EXHIBIT 13
SPECIAL ANNUAL REPORT COVER TO BE PUBLISHED BY CLIENT
AF BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 2000
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CONTENTS
Selected Financial Data 1 - 2
President's Message 3
Operational Review 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6 - 18
Independent Auditor's Report 19
Financial Statements 20 - 53
Corporate Information 54 - 56
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SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The following tables set forth certain information concerning the
financial position and results of operations of the Company at the dates and for
the years indicated. The selected financial condition data and the selected
operating data for the years then ended were derived from the audited financial
statements of the Company. The information should be read in conjunction with
the Financial Statements of the Bank presented elsewhere.
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AT JUNE 30,
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2000 1999 1998 1997 1996
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(IN THOUSANDS)
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SELECTED FINANCIAL CONDITION DATA:
Total assets ............................................. $133,370 109,931 $ 100,074 $82,024 $72,318
Loans receivable, net (1) ................................ 108,778 81,157 72,628 70,236 62,485
Investment securities (2) ................................ 9,835 11,798 9,017 6,937 5,560
Cash and cash equivalents(3) ............................. 7,423 12,395 14,789 2,533 1,830
Savings deposits ......................................... 102,680 93,106 82,488 68,218 63,468
FHLB advances ............................................ 15,513 2,564 4,116 1,654 1,250
Equity ................................................... 12,540 12,218 11,486 10,979 7,238
Book value per share ..................................... 11.95 11.64 10.90 10.98 N/A
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
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2000 1999 1998 1997 1996
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(IN THOUSANDS)
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SELECTED OPERATING DATA:
Interest income and dividends ........................... $ 9,393 7,879 $ 7,356 $ 6,213 $ 5,683
Interest expense ......................................... 4,685 3,967 3,795 3,245 3,204
-------- ------- --------- ------- -------
Net interest income ............................... 4,708 3,912 3,561 2,968 2,479
Provision for loan losses ............................... 88 20 (25) 20 57
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Net interest income after provision for
loan losses .................................. 4,620 3,892 3,586 2,948 2,422
Non-interest income ...................................... 1,821 1,206 991 169 142
Non-interest expense ..................................... 5,660 4,348 3,448 2,556 1,809
-------- ------- --------- ------- -------
Income before income tax expense and cumulative
effect of change in accounting principles ......... 781 749 1,089 561 755
Income tax expense ....................................... 328 235 381 218 301
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Net income ........................................ $ 453 514 $ 708 $ 343 $ 454
======== ======= ========= ======= =======
Basic earnings per share (4) ............................. $ 0.45 0.52 $ 0.73 $ 0.44 $ N/A
======== ======= ========= ======= =======
Diluted earnings per shares (4) .......................... $ 0.45 0.52 $ 0.72 $ 0.44 $ N/A
======== ======= ========= ======= =======
Dividends per share ...................................... $ 0.20 0.20 $ 0.20 $ 0.10 $ N/A
======== ======= ========= ======= =======
</TABLE>
(1) Loans receivable, net is comprised of total loans less allowance for
loan losses, undisbursed loan funds, and deferred loan fees.
(2) Includes FHLB stock, certificates of deposit and investment securities.
(3) Includes interest-earning deposit balances of $2.6 million, $4.2
million, $11.8 million, $1.2 million, and $840,000, at June 30, 2000,
1999, 1998, 1997 and 1996, respectively.
(4) Earnings per share has been calculated in accordance with the Statement
of Financial Accounting Standards No. 128, Earnings Per Share, and is
based on net income for the year, divided by the weighted average
number of shares outstanding for the year. In accordance with the
AICPA's SOP 93-6, unallocated ESOP shares were deducted from
outstanding shares used in the computation of earnings per share.
Diluted earnings per share includes the effect of dilutive common stock
equivalents in the weighted average number of shares outstanding.
1
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AT OR FOR THE YEAR ENDED JUNE 30,
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2000 1999 1998 1997 1996
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SELECTED FINANCIAL RATIOS AND OTHER DATA: (1)
PERFORMANCE RATIOS:
Return on average assets (1) ............................. 0.37% 0.49% 0.78% 0.44% 0.65%
Return on average equity (1) ............................. 3.99% 4.47% 6.31% 3.64% 6.50%
Average equity to average assets ......................... 9.21% 11.02% 12.21% 12.10% 10.05%
Equity to total assets at end of period .................. 9.40% 11.11% 11.48% 13.39% 10.01%
Interest rate spread (2) ................................. 3.66% 3.64% 3.64% 3.34% 3.38%
Average interest-earning assets to
to average interest-bearing liabilities ............. 108.18% 110.20% 111.95% 114.40% 107.79%
Net interest margin (3) .................................. 4.18% 4.06% 4.17% 3.96% 3.76%
Non-interest expense to average assets ................... 4.59% 4.17% 3.80% 3.28% 2.62%
Efficiency ratio (4) ..................................... 86.69% 84.96% 76.63% 81.48% 69.20%
Dividend payout ratio (6) ................................ 44.44% 38.46% 27.40% 22.73% N/A
REGULATORY CAPITAL RATIOS (5):
Tangible capital ......................................... 8.89% 10.00% 10.90% 12.90% 9.80%
Core capital ............................................. 8.89% 10.00% 10.90% 12.90% 9.80%
Total risk-based capital ................................. 11.94% 17.40% 20.40% 26.30% 19.80%
ASSET QUALITY RATIOS AND OTHER DATA:
Ratios:
Nonperforming loans to total loans .................. 0.36% 0.07% 0.03% 0.18% 0.27%
Nonperforming loans and real estate owned
total assets ..................................... 0.53% 0.11% 0.06% 0.16% 0.24%
Allowance for loan losses to:
Nonperforming loans .............................. 238.20% 1871.14% 851.10% 787.02% 629.89%
Total loans ...................................... 0.86% 1.28% 1.60% 1.42% 1.70%
Number of full service branches .......................... 5 5 4 3 3
</TABLE>
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(1) With the exception of end of period ratios, all ratios are based on
average monthly or quarterly balances during the indicated periods, and
are annualized where appropriate. Asset Quality Ratios and Regulatory
Capital Ratios are end of period ratios.
(2) The interest rate spread represents the difference between the
weighted-average yield on interest-bearing assets and the weighted-
average cost of interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(4) The efficiency ratio represents noninterest expense as a percentage of
the sum of net interest income and noninterest income.
(5) For definitions and further information relating to the Bank's
regulatory capital requirements, see "Regulation - Regulation of
Federal Savings Associations - Capital Requirements" and Note 7 of
Notes to the Consolidated Financial Statements.
(6) The dividend payout ratio represents dividends per share as a
percentage of basic earnings per share.
Earnings per share has been calculated in accordance with the Statement
of Financial Accounting Standards No. 128, Earnings Per Share, and is
based on net income for the year, divided by the weighted average
number of shares outstanding for the year. In accordance with the
AICPA's SOP 93-6, unallocated ESOP shares were deducted from
outstanding shares used in the computation of earnings per share.
2
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PRESIDENT'S MESSAGE
Dear Shareholder,
Your Company closes Fiscal Year 2000 and officially enters the 21st Century
prepared to offer our customers more financial solutions than ever before, along
with the broadest array of financial products in our 60+ year history. During
the year, we continued our growth plan that will allow us to support the cost of
delivering the products expected by our Customers.
Preparations for Y2K dampened our earnings but even so, we had a good year.
Detailed financial statements are contained elsewhere in this report but I
believe that one measure of our success is the 51% growth in non-interest income
during our 2000 year reflecting the growing contributions of our insurance and
brokerage business. Non-interest income totaled $1,821,239 in 2000 compared to
$1,205,759 during the 1999 fiscal year. Asset growth continues during the past
year as well ending the year at just over $133 million, a 21% increase over the
proceeding year-end. Most of this growth was driven by a 34% increase in loans
outstanding during the year.
We have offered a growing menu of banking products for the past 61 years. The
2000 fiscal year marked the third year of our offering insurance and annuity
products through AF Insurance Services. During the year, we added AF Insurance
Service Center in Elkin and during July 2000 the Company executed a letter of
intent to acquire an agency in Boone. Not only do these acquisitions complete
our market penetration, we now have more companies with a wider range of
products plus the volume to receive better rates from our insurance companies.
The newest segment of our financial solutions is AF Brokerage, Inc. AF
Brokerage, Inc. received final approval from NASD to operate as a fully licensed
broker/dealer during the 2000 year becoming the only locally owned broker/dealer
in our marketplace. We no longer have to rely on a third party provider for our
non-insured, non-traditional banking investments allowing local people to assist
local people in building their future.
With the addition of AF Brokerage and the expansion of the insurance agency,
your Company has the products to be the premier financial services provider in
every market we serve. The difference is now performance. I lead every member of
the AF Team in committing that performance is the primary objective in the
coming year; improving upon our non-interest income and out performing our
competitors--both local, out of town and out of state.
Thank you for your continued support and guidance. As always, your questions,
comments and suggestions are most welcome.
Sincerely,
James A. Todd
President & CEO
3
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4
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AF BANKSHARES 2000 OPERATIONAL REVIEW
During Fiscal Year 2000, the Company made significant strides in expanding it's
traditional banking business and it's broader financial services capabilities.
Continuing emphasis on checking accounts and selected FDIC insured investment
savings vehicles throughout the year resulted in a 10% increase in deposits,
from $93,106,090 at June 30, 1999 to $102,679,834 at June 30, 2000. At the same
time, the aggressive marketing of home equity lines and other loans in response
to borrowing needs of individuals, families, and businesses in the Company's
markets produced a 34% boost in total loans receivable.
Growth of the Boone bank, Appalachian First Bank, continued with the
introduction of a major television, newspaper, and radio campaign throughout
Watauga County. Of particular note is the significant growth in commercial loans
at Appalachian First.
On December 1, 1999, the Company purchased an insurance agency in Elkin, North
Carolina, now known as AF Insurance Service Center. A longstanding independent
agency in Elkin, AF Insurance Service Center has already begun producing
additional incremental business for the company. It is well worth noting that in
Fiscal Year 2000, the Company's insurance commissions from all agencies almost
doubled, from $499.9 million to $991.3 million.
On October 22, 1999, AF Brokerage, Inc. received approval of its membership in
the National Association of Securities Dealers (NASD). Subsequently, AF
Brokerage began operations in the fourth quarter of 2000 as a fully licensed
independent broker/dealer -- the first broker/dealer actually headquartered in
Ashe County.
Also, plans were finalized in Fiscal Year 2000 to improve the Company's data
processing and computer systems by implementing a new operating system provided
by Fiserv, Atlanta. The new system will be fully operational by the end of the
first quarter Fiscal Year 2001; which should increase customer responsiveness,
while reducing processing times and aiding the customer service effort by the
point of sale.
Other noteworthy events during Fiscal Year 2000 include:
o The opening of the Company's new administrative and
headquarters building in downtown West Jefferson.
o The successful preparations for Y2K, which while the problem
turned out to be negligible, helped underscore the Company's
commitment to our customers.
o Continuing employee development and training programs designed
to make our outstanding customer representatives even more
successful.
All in all, Fiscal Year 2000 was an excellent start for your Company in the new
millennium.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates. Factors which
could influence the estimates include changes in general and local market
conditions, legislative and regulatory conditions and an adverse interest rate
environment. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements, the accompanying Notes
to the Consolidated Financial Statements and the other sections contained in
this document.
REORGANIZATION
AF Bankshares, Inc. (the "Company") is a federally chartered stock holding
company for AF Bank (the "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 Company has an
insurance subsidiary operating under the trade names AF Ashelande Insurance
Service, in West Jefferson; AF Brown Insurance Agency in Wilkesboro; AF Blair
Insurance Agency in Lenior; AF Insurance Service Center in Elkin; and AF
Insurance Services, Inc. in Sparta, West Jefferson and Jefferson, North
Carolina. The Company has a brokerage service subsidiary, operating as AF
Brokerage, Inc., which serves Ashe, Alleghany, Wilkes and Watauga Counties.
On April 15, 1996, the Board of Directors of Ashe Federal Bank adopted a Plan of
Reorganization and the related Stock Issuance Plan pursuant to which the Bank
exchanged its federal mutual savings bank charter for a federal stock savings
bank charter, conducted a minority stock offering, and formed AsheCo, MHC a
mutual holding company which owned more than 50% of the common stock issued by
the Bank. The Bank conducted its minority stock offering in July and August of
1996 and the closing occurred on October 4, 1996. The Bank sold 461,779 shares
of common stock in the minority stock offering, which includes 36,942 shares
sold to its Employee Stock Ownership Plan (the "ESOP"), and issued 538,221
shares to the mutual holding company.
