, President
and Chief Executive Officer (incorporated by
reference to the 10-KSB for the year ended June 30,
1998).*
10.2 Employment Agreement with Melanie Paisley Miller,
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer (incorporated by reference
to the 10-KSB for the year ended June 30, 1998).*
10.3 Employment Agreement with Martin G. Little, Senior
Vice President and Chief Lending Officer
(incorporated by reference to the 10-KSB for the
year ended June 30, 1998).*
31
<PAGE>
10.4 Employee Stock Ownership Plan of Ashe Federal Bank
(incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended June 30,
1998).*
13.1 2000 Annual Report to Stockholders, is filed
herewith.
21.1 Subsidiary Information is incorporated herein by
reference to "Part I - Subsidiary Activities."
27.1 Financial Data Schedule.**
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended June 30, 2000.
*Incorporated by reference to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1998 as filed with the SEC on September 29, 1998.
**Filed in electronic format only.
32
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
AF BANKSHARES, INC.
(Small Business Issuer)
Date: September 22, 2000 By: /s/James A. Todd
------------------------ ----------------------------
James A. Todd
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Date
----
<S> <C>
/s/James A. Todd September 22, 2000
------------------------------------------------------------
James A. Todd
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Melanie Paisley Miller September 22, 2000
-----------------------------------------------------------
Melanie Paisley Miller
Executive Vice President, Secretary, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
/s/James A. Todd September 22, 2000
------------------------------------------------------------
Jan R. Caddell - Director
/s/Jan R. Caddell September 22, 2000
--------------------------------------------------------------
Kenneth R. Greene - Director
/s/William O. Ashley, Jr. September 22, 2000
----------------------------------------------------------
William O. Ashley, Jr. - Director
/s/Wayne R. Burgess Director September 22, 2000
------------------------------------------------------
Wayne R. Burgess - Director
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/Frank E. Roland September 22, 2000
--------------------------------------------------------
Frank E. Roland - Director
/s/Jerry L. Roten September 22, 2000
----------------------------------------------------------
Jerry L. Roten - Director
/s/John D. Weaver September 22, 2000
--------------------------------------------------------
John D. Weaver - Director
</TABLE>
34