At the Bank's annual meeting held on December 8, 1997, the shareholders of Ashe
Federal Bank approved the Ashe Federal Bank 1997 Stock Option Plan; the Ashe
Federal Bank 1997 Recognition and Retention Plan; a change in the Bank's federal
stock charter, changing the corporate name to AF Bank and approved a plan of
reorganization providing for the establishment of AF Bankshares, Inc., as a
federally chartered stock holding company parent of the Bank. 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 and the Company became a
majority owned subsidiary of AsheCo, MHC.
During the year ended June 30, 1999, the Company repurchased 6,300 shares of its
common stock for a total price of $113,750, and then reissued 2,000 of these
shares. Management does not plan to acquire additional shares until it has a
specific purpose for additional stock purchases.
GENERAL
The Company had net income of approximately $453,000 and $514,000 for the years
ended June 30, 2000 and 1999, respectively. 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 cost of interest-bearing savings deposits and other borrowings. The
primary interest-earning asset of the Company is its residential mortgage loan
portfolio representing 60.0% of total loans, with approximately 36.0% of
portfolio mortgage loans at fixed rates at June 30, 2000. The net interest
income of the
6
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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, deposit transaction fees, insurance
commissions generated from the insurance agency subsidiary, income generated
from the Company's brokerage subsidiary and for payment of other services
provided to customers by the Company. The major non-interest costs to the
Company include compensation and benefits, occupancy and equipment and 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 area. For the year ended June 30, 2000, there was an
unusual nonrecurring expenditure related to the Company's preparations for the
anticipated Y2K computer problem; this expenditure directly and adversely
affected net earnings for the period.
MANAGEMENT STRATEGY
On March 18, 1998 the Bank opened a new office, Alleghany First Bank, in Sparta,
North Carolina. Additionally, the Bank's insurance agency subsidiary offers
property, casualty, health and life insurance products within the Alleghany
facility. On March 1, 1999, the Bank opened a new branch office, in Boone, North
Carolina, operating under the trade name Appalachian First Bank. Entry in the
Boone and Alleghany markets significantly expands the Company's potential to
market its banking, insurance and non-insured investment products to a larger
and more diverse market.
On April 1, 1999 the Company purchased an insurance agency in Lenoir, North
Carolina that operates under the trade name, AF Blair Insurance Agency. On
December 1, 1999 the Company purchased an insurance agency in Elkin, North
Carolina that operates under the trade name, AF Insurance Service Center. On
July 17, 2000 the Company signed a letter of intent to purchase the assets of an
insurance agency in Boone, North Carolina. If consummated, the purchase is
expected to close in the second quarter of the 2001 fiscal year. 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 three elements: funds transfer, including checking accounts and
savings instruments, insurance and securities brokerage. Further, management
believes that the ability to offer insurance and brokerage services improves the
Company's competitive position; enhances the Company's growth; and increases
both the scope and scale of the Company's marketing efficiency. During the year
ended June 30, 1999, the Company established a securities brokerage subsidiary,
AF Brokerage, Inc., which applied to the NASD for membership 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, expansion 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.
7
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During 1995, management introduced fixed rate mortgage loans with provisions
allowing the Bank to "call the loan due" after three or five year periods, thus
reducing the period of time that the Company is exposed to a fixed rate of
interest in order to reduce interest rate risk. The call provision is now used
primarily where the fixed rate mortgage does not qualify for sale in the
secondary market and where the borrower has no desire for an ARM. At
approximately the same time, the Company began to offer consumer loans,
including automobile and home improvement loans. In June 1998, the Company began
funding automobile loans originated by selected dealers in its market area where
the Company's loan officers have final underwriting authority to determine the
acceptability of the borrowers to the Company. At the end of June 2000, the
Company had closed approximately $4.7 million of these loans. At the end of June
2000, consumer loans constituted approximately 15.2% of portfolio loans. In
1994, the Company began offering commercial loans to small businesses in Ashe
County and has continued that business to include Alleghany County, and Watauga
County. Commercial loans generally have rates based on the prime rate of
interest that more closely reflects market interest rates. Additionally,
consumer and commercial loans generally have shorter terms and thus greater
interest rate sensitivity than mortgage loans. Management has pursued the above
mortgage and non-mortgage loan strategies as primary strategies to reduce the
level of interest rate risk inherent in the Bank's loan portfolio and maintain
acceptable levels of credit risk. Funding for the loan originations has been
provided by aggressively marketing savings and checking accounts while
maintaining competitive pricing on certificates of deposits and by borrowing
from the Federal Home Loan Bank of Atlanta ("FHLB"). Deposits increased $9.6
million and FHLB advances increased $12.9 million during 2000.
In addition to loans, the Bank invests in federal agency securities,
certificates of deposit (generally with terms of five years or less), overnight
deposits with the FHLB, equity securities in the Federal Home Loan Mortgage
Corporation (FHLMC), municipal bonds and mortgage-backed securities secured by
adjustable rate mortgages and issued by the Government National Mortgage
Association (GNMA) and Fannie Mae. Management does not engage in the practice of
trading securities, rather, the Company's investment portfolio consists
primarily of securities designated as available for sale. Management intends to
maintain investment securities to meet liquidity needs as a supplement to its
lending activities and as a means to reduce interest rate risk and credit risk
of its asset base in exchange for lower rates of return than would typically be
available with other lending activities.
During the first quarter of the 2001 fiscal year, the Company is switching data
processing service providers for the Company to Fiserv, Atlanta. Fiserv, Atlanta
offers a system that is more versatile then the Company's current system.
Management believes this switch will enable the Company to provide an improved
level of customer service by improving the delivery capability of its system and
allowing the Company to provide additional products in order to met customers
needs. Management does not expect substantial increases in its data processing
costs to result from this switch.
Management believes it is important to view the annual financial results of the
Company within the larger context of the Company's long-term strategic business
plan. Doing so helps keep short-term results in better perspective, and
underscores management's commitment to the long-term profitability and success
of the Company.
It has long been management's view that the Company's success in the 21st
Century will depend in large part upon its ability to compete far beyond the
narrow boundaries imposed upon banking during the majority of the 20th Century.
In fact, the transition from "banking" to financial services provider impacted
every major competitor of the Company. The Financial Services Modernization Act
is an excellent example of regulatory and governmental support of this
viewpoint.
Management believes that the Company's customers perceive "financial services"
to encompass five broad categories: funds transfer including checking accounts;
insured savings instruments; credit/lending services; insurance; and securities
brokerage. Preparing the Company to compete on a competitively superior basis in
all these categories has had a negative impact on short-term earnings.
8
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Added to these planned investments in the Company's future were several factors
outside the control of management:
o The costs of regulatory compliance with, and preparations for
the possible Year 2000 computer problem (which in hard dollars
cost the Company more than $250,000);
o The recent tightening of short-term interest rates by the
Federal Reserve in an effort to contain inflation; and
o The resulting inverted yield curve between higher short-term
interest rates and lower long-term rates that existed during
the majority of the 2000 fiscal year.
All these factors tended to exert additional downward pressure on earnings
during the most recent fiscal year ended June 30, 2000.
However, it is well worth noting that -- given both these planned and
uncontrollable dampening factors -- the Company's earnings for the most recently
completed year remain positive.
o An increase in net loans of $27.6 million or 34.0%;
o Asset growth of $23.4 million or 21.3%, resulting in enhanced
leveraging the Company's capital;
o Continued growth in non interest income, reflecting the
Company's continuing emphasis in the areas of insurance and
securities services;
o Approval of the Company's broker/dealer license;
o The addition of the Company's fourth insurance agency to the
AF Insurance network;
o Adding additional insurance markets with major emphasis in
commercial property and casualty business, thereby providing
the Company with an even better mix between personal and
commercial coverages; and
o The completion of the Company's new administrative and
corporate headquarters building.
Therefore, management is optimistic about the future of the Company. Overall,
management and the board of directors are indeed pleased with the continued
positive short-term earnings of the Company, particularly in light of the
investments required (i.e., slightly lower short-term earnings) to accomplish
the goals of the long-term strategic plan.
9
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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND 1999:
At June 30, 2000 and 1999 assets totaled $133.4 million and $109.9 million,
respectively. Total assets increased by $23.4 million or 21.3% from June 30,
1999 to June 30, 2000, primarily a result of an increase of $27.6 million, or
34.0%, in net loans receivable and an increase of $1.6 million or 64.4% in
office properties and equipment. These increases are partially offset by a $5.0
million decrease in cash and cash equivalents. Management believes that the
increase in net loans receivable is primarily a result of increased
concentration in the commercial market, which tends to yield larger loans. The
loan growth was primarily funded by increases in FHLB advances and in savings
deposits. The Company's level of advances from the FHLB increased $12.9 million
from $2.6 million at June 30, 1999 to $15.5 million at June 30, 2000. The
Company's deposits increased by $9.6 million from $93.1 million at June 30, 1999
to $102.7 million at June 30, 2000. Management believes that the increase in
deposits is attributable to its marketing efforts directed towards increasing
balances in savings and transaction accounts.
The principal category of earning assets is loans and during the year ended June
30, 2000 loans receivable, net, increased by $27.6 million compared to an $8.5
million increase for the year ended June 30, 1999. The increase in net loans
receivable is typical for the Company, which operates in lending markets that
have had sustained loan demand over the past several years.
The Company's level of non-performing assets, defined as loans past due 90 days
or more and repossessed assets, increased slightly from .14% of total loans at
June 30, 1999, to .64% of total loans at June 30, 2000. The low level of
non-performing assets is attributable to comprehensive lending policies and
exceptional collection efforts. The Company's level of non-performing loans has
remained consistently low in relation to prior periods and total loans
outstanding. The Company had net charge offs of $231,000 during year ended June
30, 2000 compared to net charge offs of $62,000 for the year ended June 30,
1999. As a result and based on management's analysis of its allowances, a
provision for additional loan loss allowance of $88,000 was made during the year
ended June 30, 2000.
The Company's net investment in office properties and equipment increased $1.6
million to $4.2 million at June 30, 2000 from $2.5 million at June 30, 1999,
primarily a result of acquiring and renovating a building located at 21 East
Ashe Street in West Jefferson, purchase of equipment for the new insurance
agency and equipment for additional employees. The building at 21 East Ashe
Street is used for the Company's corporate offices as well as the electronic
banking and loan servicing divisions. The corporate offices were previously
located at 206 South Jefferson Avenue, which is now occupied by the Company's
Insurance and Brokerage subsidiaries.
At June 30, 2000 retained earnings increased $358,000 or 4.5% to $8.3 million,
from $8.0 million at June 30, 1999, as a result of earnings of $453,000, an
increase for a fair market value adjustment for ESOP stock in the amount of
$74,000 and offset by dividends of $206,000. Unrealized gain/loss on securities
available for sale decreased by $232,000 or 114.5% at June 30, 2000. At June 30,
2000 the Bank's regulatory capital amounted to $12.6 million compared to $12.0
million at June 30, 1999, which as a percentage of total assets was 8.9% and
10.0% and was in excess of regulatory capital requirements at such dates.
10
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The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's rate)
(ii) changes attributable to rate (changes in rate multiplied by the prior
period's volume) and (iii) mixed changes (changes in volume multiplied by
changes in rate). Rate/volume variances are allocated to the rate/volume column.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
---------------------------------------- --------------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
---------------------------------------- --------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME NET VOLUME RATE VOLUME NET
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(IN THOUSANDS)
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ASSETS:
Interest-earning assets:
Interest-bearing deposits ........ $ (399) $ 56 $ (39) $ (382) $ 285 $ 9 $ 10 $ 304
Investment securities ............ (23) 133 (6) 104 171 (66) (26) 79
Loans receivable ................. 2,103 (238) (73) 1,792 277 (132) (5) 140
------- ----- ----- ------- ----- ----- ---- -----
Total ........................ 1,681 (49) (118) 1,514 733 (189) (21) 523
------- ----- ----- ------- ----- ----- ---- -----
LIABILITIES:
Interest-bearing liabilities:
NOW and MMDA accounts ............ 67 (12) (3) 52 59 (95) (16) (52)
Passbook savings ................. 128 4 1 133 248 (61) (27) 160
Certificates of deposit .......... 152 (36) (2) 114 234 (105) (9) 120
Borrowed funds ................... 495 (22) (54) 419 (66) 13 (3) (56)
------- ----- ----- ------- ----- ----- ---- -----
Total ........................ 842 (66) (58) 718 475 (248) (55) 172
------- ----- ----- ------- ----- ----- ---- -----
Net interest income .............. $ 839 $ 17 $ (60) $ 796 $ 258 $ 59 $ 34 $ 351
======= ===== ===== ======= ===== ===== ==== =====
</TABLE>
11
<PAGE>
The following table provides information concerning the Company's yields on
interest-earning assets and cost of funds on interest-bearing liabilities over
the years ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
AT JUNE 30, -----------------------------------------------------------
2000 2000 1999
------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
ACTUAL YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ----- -------- -------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits ............... $ 2,599 5.63% $ 2,939 $ 189 6.43% $ 9,741 $ 571 5.86%
Investment securities ................... 9,835 6.24% 9,523 605 6.35% 9,975 501 5.02%
Loans receivable(1) ..................... 108,778 8.63% 100,228 8,599 8.58% 76,597 6,807 8.89%
-------- ----- -------- -------- -------- --------
Total interest-earning assets ....... 121,212 8.37% 112,690 9,393 8.34% 96,313 7,879 8.18%
-------- --------
Non-interest-earning assets ............. 12,158 10,645 8,002
-------- -------- --------
Total assets ....... $133,370 $123,335 $104,315
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW and MMDA accounts ................... $ 18,589 1.92% $ 16,015 353 2.20% $ 13,160 301 2.29%
Savings ................................. 23,032 3.83% 22,857 831 3.64% 19,257 698 3.62%
Certificates of deposit ................. 56,937 5.71% 54,800 2,885 5.26% 51,995 2,771 5.33%
FHLB Advances and notes payable ......... 16,443 5.65% 10,495 616 5.87% 2,988 197 6.59%
-------- ----- -------- -------- -------- --------
Total interest-bearing liabilities..... 115,001 4.71% 104,167 4,685 4.50% 87,400 3,967 4.54%
-------- --------
Other non-interest-bearing liabilities... 5,829 7,811 5,424
Equity .................................. 12,540 $ 11,357 11,491
-------- -------- --------
Total liabilities and equity ....... $133,370 $123,335 104,315
======== ======== ========
Net interest income and
interest rate spread(2) .................... 3.66% $ 4,708 3.84% $ 3,912 3.64%
======== ========
Net interest=earning assets and
net interest margin (3) .................... $ 6,211 $ 8,523 4.18% $ 8,913 4.06%
======== ======== ========
Ratio of interest-earning assets to
interest-bearing liabilities ............... 105.40% 108.18% 110.20%
<FN>
-------------------------------
(1) Balance is net of deferred loan fees and loans in process. Non-accrual loans are included in the balances.
(2) Average interest rate spread represents the difference between the yield on average interest-earning assets and the cost of
average interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets. With the exception of
end of period ratios, all ratios are based on monthly balances during the indicated years. Management does not believe that
the use of month end balances instead of daily balances has caused a material difference in the information presented.
</FN>
</TABLE>
12
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 2000 AND
1999:
GENERAL. Net income for the years ended June 30, 2000 and 1999 was $453,000 and
$514,000, respectively. The decrease of $61,000 or 11.8% was primarily
attributable to decreased interest income on interest bearing deposits due to
the increased level of non-interest bearing deposits that the Bank maintained to
prepare for potential customer withdrawals resulting from year 2000 concerns.
Changes were also attributable to costs associated with the Bank's branch office
in Watagua County, Appalachian First Bank, the costs associated with the
purchase of AF Insurance Service Center, in Elkin North Carolina and the
addition of employees in order to prepare the Company for future expansion.
Management believes that these initial costs of expansion will better position
the Company for the future. In management's opinion, there has been an
improvement in the level of interest rate risk from the end of the Company's
most recent fiscal year.
NET INTEREST INCOME. Net interest income increased by $796,000 or 20.3% from
$3.9 million for year ended June 30, 1999 to $4.7 million for the year ended
June 30, 2000. The increase is primarily attributed to the $27.6 million
increase in net loans receivable from $81.1 million at June 30, 1999 to $108.8
million at June 30, 2000, resulting in an increase of $1.8 million in interest
income from loans. This increase was partially offset by an increase of $718,000
in interest expense.
INTEREST INCOME. Interest income increased by $1.5 million, or a 19.2% increase,
from $7.9 million during the year ended June 30, 1999 to $9.4 million during the
year end June 30, 2000. This increase was attributable to a change in the volume
and mix of the Company's loan portfolio.
INTEREST EXPENSE. Interest expense for the year ended June 30, 2000 increased
$718,000 to $4.7 million. The increase is the result of an increase in the
average outstanding balance in the level of deposits and FHLB advances for the
year ended June 30, 2000 as compared to the similar period in 1999.
PROVISION FOR LOAN LOSSES. Management made $88,000 of additional provisions for
loan losses during the year ended June 30, 2000. The Company experienced net
charge offs of $231,000 during the year ended June 30, 2000. During the year
ended June 30, 1999, provision of $20,000 was made and the Company experienced
net charge offs of $62,000. Provisions, which are charged to operations and
resulting loan loss allowances, are amounts that management believes will be
adequate to absorb losses on existing loans that may become uncollectible. Loans
are charged off against the allowance when management believes that
collectibility is unlikely. The evaluation to increase or decrease the
provisions and resulting allowances is based both on prior loan loss experience
and other factors, such as changes in the nature and volume of the loan
portfolio, overall portfolio quality and current economic conditions. The
Company's level of non-performing loans remained consistently low in relation to
prior periods and total loans outstanding during the year ended June 30, 2000.
At June 30, 2000, the Company's level of general valuation allowances for loan
losses amounted to $979,000 which management believes is adequate to absorb any
losses that may exist in its loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $615,000 or 51.0% during
fiscal year 2000. The increase was primarily attributed to increased insurance
commissions generated by the insurance agency and income generated by the
Company's brokerage subsidiary. Both these areas of growth and widening market
penetration are expected to continue to produce increases in non-interest
income.
13
<PAGE>
NON-INTEREST EXPENSE. Non-interest expense increased by $1.3 million or 30.2%
from $4.3 million for the year ended June 30, 1999 to $5.7 million for the year
ended June 30, 2000. Increases for non-interest expense for the year ended June
30, 2000 are primarily attributable to compensation and employee benefit costs,
occupancy, and data processing costs. Compensation costs increased by $761,000
for the year ended June 30, 2000, primarily as the result of the addition of new
employees in the Company and insurance agency in order to service current growth
and to prepare the Company for future expansion. Occupancy cost increased by
$77,000 for the year ended June 30, 2000, primarily because of the addition of
the insurance location in Elkin, and, costs associated with renovations on the
new corporate and administrative building.
INCOME TAXES. Income taxes resulted from applying normal, expected tax rates on
income earned during the year ended June 30, 2000 and 1999. Income tax expense
was $328,000 and $236,000, for the years ended June 30, 2000 and 1999,
respectively. The effective tax rate applied was higher than the statutory tax
rates for 2000, primarily due to permanent differences resulting from the
decrease in the market price of shares vesting under the recognition and
retention plan in the current year.
IMPACT OF THE YEAR 2000. The Company is pleased to report that no significant
difficulties were encountered.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND
1998:
GENERAL. Net income for the years ended June 30, 1999 and 1998 was $514,000 and
$708,000, respectively. The decrease of $195,000 or 27.5% was primarily
attributable to the cost associated with establishing a bank branch in Watauga
County, costs associated with obtaining a broker dealer license and costs to
acquire additional insurance agencies. Management believes that these costs are
indicative of growth and necessary in order to provide access to customers and
markets that enhance the Company's value and earnings potential in the long
term. In management's opinion, there has been an improvement in the level of
interest rate risk from the end of the Company's most recent fiscal year.
NET INTEREST INCOME. Net interest income increased by $351,000 or 9.8% from $3.6
million for year ended June 30, 1998 to $3.9 million for the year ended June 30,
1999. The increase is a result of increased average outstanding balances in
interest-earning assets, partially offset by the decline in the prime rate of
interest during the year. The decline in rates between June 30, 1998 and 1999
reduced interest income by approximately $189,000. Volume accounted for an
annualized increase in interest income of approximately $733,000. Interest
expense on deposits declined approximately $248,000 based on a reduction in
rates while interest expense increased by $475,000 based on an increase in
volume.
INTEREST INCOME. Interest income increase by $523,000, or a 7.1% increase, from
$7.4 million during the year ended June 30, 1998 to $7.9 million during the year
end June 30, 1999. This increase was attributable to a change in the volume and
mix of the Company's loan portfolio and an increase in the average of
interest-bearing deposits.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1999 increased
$172,000 to $4.0 million. The increase is the result of an increase in the
average outstanding balances in the level of deposits for the year ended June
30, 1999 as compared to the similar period in 1998. However, the average rate
for deposits was lower at June 30, 1999 than for the comparable period in 1998,
and was an offsetting factor to interest expense.
14
<PAGE>
PROVISION FOR LOAN LOSSES. Management made additional provisions for loan losses
during the year ended June 30, 1999, of $20,000. The Company experienced net
charge offs of $62,000 during the year ended June 30, 1999. During the year
ended June 30, 1998, no provisions were made; however, the Company experienced
net recoveries of $158,000 that served to increase the level of loan loss
reserves. Provisions, which are charged to operations and resulting loan loss
allowances, are amounts that the Company's management believes will be adequate
to absorb potential losses on existing loans that may become uncollectible.
Loans are charged off against the allowance when management believes that
collectibility is unlikely. The evaluation to increase or decrease the
provisions and resulting allowances is based both on prior loan loss experience
and other factors, such as changes in the nature and volume of the loan
portfolio, overall portfolio quality and current economic conditions. The
Company's level of non-performing loans remained consistently low in relation to
prior periods and total loans outstanding during the year ended June 30, 1999.
At June 30, 1999 the Company's level of general valuation allowances for loan
losses amounted to $1.1 million which management believes is adequate to absorb
any losses that may exist in its loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $214,000 or 21.6% during
the fiscal year 1999. The increase was primarily attributable to a gain on the
sale of FHLMC stock of $148,000, insurance commissions of $500,000 generated by
the insurance agency, and income generated by the Company's brokerage
subsidiary.
NON-INTEREST EXPENSE. Non-interest expense increased by $860,000 or 24.7% from
$3.5 million for the year ended June 30, 1998 to $4.3 million for the year ended
June 30, 1999. Increases for non-interest expense are primarily attributable to
compensation and employee benefit costs, occupancy, data processing costs and
legal expenses. Compensation costs increased by $460,000 for the year ended June
30, 1999, primarily as the result of additional insurance agency employees'
salaries, the addition of Appalachian First Bank employee salaries, and the
addition of salaries paid to AF Brokerage, Inc. Occupancy cost increased by
$98,000 for the year ended June 30, 1999, due to increased depreciation expense
resulting from the new branch location in Boone, computer equipment acquired for
the new insurance office in Lenior and for the brokerage subsidiary. Additional
legal costs during the current period were the result of applying for a
broker/dealer registration.
INCOME TAXES. Income taxes resulted from applying normal, expected tax rates on
income earned during the year ended June 30, 1999 and 1998. Income tax expense
was $236,000 and $381,000, for the years ended June 30, 1999 and 1998. The
effective tax rate applied was slightly lower than the statutory tax rates,
primarily due to qualifying investment income that was exempt from state income
taxes. Legislated decreases are expected in the North Carolina corporate tax
rate in future periods, which would lower the overall effective tax rate.
CAPITAL RESOURCES AND LIQUIDITY
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter-term interest earning deposits. At June 30, 2000, cash and cash
equivalents, a significant source of liquidity, totaled $7.4 million.
15
<PAGE>
As a federally chartered savings bank, the Bank must maintain a daily average
balance of liquid assets equal to at least 4% of withdrawable deposits and short
term borrowings. The Bank's liquidity ratio at June 30, 2000, as computed under
OTS regulations, was considerably in excess of such requirements. Given its
excess liquidity and its ability to borrow from the FHLB, the Bank believes that
it will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, and other cash requirements.
The Company's capital position is in excellent shape, by any objective benchmark
or comparison.
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management is focused primarily on evaluating and
managing the Company's net interest income in relation to various risk criteria.
Factors beyond the Company's control, such as the effects of changes in market
interest rates and competition, may also have an impact on the management of
interest rate risk.
In the absence of other factors, the Company's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Inversely, the Company's yields and cost of funds will decrease when market
rates decline. The Company is able to manage these fluctuations to some extent
by attempting to control the maturity or rate adjustments of its
interest-earning assets and interest-bearing liabilities over given periods of
time. One of the Company's tools to monitor interest rate risk is the
measurement of sensitivity of its net portfolio value to changes in interest
rates.
In order to minimize the potential effects of adverse material and prolonged
increases in market interest rates on the Company's operations, management has
implemented an asset/liability program designed to improve the Company's
interest rate risk exposure. The program emphasizes that originations of
five-year fixed rate balloon mortgages, adjustable rate mortgages, selling long
term fixed rate loans to the secondary market, shorter term consumer and
commercial loans, the investment of excess cash in short or intermediate term
interest-earning assets, and the solicitation of deposit accounts that can be
repriced rapidly.
Although the Company's asset/liability management program has generally helped
to decrease the exposure of its earnings to interest rate increases, the Company
continues to be susceptible to increased levels of interest rates, which will
adversely affect earnings during prolonged periods of rising interest rates and
positively affect earnings during prolonged periods of interest rate declines.
NET PORTFOLIO VALUE
All federally regulated financial institutions are required to measure the
exposure to changes in interest rates. Institutions with assets of less than
$500 million may rely on outside sources of measurement such as that provided by
the OTS and the FHLB. The purpose is to determine how changes in interest rates
affect the estimated value or Net Portfolio Value ("NPV") of the insured
institution's statement of financial condition under several immediate or
"shock" changes in market rates. Since the timing of repricing opportunities for
interest-earning assets and interest-bearing liabilities are different, the
impact of shock changes will have a negative, neutral or positive impact on the
NPV of the bank based on the structure of the bank's assets and liabilities.
Thus, NPV is the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts. Generally, the level
of interest rate risk is measured in a 200 basis point shock environment that
has the most negative impact on the Company's NPV.
16
<PAGE>
The Company's banking subsidiary, AF Bank, has historically been a mortgage
lender which means that it generally has longer terms before repricing its
assets than does its interest bearing liabilities or deposit accounts;
therefore, a rising rate environment will have the most negative impact on the
NPV of the Company. Management has implemented a strategy of limiting the terms
of mortgage loans that it cannot sell in the secondary market, increasing the
level of loans tied more closely to market interest rates such as the prime
rate, and generally reducing the terms of loans that the Company offers for
portfolio. The following table presents the Company's NPV at June 30, 2000, as
calculated by the OTS, based on information provided to the OTS by the Company.
As a result of management's actions, at June 30, 2000, the estimated NPV
declined by 7% in a 300 basis point rising interest rate shock scenario compared
to a loss in NPV of 4% in a falling rate scenario. This compares to a decline of
13% under a similar rise and a gain of 12% in a similar decline one year
earlier. The improvement in interest rate risk is further measured by the basis
point decline in the ratio of NPV to the PV of assets, defined as the
Sensitivity Measure by the OTS. At June 30, 2000, the decline of the sensitivity
measure was 54 basis points with a 300 basis point shock increase in rates
compared to a decline of 128 basis points at June 30, 1999.
<TABLE>
<CAPTION>
NPV as $ of PV (5)
Net Portfolio Value of Assets
------------------------------------------------------------------------------- ---------------------------------
Changes in Rates $ Amount $ Change (1) % of Change (2) Ratio (3) Change (4)
---------------- -------- ------------ --------------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 bp 13,945 (1118) (7.00)% 10.68% (54)
+200 bp 14,478 (585) (4.00)% 10.98% (24)
+100 bp 14,888 (176) 1.00 % 11.18% (4)
0 bp 15,063 -- -- 11.22% --
-100 bp 14,842 (222) (1.00)% 10.99% (23)
-200 bp 14,312 (752) (5.00)% 10.56% (66)
-300 bp 14,426 (638) (4.00)% 10.55% (66)
<FN>
(1) Represents the excess (deficiency) of NPV assuming the indicated change in interest rates minus the estimated NPV assuming
no change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated
NPV ratio assuming no change in interest rates.
(5) PV means present value.
</FN>
</TABLE>
The following chart provided by the OTS reflects further measures of the
Company's interest rate risk.
RISK MEASURES: 200BP RATE SHOCK: June 30, 2000 June 30, 1999
------------- -------------
Pre-Shock NPV Ratio: NPV as a % of PV of Assets 11.22% 12.40%
Exposure Measure: Post Shock NPV Ratio 10.56% 11.72%
Sensitivity Measure: Change in NPV -66 bp -68 bp
17
<PAGE>
Certain shortcomings are inherent in the methodology used in the above table.
Modeling changes in NPV requires the making of certain assumptions that may tend
to oversimplify the manner in which actual yields and costs respond to changes
in market interest rates. First, the models assume that the composition of the
Bank's interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured. Second, the models
assume that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements do provide an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income.
Furthermore, in times of decreasing interest rates, the value of fixed-rate
assets could increase in value and the lag in repricing of interest rate
sensitive assets could be expected to have a positive effect on the Company.
Management believes that the NPV method of assessing the Company's exposure to
interest rate risk and potential reductions in net interest income is a useful
tool for measuring risk. Management also believes that the charts reflect the
positive impact of strategies to reduce interest rate risk as evidenced most
prominently by the relatively low level of interest rate sensitivity that
reflected a decline of 66 basis points and 68 basis points for the years ended
June 30, 2000 and 1999, respectively. The strategies that have reduced the level
of interest rate risk under an increasing rate assumption will continue to
reduce the impact or rising rates as long term mortgages are sold and replaced
with shorter term mortgage and nonmortgage loans with rates that can be adjusted
to more closely simulate market rates of interest. Management believes that a
strong equity capital position and the existence of the corporate authority to
raise additional capital as necessary act as valuable tools to absorb interest
rate risk.
FUTURE REPORTING REQUIREMENTS
The FASB has issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which the Company has not been required to adopt as of June
30, 2000. This Statement, which is effective for fiscal years beginning after
June 15, 2000, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security, or a foreign
currency denominated forecasted transaction. This Statement is not expected to
have a significant impact on the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying footnotes have been prepared in
accordance with GAAP, which require the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The assets and liabilities of the Bank are primarily monetary in nature and
changes in the market interest rates have a greater impact on the Company's
performance than do the effects of inflation.
18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
AF Bankshares, Inc. and Subsidiaries
West Jefferson, North Carolina
We have audited the accompanying consolidated statements of financial condition
of AF Bankshares, Inc. and Subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AF Bankshares, Inc. and
Subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Charlotte, North Carolina
July 28, 2000
19
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Interest-bearing deposits $ 2,599,071 $ 4,173,311
Noninterest-bearing deposits 4,823,781 8,221,749
Certificates of deposit, at cost 99,000 198,000
Securities held to maturity (fair value $100,000 in 2000 and
1999) (Note 2) 100,000 100,000
Securities available for sale (Note 2) 8,860,452 10,976,170
Federal Home Loan Bank stock (Notes 2 and 6) 775,700 523,600
Loans receivable, net (Notes 3 and 6) 108,778,257 81,156,766
Real estate owned 289,441 59,000
Office properties and equipment, net (Note 4) 4,183,610 2,544,777
Accrued interest receivable on loans 605,749 398,918
Accrued interest receivable on investment securities 82,647 97,598
Prepaid expenses and other assets 562,317 546,721
Deferred income taxes, net (Note 12) 499,045 425,100
Intangible assets, net of accumulated amortization of
$156,882 in 2000 and $76,284 in 1999 1,111,333 509,716
------------------------------
TOTAL ASSETS $133,370,403 $109,931,426
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------
Liabilities:
Savings deposits (Note 5) $102,679,834 $ 93,106,090
Note payable (Note 6) 700,000 --
Note payable - ESOP (Note 9 and 17) 229,878 255,420
Advances from Federal Home Loan Bank (Note 6) 15,513,007 2,564,358
Accounts payable and other liabilities (Note 10) 1,630,313 1,636,362
Redeemable common stock held by the ESOP, net of
unearned ESOP shares (Notes 9 and 17) 77,116 150,942
------------------------------
TOTAL LIABILITIES 120,830,148 97,713,172
------------------------------
Commitments and Contingencies (Notes 10 and 13)
Stockholders' equity (Note 17):
Common stock, par value $.01 per share; authorized 5,000,000
shares; 1,053,678 issued and 1,049,378 outstanding shares
shares at 2000 and 1999 (Note 7) 10,537 10,537
Additional paid-in capital 4,591,555 4,593,516
Retained earnings, substantially restricted (Notes 7 and 12) 8,331,965 7,974,373
Recognition and retention plan (Note 11) (281,344) (479,960)
Accumulated other comprehensive income (loss) (Note 2) (28,608) 203,638
------------------------------
12,624,105 12,302,104
Less cost of 4,300 shares of treasury stock (83,850) (83,850)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 12,540,255 12,218,254
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,370,403 $109,931,426
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $ 8,598,994 $ 6,806,902
Investment securities 605,189 501,410
Interest-bearing deposits 188,787 570,867
------------------- ---------------
9,392,970 7,879,179
------------------- ---------------
Interest expense:
Deposits (Note 5) 4,069,009 3,769,899
Federal Home Loan Bank advances (Note 6) 569,966 175,451
Note payable 22,462 --
Note payable, ESOP 23,761 21,918
------------------- ---------------
4,685,198 3,967,268
------------------- --------------
NET INTEREST INCOME 4,707,772 3,911,911
Provision for loan losses (Note 3) 88,000 20,000
------------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,619,772 3,891,911
------------------- --------------
Noninterest income
Insurance commissions 991,301 499,845
Gain on sale on investments available for sale 94,603 165,505
Other 735,335 540,409
------------------- --------------
1,821,239 1,205,759
------------------- --------------
Noninterest expenses
Compensation and employee benefits (Notes 8, 9, 10 and 11) 3,022,254 2,261,079
Occupancy and equipment 502,700 426,161
Deposit insurance premiums 36,365 48,918
Computer processing charges 273,202 209,018
Amortization 80,598 41,294
Other 1,745,089 1,361,826
------------------- --------------
5,660,208 4,348,296
------------------- --------------
INCOME BEFORE INCOME TAXES 780,803 749,374
Income taxes (Note 12) 327,595 235,540
------------------- --------------
NET INCOME $ 453,208 $ 513,834
=================== ==============
Basic earning per share (Note 14) $ 0.45 $ 0.52
=================== ==============
Diluted earnings per share (Note 14) $ 0.45 $ 0.52
=================== ==============
Cash dividends per share $ 0.20 $ 0.20
=================== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Common Additional Retained
Stock Paid-In Capital Earnings
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1998 $ 10,537 $ 4,580,151 $ 7,279,694
Vesting of recognition and retention plan -- -- --
Transfer from redeemable common stock net of
unearned ESOP shares -- -- 357,127
ESOP contribution -- 13,365 33,723
Cash dividend, $.20 per share -- -- (205,105)
Purchase of common stock for treasury -- -- --
Issuance of common stock from treasury -- -- (4,900)
Net income -- -- 513,834
Other comprehensive income, net of tax:
Unrealized holding losses arising during
period, net of taxes $(82,485) (Note 2) -- -- --
Less: reclassification adjustment for
gains included in net income,
net of taxes of $51,969 (Note 2) -- -- --
Other comprehensive loss -- -- --
Comprehensive income -- -- --
------------- ------------------- ----------------
Balance, June 30, 1999 10,537 4,593,516 7,974,373
Vesting of recognition and retention plan -- -- --
Transfer from redeemable common stock net of
unearned ESOP shares -- -- 73,826
ESOP contribution -- (1,961) 37,000
Cash dividend, $.20 per share -- -- (206,442)
Net income -- -- 453,208
Other comprehensive income, net of tax:
Unrealized holding losses arising during
period, net of taxes $(192,664) (Note 2) -- -- --
Less: reclassification adjustment for
gains included in net income,
net of taxes of $36,536 (Note 2) -- -- --
Other comprehensive loss -- -- --
Comprehensive income -- -- --
------------- ------------------- ----------------
Balance, June 30, 2000 $ 10,537 $ 4,591,555 $ 8,331,965
============= =================== ================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
Accumulated Other Total
Recognition and Comprehensive Treasury Stockholders'
Retention Plan Income (Loss) Stock Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C>
$ (678,576) $ 294,380 $ -- $ 11,486,186
198,616 -- -- 198,616
-- -- -- 357,127
-- -- -- 47,088
-- -- -- (205,105)
-- -- (113,750) (113,750)
-- -- 29,900 25,000
-- -- -- 513,834
-- (204,278) -- --
-- 113,536 -- --
---------------
-- (90,742) -- (90,742)
---------------
-- -- -- 423,092
-------------- --------------- ------------- ---------------
(479,960) 203,638 (83,850) 12,218,254
198,616 -- -- 198,616
-- -- -- 73,826
-- -- -- 35,039
-- -- -- (206,442)
-- -- -- 453,208
-- (290,313) -- --
-- 58,067 -- --
---------------
-- (232,246) -- (232,246)
---------------
-- -- -- 220,962
-------------- --------------- ------------- ---------------
$ (281,344) $ (260,854) $ (83,850) $ 12,540,255
============== =============== ============= ===============
</TABLE>
23
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 453,208 $ 513,834
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 88,000 20,000
Loss on disposal of office properties and equipment -- 607
Loss on sale of other real estate owned 10,962 --
Gain on sale of investments available for sale (94,603) (165,505)
Provision for depreciation 380,547 320,575
Amortization of goodwill and noncompete covenants 80,598 41,294
Amortization of deferred loan fees (175,794) (156,603)
Amortization of premium/discount on investments 62,153 23,823
Amortization of unearned ESOP shares 37,000 33,723
ESOP fair value adjustment (1,961) 13,365
Vesting of recognition and retention plan 198,616 198,616
Stock compensation -- 25,000
Proceeds from sale of loans held for sale 3,823,079 12,133,119
Origination of loans held for sale (3,831,520) (12,120,263)
(Gain) loss on sale of loans held for sale 8,441 (12,856)
Deferred income taxes 74,916 (59,165)
Increase in operating assets:
Accrued interest receivable (191,880) (86,957)
Prepaid expenses and other assets (15,596) (107,058)
Increase (decrease) in liabilities:
Accounts payable and other liabilities (6,049) 456,048
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 900,117 1,071,597
------------- -------------
Cash Flows from Investing Activities
Purchases of securities available for sale (1,500,000) (9,501,897)
(Increase) decrease in FHLB stock (252,100) 100,400
Proceeds from calls of securities available for sale 1,580,000 4,950,000
Proceeds from sale of securities available for sale 300,528 329,423
Principal payments received on securities available for sale 1,386,533 1,333,342
Purchase of securities held to maturity (100,000) --
Proceeds from maturity of security held to maturity 199,000 --
Net originations of loans receivable (27,863,180) (8,467,343)
Purchase of office properties and equipment (2,016,787) (717,171)
Proceeds from sale of properties and equipment 15,192 11,995
Proceeds from sale of other real estate owned 88,080 54,165
Purchase of goodwill and noncompete agreement -- (266,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (28,162,734) (12,173,086)
------------- -------------
</TABLE>
(Continued)
24
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Financing Activities
Net increase in savings deposits $ 9,573,744 $ 10,617,874
Net borrowings (payments) on FHLB advances 12,948,649 (1,551,238)
Purchase of common stock for treasury -- (113,750)
Principal payments on borrowings (25,542) (40,000)
Cash dividends paid (206,442) (205,105)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,290,409 8,707,781
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,972,208) (2,393,708)
Cash and cash equivalents:
Beginning 12,395,060 14,788,768
--------------- ---------------
Ending $ 7,422,852 $ 12,395,060
=============== ===============
Supplemental Schedule of Cash and Cash Equivalents
Interest-bearing deposits $ 2,599,071 $ 4,173,311
Noninterest-bearing 4,823,781 8,221,749
--------------- ---------------
$ 7,422,852 $ 12,395,060
=============== ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,585,898 $ 3,996,665
Income taxes 241,907 335,333
Supplemental Disclosure of Noncash Investing and Financing
Activities
Net change in unrealized gain (loss) on securities available
for sale, net of tax $ (232,246) $ (90,742)
Transfer from loans receivable to real estate owned 329,483 104,563
Originations of loans to facilitate sale of real estate owned -- (29,513)
Fair value of ESOP shares in excess of unearned ESOP shares 36,826 323,404
Transfer to retained earnings to redeemable common stock 73,826 357,127
Note payable issued for purchase of insurance agency 700,000 --
Fair value of office equipment received in purchase of
insurance agency (17,785) --
Intangible assets recorded on purchase of insurance agency (682,215) --
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business: AF Bankshares, Inc. (the "Company") is a bank holding
company which owns 100% of the common stock of AF Bank (the "Bank"), formerly
Ashe Federal Bank. 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 and four branches in
Sparta, Jefferson, Boone and Warrensville, North Carolina. The principal
activities of the Bank consist of obtaining savings deposits and providing
credit to customers in its primary market area, Ashe, Alleghany and Watauga
Counties. On April 15, 1996, the Board of Directors of the Bank adopted a Plan
of Reorganization and a related Stock Issuance Plan pursuant to which the Bank
exchanged its federal mutual savings bank charter for a federal stock savings
bank charter, conducted a minority stock offering, and formed AsheCo, M.H.C., a
mutual holding company which owned 53.8% of the common stock issued by the Bank.
The Bank conducted its minority stock offering in July and August of 1996 and
the closing occurred on October 4, 1996. The Bank sold 461,779 shares of common
stock in the minority stock offering, including 36,942 shares sold to its
Employee Stock Ownership Plan (the "ESOP"), and issued 538,221 shares to the
mutual holding company. See Note 16 for additional information concerning the
minority stock offering and the reorganization.
On June 16, 1998, the Board of Directors approved the formation of a mid-tier
holding company, AF Bankshares, Inc. which became a 100% owner of the Bank in a
stock swap with AsheCo, M.H.C., which was accounted for similar to a pooling of
interests. At June 30, 1998, AsheCo, M.H.C.'s ownership of AF Bankshares, Inc.
decreased to 51.10% due to the shares issued under the recognition and retention
plan discussed in Note 11. During the year ended June 30, 1999, AsheCo, M.H.C.'s
ownership of AF Bankshares, Inc. increased to 51.29% due to the purchase of
shares held in treasury. No additional changes in AsheCo, M.H.C.'s ownership of
AF Bankshares, Inc. occurred during the year ended June 30, 2000.
On July 1, 1997, the Bank purchased two insurance agencies to form AF Insurance
Services, Inc., which became a wholly owned subsidiary of the Bank. A plan of
reorganization was completed during the year ended June 30, 1999 and AF
Insurance Services, Inc. became a wholly owned subsidiary of AF Bankshares, Inc.
On April 1, 1999 and again on December 1, 1999, AF Insurance Services, Inc.
purchased additional insurance agencies. AF Insurance Services, Inc. operates
from its main office in West Jefferson, North Carolina and branch offices in
Lenoir, North Wilkesboro, Jefferson, Elkin and Sparta, North Carolina. The
transactions were recorded under the purchase method of accounting. Revenues are
not material to the financial information.
On August 5, 1998, the Company formed AF Brokerage, Inc., which is a wholly
owned subsidiary of the Company. Prior to receiving its approval from the NASD
to become a registered broker/dealer, AF Brokerage, Inc. operated through the
use of a third party clearing broker. AF Brokerage, Inc. began operating as an
independent broker/dealer in May, 2000. Revenues are not material to the
financial information.
26
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following is a description of the significant accounting policies used in
the preparation of the accompanying financial statements.
Principles of consolidation: The consolidated financial statements include the
accounts of AF Bankshares, Inc. and its wholly owned subsidiaries, AF Bank, AF
Insurance Services, Inc. and AF Brokerage, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
Basis of financial statement presentation: The accounting and reporting policies
of the Company conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported revenues and expenses for the period. Actual results could differ from
those estimates.
Cash and cash equivalents: For purposes of reporting the statements of cash
flows, the Company includes cash on hand and demand deposits at other financial
institutions with terms less than 90 days as cash and cash equivalents. Cash
flows from loans, loans held for sale and deposits are reported net. The Company
maintains amounts due from banks which, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts.
Investment securities: The Company and the Bank have investments in debt and
equity securities. Debt securities consist primarily of U.S. Government agency
securities, Federal Home Loan Bank bonds, Fannie Mae and Government National
Mortgage Association securities and certificates of deposit. Equity securities
consist of Federal Home Loan Mortgage Corporation (FHLMC) stock and mutual
funds.
Management classifies all debt securities and certain equity securities as
trading, available for sale, or held to maturity as individual investment
securities are acquired, and thereafter the appropriateness of such
classification is reassessed at each statement of financial condition date.
Because the Company does not buy investment securities in anticipation of
short-term fluctuations in market prices, none of the investment securities are
classified as trading in accordance with Statement 115. All securities have been
classified as either available for sale or held to maturity.
Securities available for sale: Securities classified as available for sale are
those securities that the Company intends to hold for an indefinite period of
time but, as in the case of debt securities, not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Premiums and discounts are
amortized using the interest method over the securities' contractual lives.
Unrealized gains or losses are reported as increases or decreases in equity, net
of the related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in income.
27
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Declines in the fair value of individual securities classified as either
available for sale or held to maturity below their amortized cost that are
determined to be other than temporary result in write-downs of the individual
securities to their fair value with the resulting write-downs included in
current earnings as realized losses.
Securities held to maturity: Securities classified as held to maturity are those
securities for which the Company has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount, computed by the interest
method over their contractual lives. Based on the Company's financial position
and liquidity, management believes the Company has the ability to hold these
securities to maturity.
Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
Home Loan Bank (FHLB) system, is required to maintain an investment in capital
stock of the FHLB in an amount equal to the greater of 1% of its outstanding
home loans or 5% of advances from the FHLB. No ready market exists for the FHLB
stock, and it has no quoted market value.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, the undisbursed portion of construction loans,
and net deferred loan-origination fees and costs. The Bank's loan portfolio
consists principally of mortgage loans collateralized by first trust deeds on
single family residences, other residential property, commercial property and
land.
Allowance for loan losses: The allowance for loan losses is increased by charges
to income and decreased by charge-offs (net of recoveries) based on the Bank's
evaluation of the potential and inherent risk of losses in its loan portfolio.
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management uses the best information available to make evaluations, future
adjustments may be necessary, if economic or other conditions differ or change
substantially from the assumptions used.
Impaired loans: SFAS No. 114, Accounting by Creditors for Impairment of a Loan,
requires that the Bank establish a specific loan allowance on an impaired loan
if the present value of the future cash flows discounted using the loan's
effective interest rate is less than the carrying value of the loan. An impaired
loan can also be valued based upon its fair value or the market value of the
underlying collateral if the loan is primarily collateral dependent. The Bank
assesses for impairment all loans delinquent more than 90 days. See Note 3 for a
further information.
28
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Interest income: SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures, which amended SFAS No. 114 requires
disclosure of the Bank's method of accounting for interest income on impaired
loans. The Bank does not accrue interest on loans delinquent 90 days or more. In
addition, interest accrued up to 90 days is reversed by the establishment of a
reserve for uncollected interest, if in the opinion of management collectibility
is uncertain. Such interest, if ultimately collected, is credited to income in
the period received. The Bank anticipates that it will account for interest on
impaired loans in a similar fashion in the future if and when it has impaired
loans.
Loan-origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for actual prepayments.
Loans held for sale: Loans held for sale are those loans the Bank has the intent
to sell in the foreseeable future. They are carried at the lower of aggregate
cost or market value. Gains and losses on sales of loans are recognized at
settlement dates and are determined by the difference between the sales proceeds
and the carrying value of the loans. All sales are made without recourse. The
Bank has no loans held for sale at June 30, 2000 or 1999.
Real estate owned: Real estate owned is initially recorded at the estimated fair
value at the date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations of the property are periodically performed by management
and the real estate is carried at the lower of cost or fair value minus
estimated costs to sell. Costs relating to improvement of the property are
capitalized, while holding costs of the property are charged to expense in the
period incurred.
Office properties and equipment: Office properties and equipment are stated at
cost less accumulated depreciation computed principally by the straight-line
method over estimated useful lives.
Intangible assets: Goodwill is the cost of the investment in AF Insurance
Services, Inc. in excess of the fair value of net assets at the date of purchase
and is being amortized by the straight line method over a period of fifteen
years. Noncompete agreements are stated at cost less accumulated amortization
computed by the straight-line method over a period of seven years.
Pension plans: The Bank has a 401(k) retirement plan available to substantially
all employees. The Bank matches certain portions of voluntary contributions by
participating employees.
The Bank has deferred compensation and retirement plan agreements for the
benefit of the Board of Directors. Both plans are unfunded and the liabilities
are being accrued over the terms of active service of the directors. The Bank
also has an ESOP which covers substantially all of it's employees. Contributions
to the plan are based on amounts necessary to fund the amortization requirements
of the ESOP's debt to an unrelated third party financial institution, subject to
compensation limitations, and are expensed based on the AICPA's Statement of
Position 93-6, Employers' Accounting for Employee Stock Ownership Plans.
29
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Additionally, the Company has implemented a qualified stock option plan
authorizing the grant of up to 21,322 stock options to certain officers and
directors, either in the form of incentive stock options or non-incentive stock
options. The Bank has also implemented a recognition and retention plan by
reserving 53,678 shares of common stock for issuance to certain officers and
directors.
Advance payments by borrowers for taxes and insurance: Certain borrowers make
monthly payments, in addition to principal and interest, in order to accumulate
funds from which the Bank can pay the borrowers' property taxes and insurance
premiums.
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Off-statement of financial condition risk: The Bank is a party to financial
instruments with off-statement of financial condition risk such as commitments
to extend credit and home equity lines of credit. Management assesses the risk
related to these instruments for potential losses on an ongoing basis.
Earnings per share: SFAS No. 128, Earnings Per Share, requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per-share amounts. Basic per-share
amounts are computed by dividing net income (the numerator) by the
weighted-average number of common shares outstanding (the denominator). All
other entities are required to present basic and diluted per-share amounts.
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations. For both
computations, the number of shares of common stock purchased by the Company's
employee stock ownership plan, which have not been allocated to participant
accounts, are not assumed to be outstanding.
Comprehensive income: SFAS No. 130, Reporting Comprehensive Income, establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement requires that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
30
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Fair value of financial instruments: The estimated fair values required under
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required to develop
the estimates of fair value. Accordingly, the estimates presented for the fair
value of the Company's financial instruments are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair market value amounts.
The fair value estimates presented are based on pertinent information available
to management as of June 30, 2000 and 1999. Although management is not aware of
any factors that would significantly affect the estimated fair value amount,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date and therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
NOTE 2. DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the statements of financial
condition according to management's intent. The carrying amount of securities
and approximate fair values at June 30 were as follows:
<TABLE>
<CAPTION>
2000
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Debt securities:
U.S. Government agency securities $ 4,415,595 $ 1,348 $ (88,558) $ 4,328,385
Fannie Mae and Government
National Mortgage Association 3,204,715 5,348 (54,836) 3,155,227
Municipals 282,930 -- (11,559) 271,371
Equity securities:
Mutual Funds 1,000,000 -- (98,655) 901,345
Federal Home Loan Mortgage
Corporation Common Stock 4,200 199,924 -- 204,124
----------------------------------------------------------------
8,907,440 206,620 (253,608) 8,860,452
Held to maturity securities:
Debt securities:
Federal Home Loan Bank 100,000 -- -- 100,000
Other investments:
Federal Home Loan Bank stock 775,700 -- -- 775,700
----------------------------------------------------------------
$ 9,783,140 $ 206,620 $ (253,608) $ 9,736,152
================================================================
</TABLE>
31
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2. DEBT AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Debt securities:
U.S. Government agency securities $ 4,524,263 $ 3,125 $ (39,229) $ 4,488,159
Fannie Mae and Government
National Mortgage Association 4,625,811 49,513 (3,080) 4,672,244
Municipals 281,977 (20,493) 261,484
Equity securities:
Mutual Funds 1,205,216 61,939 (45,792) 1,221,363
Federal Home Loan Mortgage
Corporation Common Stock 4,784 328,136 -- 332,920
-------------------------------------------------------------
10,642,051 442,713 (108,594) 10,976,170
Held to maturity securities:
Debt securities:
Federal Home Loan Bank 100,000 -- -- 100,000
Other investments:
Federal Home Loan Bank stock 523,600 -- -- 523,600
--------------------------------------------------------------
$ 11,265,651 $ 442,713 $ (108,594) $ 11,599,770
==============================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30, 2000,
by contractual maturity are shown below. Fannie Mae and Government National
Mortgage Association securities are not included in the maturity categories
because they do not have a single maturity date. Additionally, equity securities
and mutual funds are not included in the maturity categories because they do not
have contractual maturities.
32
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2. DEBT AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Held to maturity securities: Available for sale securities:
------------------------------------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Due from one year to five years $ 100,000 $ 100,000 $ 3,269,590 $ 3,219,813
Due from five years to ten years -- -- 500,000 492,187
Due after ten years -- -- 928,935 887,756
Fannie Mae and Government
National Mortgage Association
debt securities -- -- 3,204,715 3,155,227
Mutual funds -- 1,000,000 901,345
Equity securities -- -- 4,200 204,124
------------------------------------------------------------
$ 100,000 $ 100,000 $ 8,907,440 $ 8,860,452
============================================================
</TABLE>
Sales of securities are summarized as follows for the years ended June 30:
<TABLE>
<CAPTION>
2000 1999
----------------------------
<S> <C> <C>
Proceeds from calls of securities available for sale $ 1,580,000 $ 4,950,000
Proceeds from sale of securities available for sale 300,528 329,423
----------------------------
1,880,528 5,279,423
Realized gain on sale of securities available for sale (94,603) (165,505)
----------------------------
Cost of securities sold $ 1,785,925 $ 5,113,918
============================
</TABLE>
The change in accumulated other comprehensive income (loss), which consists of
unrealized gains (losses) on securities available for sale for the years ended
June 30, are as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------
<S> <C> <C>
Balance, beginning $ 203,638 $ 294,380
Change in net unrealized gains (381,107) (149,383)
Change in deferred income taxes 148,861 58,641
----------------------------
Balance, ending $ (28,608) $ 203,638
============================
</TABLE>
33
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
Loans receivable at June 30, consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------------------------
<S> <C> <C>
One to four-family $ 68,813,143 $ 48,432,985
Multifamily 2,277,623 316,111
Non residential 8,577,554 2,068,070
Land 2,439,602 1,258,481
Construction loans 4,058,901 5,081,781
Commercial loans 10,455,888 18,261,202
Consumer loans 17,375,621 12,143,508
----------------------------
113,998,332 87,562,138
Less:
Undisbursed loan funds (3,992,983) (5,033,086)
Deferred loan fees (247,824) (249,605)
Allowance for loan losses (979,268) (1,122,681)
----------------------------
$108,778,257 $ 81,156,766
============================
</TABLE>
The following is an analysis of the allowance for loan losses for the years
ended June 30:
<TABLE>
<CAPTION>
2000 1999
----------------------------
<S> <C> <C>
Balance, beginning $ 1,122,681 $ 1,164,263
Provisions charged to operations 88,000 20,000
Charge-offs (327,835) (74,034)
Recoveries 96,422 12,452
----------------------------
Balance, ending $ 979,268 $ 1,122,681
============================
</TABLE>
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118 Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosure, requires that the Bank establish a specific allowance on
impaired loans and disclosure of the Bank's method of accounting for interest
income on impaired loans. The Bank assesses all loans delinquent more than 90
days for impairment and such loans amounted to approximately $411,000 and
$60,000 at June 30, 2000 and 1999, respectively. These loans are primarily
collateral dependent and management has determined that the underlying
collateral value is in excess of the carrying amounts. As a result, the Bank has
determined that specific allowances on these loans are not required. Interest
income foregone during 2000 and 1999 was $16,249 and $4,313, respectively. The
Bank established reserves for uncollectible interest totaling $10,911 and $4,313
at June 30, 2000 and 1999, respectively.
34
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)
Loan activity to officers and directors of the Company during the years ended
June 30, 2000 and 1999, is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------
<S> <C> <C>
Balance, beginning $ 1,035,605 $ 943,194
Disbursements 470,177 672,300
Payments received (180,609) 579,890
----------------------------
Balance, ending $ 1,325,173 $ 1,035,604
============================
</TABLE>
Mortgage loans serviced for others consist of FNMA loans and are not included in
the accompanying statements of financial condition. Mortgage loan portfolios
serviced for Fannie Mae were approximately $22,613,000 and $20,657,000 at June
30, 2000 and 1999, respectively.
There were no loans held for sale or outstanding commitments to sell loans as of
June 30, 2000 or 1999.
NOTE 4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------------------------
<S> <C> <C>
Land and land improvements $ 308,329 $ 308,329
Buildings 2,968,811 1,421,055
Furniture and fixtures 1,919,117 1,434,791
Leasehold improvements 252,120 252,120
Automobiles 63,409 84,345
----------------------------
5,511,786 3,500,640
Accumulated depreciation (1,328,176) (955,863)
----------------------------
$ 4,183,610 $ 2,544,777
============================
</TABLE>
35
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5. SAVINGS DEPOSITS
Savings deposits at June 30 consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------
<S> <C> <C>
Interest-bearing checking accounts at 1.91% (2.25% 1999) $ 17,194,967 $ 13,831,977
Commercial and free checking (noninterest bearing) 3,960,144 3,914,090
Passbook savings 3.83% (3.05% 1999) 23,032,283 21,840,801
Money market demand accounts 2.00% (2.50% 1999) 1,393,563 1,593,041
------------------------------------------
45,580,957 41,179,909
------------------------------------------
Certificates of Deposit:
weighted average rate of 5.71% (4.94% 1999)
4.00% to 5.99% 38,922,959 49,488,579
6.00% to 7.99% 18,014,374 2,299,181
------------------------------------------
56,937,333 51,787,760
------------------------------------------
Accrued interest payable 161,544 138,421
------------------------------------------
$ 102,679,834 $ 93,106,090
==========================================
Weighted average cost of savings deposits 4.34% 4.29%
==========================================
</TABLE>
At June 30, 2000, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
2001 2002 2003 2004 After Total
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4.00% to 5.99% $33,438,122 $3,899,891 $ 1,022,495 $ 338,907 $ 223,544 $38,922,959
6.00% to 7.99% 14,523,035 1,681,664 1,612,238 50,000 147,437 18,014,374
-------------------------------------------------------------------------------------------------------
$47,961,157 $5,581,555 $ 2,634,733 $ 388,907 $ 370,981 $56,937,333
=======================================================================================================
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $17,081,469 and $13,910,406 at June 30, 2000 and
1999, respectively. At June 30, 2000, scheduled maturities of jumbo certificates
of deposit are as follows:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
---------------------------------------
<S> <C> <C>
Maturity period:
Within three months $ 5,568,024 5.81%
Three through six months 4,748,807 5.99
Six through twelve months 4,719,992 6.08
Over twelve months 2,044,646 5.58
---------------------------------------
$17,081,469 5.89%
=======================================
</TABLE>
36
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5. SAVINGS DEPOSITS (CONTINUED)
Eligible savings accounts are insured to $100,000 by the Savings Association
Insurance Fund (SAIF) which is administered by the Federal Deposit Insurance
Corporation (FDIC).
The Bank has pledged securities with a fair value of $100,000 at June 30, 2000
as collateral on treasury tax and loan account.
Interest expense on savings deposits consists of the following for the years
ended June 30:
<TABLE>
<CAPTION>
2000 1999
--------------------=------------------
<S> <C> <C>
Interest-bearing checking $ 352,730 $ 300,521
Passbook savings accounts 831,664 698,461
Certificate accounts 2,884,615 2,770,917
---------------------------------------
$ 4,069,009 $ 3,769,899
== ====================================
</TABLE>
NOTE 6. NOTES PAYABLE AND FEDERAL HOME LOAN BANK ADVANCES
Notes payable were entered into by AF Insurance Services, Inc. in conjunction
with the purchase of an insurance agency in Elkin, NC and consists of the
following at June 30:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------
<S> <C> <C>
Notes payable, due in quarterly interest only installments at
5.50% through December 1, 2004, at which time repayments
of principal and interest will commence over a period of 60
months with first payment due on January 1, 2005. $ 700,000 $ --
=======================================
</TABLE>
The Bank had advances outstanding of $15,513,007 and $2,564,358 at June 30, 2000
and 1999, respectively, from the FHLB. Interest is payable at rates ranging from
6.13% to 6.95%. Pursuant to collateral agreements with the FHLB, advances are
collateralized by all the Bank's stock in the FHLB and qualifying first mortgage
loans. $4,000,000 of the advances are due in June 2001, $862,500 is due by
August 2002, $150,507 is due January 2007, $5,000,000 is due August 2009, and
$3,000,000 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. Interest expense was $569,966 and $175,451 for the years ended June 30,
2000 and 1999, respectively.
37
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7. STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Office of Thrift Supervision (OTS) regulations require institutions to have
a minimum regulatory tangible capital equal to 1.5% of total assets, a minimum
ratio of 3% of total assets is required for the core capital ratio provided the
institution receives the highest rating during the examination process. For
institutions that receive less than the highest rating, the minimum core capital
ratio requirement is 4% of total assets. A minimum of 8% of risk-weighted assets
is required for the risk-based capital ratio. At June 30, 2000 and 1999, the
Bank exceeded all of the capital requirements.
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under the requirements of the OTS at June 30, 2000
and 1999:
<TABLE>
<CAPTION>
June 30, 2000 Regulatory Capital
-------------------------------------------------------------------------------------------
Percent Percent Percent
of of of
Tangible Tangible Core Tangible Risk-based Risk-based
Capital Assets Capital Assets Capital Assets
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $ 11,688,699 $ 11,688,699 $ 11,688,699
Unrealized loss on
securities
available for sale 28,608 28,608 28,608
Equity investment
and other assets -- -- (118,575)
Qualifying general
loan loss
allowance -- -- 979,268
----------------- ------------- -----------------
Regulatory capital 11,717,307 8.9 % 11,717,307 8.9 % 12,578,000 11.9 %
Minimum capital
requirement 1,976,366 1.5 5,270,309 4.0 8,427,471 8.0
------------------------------------------------------------------------------------------
Excess regulatory
capital $ 9,740,941 7.4 % $ 6,446,998 4.9 % $ 4,150,529 3.9 %
==========================================================================================
</TABLE>
38
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1999 Regulatory Capital
-------------------------------------------------------------------------------------------
Percent Percent Percent
of of of
Tangible Tangible Core Tangible Risk-based Risk-based
Capital Assets Capital Assets Capital Assets
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $ 11,063,063 $ 11,063,063 $ 11,063,063
Unrealized gain on
securities
available for sale (165,855) (165,855) (165,855)
Equity investment
and other assets -- -- 147,661
Qualifying general
loan loss
allowance -- -- 856,113
--------------- --------------- --------------
Regulatory capital 10,897,208 10.0 % 10,897,208 10.0 % 11,900,982 17.4 %
Minimum capital
requirement 1,627,815 1.5 4,340,840 4.0 5,483,920 8.0
-------------------------------------------------------------------------------------------
Excess regulatory
capital $ 9,269,393 8.5 % $ 6,556,368 6.0 % $ 6,417,062 9.4 %
===========================================================================================
</TABLE>
As of June 30, 2000, the most recent notification from the OTS categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain total
capital to risk weighted assets of 10%, Tier I Capital to risk weighted assets
of 6% and Tier I Capital to total assets of 5% or $10,534,339, $6,320,603 and
$6,587,888, respectively. There are no conditions or events since that
notification that management believes have changed the Bank's category.
Under the conversion regulations the Bank may not declare or pay a cash dividend
on any of its stock if the effect thereof would cause the Bank's equity to be
reduced below (1) the amount required for the liquidation account; or (2) the
net worth requirements imposed by the OTS.
The Company paid cash dividends totaling $.20 per share during the each of the
years ended June 30, 2000 and 1999. On August 21, 2000, the Company declared a
$.05 per share cash dividend for stockholders of record as of September 1, 2000
to be paid on September 18, 2000.
39
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8. EMPLOYEE PENSION AND INCENTIVE PLANS
The Company has a profit-sharing plan for the benefit of substantially all
employees. Contributions are discretionary and totaled $57,608 and $41,281 for
the years ended June 30, 2000 and 1999, respectively.
The Company also has a discretionary bonus plan under which bonuses are paid to
all employees if approved by the Board of Directors each year. Expense related
to these incentives was $113,220 and $36,544 for the years ended June 30, 2000
and 1999, respectively.
In addition, the Company has a 401(k) retirement plan which contains provisions
for specified matching contributions by the Bank. The Bank funds contributions
as they accrue and 401(k) plan expense amounted to $92,302 and $70,367 for the
years ended June 30, 2000 and 1999, respectively.
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN
As part of the Reorganization, the Bank established an ESOP to benefit
substantially all employees. The ESOP purchased 36,942 shares of common stock
with the proceeds from a loan from a third party financial institution. The note
requires annual principal payments of 10% of the outstanding principal balance
plus interest at the lending institution's prime rate (9.50% at June 30, 2000)
less .5% with a balloon payment due June, 2002. The Bank is expected to make
quarterly contributions to the ESOP in amounts sufficient to allow the ESOP to
make its scheduled principal and interest payments on the note. The ESOP shares
are pledged as collateral for the debt. As the debt is repaid, shares are
released from collateral and allocated to active employees, based on proportion
of debt service paid in the year. The debt of the ESOP is recorded as debt in
the Company's accompanying statement of financial condition.
At June 30, 2000, future principal payments are due as follows:
<TABLE>
<CAPTION>
Year Ending June 30: Amount
-------------------------------------------------------------------------------------------------------------------
<S> <C>
2001 $ 22,988
2002 206,890
-----------------
$ 229,878
=================
</TABLE>
Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Bank and are not reported as dividends in the financial statements. Dividends on
allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements.
40
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
Excluding interest, expense of $35,039 and $47,088 during 2000 and 1999,
respectively, has been incurred in connection with the ESOP. The expense
includes, in addition to the cash contribution necessary to fund the ESOP,
$(1,961) in 2000 and $13,365 in 1999, which represents the difference between
the fair value of the shares which have been released or committed to be
released to participants, and the cost of these shares to the ESOP. The Bank has
credited (charged) this amount to paid-in capital in accordance with the
provisions of AICPA Statement of Position 93-6.
At June 30, 2000 and 1999, 15,100 and 11,400 shares held by the ESOP have been
released or committed to be released to the plan's participants for purposes of
computing earnings per share. The fair value of the unallocated shares amounted
to approximately $175,000 and $281,000 at June 30, 2000 and 1999, respectively.
The Bank has also recorded a liability for a put back option, which represents
the excess of the fair market value of the total number of ESOP shares over the
original cost of the unallocated ESOP shares. The liability recorded under the
put back option was $77,116 and $150,942 at June 30, 2000 and 1999,
respectively.
NOTE 10. DEFERRED COMPENSATION AND RETIREMENT PLAN AGREEMENTS
The Bank has an unfunded deferred compensation agreement providing retirement,
disability, and death benefits for directors. Vested benefits under the
agreements are payable in monthly installments over a ten-year period upon the
director's death, disability or retirement. The Bank has insured the lives of
the directors for amounts sufficient to discharge its obligations under the
agreements. The Bank also has a retirement plan for members of the Board of
Directors which the Plan states that outside directors with at least ten years
of service will receive an amount equal to their annual retainer for ten years
after their retirement from the Board. The liability for the benefits is being
accrued over the terms of active service of the directors. The amount charged to
expense under these plans amounted to $55,536 and $54,361 for the years ended
June 30, 2000 and 1999, respectively.
41
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11. RECOGNITION AND RETENTION PLAN AND STOCK OPTION PLAN
The Bank's stockholders approved the Bank's Recognition and Retention Plan (the
"RRP") and the Bank's stock option plan on December 8, 1997. The stock option
plan provides for the issuance of up to 21,322 stock options to certain officers
and directors in the form of incentive stock options or non-incentive stock
options. The exercise price of the stock options may not be less than the fair
market value of the Company's common stock at the date of grant. Under the Plan
21,322 of options, which vest at the rate of 20% annually beginning at the date
of grant, were all granted on December 8, 1997 and expire on December 8, 2007.
As permitted under the generally accepted accounting principles, grants under
the plan are accounted for following the provisions of APB Opinion No. 25 and
its related interpretations. Accordingly, no compensation cost has been
recognized for grants made to date. Had compensation cost been determined based
on the fair value method prescribed in FASB Statement No. 123, the pro forma
effect on reported net income for the year ended June 30, 2000 and 1999 would be
as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------
<S> <C> <C>
Net income
As reported $ 453,208 $ 513,834
Pro forma 424,553 485,179
Earnings per share
As reported
Basic $ 0.45 $ 0.52
Diluted 0.45 0.52
Pro forma
Basic 0.42 0.49
Diluted 0.42 0.49
</TABLE>
In determining the fair value of the option grant as prescribed in Statement No.
123, the Black-Scholes option pricing model was used with the following
assumptions: a risk-free interest rate of 5.61%, expected lives of 10 years,
expected volatility of 17.19% and expected dividends of $0.20 per year.
At June 30, 2000, 21,322 options have been granted at an exercise price of
$18.50, of which 12,793 options are currently exercisable. No options have been
exercised to date and all options granted are outstanding at June 30, 2000.
The RRP reserved for issuance 53,678 shares of common stock to certain officers
and directors. The Bank issued shares to fund the RRP in December of 1997. The
restricted common stock under the RRP vests at the rate of 20% annually
beginning at the date of grant. The expense related to the vesting of the RRP
totaled $198,616 for each of the years ended June 30, 2000 and 1999.
42
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12. INCOME TAX MATTERS
Under the Internal Revenue code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. The Bank is required to compute such deductions
using an experience method. The Bank's tax bad debt deduction was $231,413 and
$61,583 in 2000 and 1999, respectively.
The Bank will have to recapture its excess tax bad debt reserves which have
accumulated since 1988, amounting to approximately $92,000 over a six year
period. The tax associated with the recaptured reserves is approximately
$36,000. The recapture was scheduled to begin with the Bank's 1997 year, but was
delayed two years because the Bank originated a required minimum level of
mortgage loans. Deferred income taxes have been previously established for the
taxes associated with the recaptured reserves and the ultimate payment of the
related taxes will not result in a charge to earnings. The amount of reserve
recaptured and associated tax were approximately $15,000 and $6,000,
respectively, for each of the years ended June 30, 2000 and 1999.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987 which are in excess of additions to recorded
loan loss allowances. At June 30, 2000, retained earnings contain certain
historical additions to bad debt reserves for income tax purposes of
approximately $870,000, the balance at June 30, 1987, for which no deferred
taxes have been provided because the Bank does not intend to use these reserves
for purposes other than to absorb losses. If amounts which qualified as bad debt
deductions are used for purposes other than to absorb bad debt losses or
adjustments arising from the carryback of net operating losses, income taxes may
be imposed at the then existing rates. The approximate amount of unrecorded
deferred tax liability associated with these historical additions is
approximately $340,000. In the future, if the Bank does not meet the income tax
requirements necessary to permit the deduction of an allowance for bad debts,
the Bank's effective tax rate would increase to the maximum percent under
existing law.
43
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12. INCOME TAX MATTERS (CONTINUED)
The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax asset as of June 30 were:
<TABLE>
<CAPTION>
2000 1999
------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 376,711 $ 435,431
Reserve for uncollected interest 3,908 1,672
Unrealized loss on securities available for sale 18,378 --
Deferred compensation 224,030 201,933
Recognition and retention plan 44,743 44,934
Deferred loan fees 6,255 --
State net economic loss carryforwards 8,717 --
-----------------------------------
682,742 683,970
-----------------------------------
Deferred tax liabilities:
Reserve for loan losses 17,738 23,752
Unrealized gain on securities available for sale -- 130,483
Depreciation 104,051 37,602
FHLB stock dividends 60,170 60,427
Prepaid expenses 1,738 --
Deferred loan fees -- 6,606
-----------------------------------
183,697 258,870
-----------------------------------
NET DEFERRED TAX ASSET $ 499,045 $ 425,100
===================================
</TABLE>
At June 30, 2000 and 1999, no valuation allowance was recorded on deferred tax
assets.
The provision for income taxes charged to operations for the years ended June
30, 2000 and 1999 consists of the following:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------
<S> <C> <C>
Current $ 252,679 $ 294,705
Deferred 74,916 (59,165)
----------------------------------------
$ 327,595 $ 235,540
========================================
</TABLE>
A reconciliation of income taxes computed at the statutory federal income tax
rate to the income tax provision follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory rate $ 265,473 34.0% $ 254,787 34.0%
State tax, net of federal benefit 32,928 4.2 25,834 3.4
Municipal interest income (9,231) (1.2) (27,296) (3.6)
Permanent differences 42,682 5.50 -- --
Other (4,257) (0.5) (17,785) (2.4)
------------------------------------------------------------------------------
Total $ 327,595 42.0% $ 235,540 31.4%
==============================================================================
</TABLE>
44
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and equity lines of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk, except for undisbursed construction loan funds, is as
follows at June 30, 2000:
<TABLE>
<CAPTION>
Notional
Amount
--------------------
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Undisbursed home equity lines of credit $ 8,453,000
Undisbursed commercial letters of credit 25,000
</TABLE>
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Home equity
lines of credit have variable rates based on the prime rate of interest. Home
equity lines are reassessed every five years. Because many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The collateral obtained by
the Bank upon extension of credit is based on management's credit evaluation of
the customer. The collateral held is the underlying real estate. Undisbursed
commercial lines of credit have variable rates of prime plus two percent and are
reassessed on an annual basis. Prime at June 30, 2000 was 9.50%.
The Bank has entered into operating leases for the branch locations in
Warrensville, Sparta and Boone, North Carolina and the two insurance company
branches located in Wilkesboro and Lenoir, North Carolina. The minimum annual
lease payments are not significant to the Company's operations.
45
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14. EARNINGS PER SHARE
Earnings per share has been calculated in accordance with Financial Accounting
Standards Board Statement No. 128, Earnings Per Share, and Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans. For purposes of
this computation, the number of shares of common stock purchased by the Bank's
employee stock ownership plan which have not been allocated to participant
accounts are not assumed to be outstanding. The following are reconciliations of
the amounts used in the per share calculations:
<TABLE>
<CAPTION>
For the Year Ended June 30, 2000
---------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------
<S> <C> <C> <C>
BASIC AND DILUTED EPS $ 453,208 1,009,987 $ 0.45
=========================================================
<CAPTION>
For the Year Ended June 30, 1999
---------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------
<S> <C> <C> <C>
BASIC AND DILUTED EPS $ 513,834 995,301 $ 0.52
=========================================================
</TABLE>
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments as of June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash
Interest-bearing $ 2,599,071 $ 2,599,071 $ 4,173,311 $ 4,173,311
Noninterest-bearing
deposits 4,823,781 4,823,781 8,221,749 8,221,749
Certificates of deposit 99,000 99,000 198,000 198,000
Investments 8,960,452 8,960,452 11,076,170 11,076,170
Loans receivable 108,778,257 108,706,482 81,156,766 79,796,954
Accrued interest receivable 688,396 688,396 496,516 496,516
FHLB stock 775,700 775,700 523,600 523,600
Financial liabilities:
Deposits 102,679,834 102,513,268 93,106,090 92,924,645
Advances from FHLB 15,513,007 15,513,007 2,564,358 2,564,358
Notes payable 700,000 700,000 -- --
Note payable, ESOP 229,878 229,878 255,420 255,420
</TABLE>
46
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that the
fair values disclosed in this table do not represent market values of all assets
and liabilities of the Company and, thus, should not be interpreted to represent
the market or liquidation value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and certificates of deposits: The carrying amounts for cash and short-term
instruments approximate their fair values.
Investment securities: Fair values for securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of similar securities.
Loans receivable: The fair value of fixed rate loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. Certain prepayment assumptions have also been made depending upon
the original contractual lives of the loans. The fair value of variable rate
loans approximates their carrying value as these loans reprice frequently.
Accrued interest receivable and accrued interest payable: The fair value of
accrued interest receivable and payable is the amount receivable or payable on
demand at the statement of financial condition date.
FHLB stock: The fair value of FHLB stock is the stated value by the FHLB.
Deposits: The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the statement of financial
condition date. The fair value of fixed maturity certificates of deposit are
estimated based upon the discounted value of contractual cash flows using rates
currently offered for deposits with similar remaining maturities.
Advances from FHLB, Notes payable and Note payable, ESOP: The fair value of the
Advances from FHLB, Notes payable and Note payable, ESOP is equal to the
carrying value of the liability.
Off-statement of financial condition instruments: Fair values for the Company's
off-statement of financial condition instruments (loan commitments) are based on
fees currently charged for similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standings. The fair value
for such commitments is nominal.
47
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16. REORGANIZATION AND MINORITY STOCK OFFERING
On October 4, 1996, the Bank consummated its reorganization, as explained in
Note 1, and issued 461,779 shares in a minority stock offering (including 36,942
shares to the ESOP) which resulted in gross proceeds of $4,617,790, or
$3,917,389, net of conversion costs of $700,401. At closing, such costs were
netted against the stock proceeds received and shown as a reduction of
stockholders' equity. As a part of the reorganization, the Bank formed a mutual
holding company, AsheCo, M.H.C., which was issued 538,221 shares of the Bank's
common stock. 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 were 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 an
ownership interest of 53.8% 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 other matters which require a vote only by the minority
stockholders. The mutual holding company has registered as a savings and loan
holding company and is subject to regulation, examination, and supervision by
the OTS.
The Bank also established an ESOP which was issued 36,942 shares of common stock
in the reorganization. The funds used by the ESOP to acquire these shares were
obtained from borrowings from an unaffiliated third party lender. The loan is
reflected in the financial statements of the Bank which makes contributions to
the ESOP necessary to amortize the debt. Such contributions are expensed based
upon the fair value of the ESOP shares released or committed to be released from
restriction (or no longer debt financed). The total number of shares of common
stock issued as a result of the offering and reorganization were 1,000,000. On
June 16, 1998, the Board of Directors approved the formation of a mid-tier
holding company, AF Bankshares, Inc. which became a 100% owner of the Bank in a
stock swap with AsheCo, M.H.C., which was accounted for similar to a pooling of
interests. At June 30, 1998, AsheCo, M.H.C.'s ownership of AF Bankshares, Inc.
decreased to 51.1% due to the shares issued under the recognition and retention
plan discussed in Note 11. At June 30, 1999, AsheCo, M.H.C.'s ownership of AF
Bankshares, Inc. increased to 51.38% due to the purchase of shares held in
treasury.
Concurrent with the reorganization, the Bank has established a liquidation
account in an amount equal to its net worth as reflected in its latest statement
of financial condition used in its final offering circular. The liquidation
account will be maintained for the benefit of eligible deposit account holders
and supplemental eligible deposit account holders who continue to maintain their
deposit accounts in the Bank after the reorganization. Only in the event of a
complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted sub account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock. Dividends
paid by the bank subsequent to the reorganization cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on its common stock if its
stockholders' equity would thereby be reduced below either the aggregate amount
then required for the liquidation account or the minimum regulatory capital
requirements imposed by federal regulations.
48
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA
The following are the condensed financial statements of AF Bankshares, as of and
for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
AF Bankshares, Inc.
Condensed Balance Sheets
June 30, 2000 and 1999
2000 1999
---------------------------------------
<S> <C> <C>
Assets:
Cash $ 116 $ 232,410
Securities available for sale -- 267,155
Investment in AF Bankshares 11,688,699 11,063,063
Investment in AF Insurance Services, Inc. 696,028 744,851
Investment in AF Brokerage, Inc. 241,252 236,758
Other assets 259,060 111,930
---------------------------------------
$ 12,885,155 $ 12,656,167
=======================================
Liabilities and Equity:
Liabilities:
Accounts payable $ 37,906 $ 31,551
Note payable - ESOP 229,878 255,420
Redeemable common stock held by the ESOP, net of
unearned ESOP shares 77,116 150,942
---------------------------------------
344,900 437,913
---------------------------------------
Equity:
Common stock 10,537 10,537
Additional paid-in capital 11,871,250 11,873,210
Retained earnings 1,052,270 694,679
Recognition and retention plan (281,344) (479,960)
Accumulated other comprehensive income (loss) (28,608) 203,638
---------------------------------------
12,624,105 12,302,104
Less cost of 4,300 shares of treasury stock (83,850) (83,850)
---------------------------------------
12,540,255 12,218,254
---------------------------------------
$ 12,885,155 $ 12,656,167
=======================================
</TABLE>
49
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)
<TABLE>
<CAPTION>
AF Bankshares, Inc.
Condensed Statements of Income
Years Ended June 30, 2000 and 1999
2000 1999
---------------------------------------
<S> <C> <C>
Interest and investment income $ 65,207 $ 18,305
Equity in earnings subsidiaries 577,154 645,031
Income tax credits 64,344 74,212
Other expense (253,497) (223,714)
----------------------------------------
Net income $ 453,208 $ 513,834
========================================
<CAPTION>
AF Bankshares, Inc.
Condensed Statements of Cash Flows
Years Ended June 30, 2000 and 1999
2000 1999
-----------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 453,208 $ 513,834
Change in assets and liabilities:
Gain on sale of securities (63,994) (17,400)
Stock compensation -- 25,000
Equity in earnings of subsidiaries (577,154) (645,031)
Increase in accounts payable and other liabilities 39,883 608
Increase in other assets (147,130) (111,930)
-----------------------------------
Net cash used in operating activities (295,187) (234,919)
-----------------------------------
Cash Flows from Investing Activities:
Purchase of securities available for sale -- (367,001)
Proceeds from sales of securities available for sale 269,335 179,185
Upstream dividends from AF Bank -- 2,000,000
Purchase of insurance agency -- (276,000)
Capitalization of AF Brokerage, Inc. -- (250,000)
Investment in AF Insurance Services, Inc. -- (500,000)
-----------------------------------
Net cash provided by investing activities 269,335 786,184
-----------------------------------
Cash Flows from Financing Activities:
Cash dividends paid (206,442) (205,105)
Purchase of common stock for treasury -- (113,750)
-----------------------------------
Net cash used in financing activities (206,442) (318,855)
-----------------------------------
Net increase (decrease) in cash (232,294) 232,410
Cash - beginning 232,410 --
-----------------------------------
Cash - ending $ 116 $ 232,410
===================================
</TABLE>
50
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)
The following are the condensed financial statements of the mutual holding
company, AsheCo, M.H.C., as of and for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
AsheCo, M.H.C.
Condensed Balance Sheets
June 30, 2000 and 1999
2000 1999
----------------------------------------
<S> <C> <C>
Assets:
Cash $ 281,371 $ 222,503
Investment in AA&G, Inc. and Subsidiary 99,090 66,828
Investment in AF Bankshares, Inc. and Subsidiaries 6,431,897 6,277,739
Other assets 48,588 26,086
----------------------------------------
$ 686,0946 $ 6,593,156
========================================
Liabilities and Equity:
Liabilities:
Accrued expenses and other liabilities $ 1,000 $ 1,000
----------------------------------------
Equity:
Additional paid-in-capital 5,797,425 5,768,073
Retained earnings 1,062,521 824,083
----------------------------------------
6,859,946 6,592,156
----------------------------------------
$ 6,860,946 $ 6,593,156
========================================
<CAPTION>
AsheCo, M.H.C.
Condensed Statements of Income
Years Ended June 30, 2000 and 1999
2000 1999
----------------------------------------
<S> <C> <C>
Interest income $ 7,367 $ 6,242
Equity in earnings subsidiaries 264,713 296,610
Income tax credits (expense) (9,661) 14,212
Other expense (23,981) (42,452)
----------------------------------------
Net income $ 238,438 $ 274,612
========================================
</TABLE>
51
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)
<TABLE>
<CAPTION>
AsheCo, M.H.C.
Condensed Statement of Cash Flows
Years Ended June 30, 2000 and 1999
2000 1999
----------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 238,438 $ 274,612
Change in assets and liabilities:
Equity in earnings of subsidiaries (264,713) (296,610)
Decrease in accounts payable -- (11,000)
Increase in other assets (22,502) (6,677)
----------------------------------------
Net cash used in operating activities (48,777) (39,675)
Cash Flows from Investing Activities:
Dividends from AF Bankshares, Inc. (107,645) (107,644)
----------------------------------------
Net increase in cash 58,868 67,969
Cash - beginning 222,503 154,534
----------------------------------------
Cash - ending $ 281,371 $ 222,503
========================================
</TABLE>
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which the Company has not been required to adopt as of June
30, 2000. This Statement, which is effective for fiscal years beginning after
June 15, 2000, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security, or a foreign
currency denominated forecasted transaction. This Statement is not expected to
have a significant impact on the Company.
52
<PAGE>
(This page intentionally left blank)
53
<PAGE>
AF BANKSHARES, INC.
CORPORATE INFORMATION
OFFICERS
JAMES A. TODD MELANIE PAISLEY MILLER
President and Chief Executive Officer Executive Vice President,
Secretary/Treasurer,
Chief Financial Officer
DIRECTORS
JAN R. CADDELL, Chairman KENNETH R. GREENE, Vice Chairman
JAMES A. TODD JOHN D. WEAVER
JERRY L. ROTEN WAYNE R. BURGESS
W. O. ASHLEY, JR. FRANK E. ROLAND
54
<PAGE>
CORPORATE INFORMATION (Continued)
OFFICES
<TABLE>
<CAPTION>
<S> <C>
Corporate Offices Insurance and Brokerage Offices
21 East Ashe Street 206 S. Jefferson Avenue
West Jefferson, North Carolina 28694 West Jefferson, North Carolina 28694
West Jefferson Office Jefferson Office
205 S. Jefferson Avenue 840 E. Main Street
West Jefferson, North Carolina 28694 Jefferson, North Carolina 28640
Warrensville Office Sparta Office - d/b/a Alleghany First Bank
4951 NC Hwy. 88 West 403 South Main Street
Warrensville, North Carolina 28693 Sparta, NC 28675
Boone Office - d/b/a Appalachian First Bank North Wilkesboro Office - AF Brown Insurance
285 Highway 105 315 Main Street
Boone, NC 28607 North Wilkesboro, NC 28659
Lenoir Office - AF Blair Insurance AF Insurance Center of Elkin
324 Morganton Blvd, SW 227A West Main Street
Lenoir, NC 28645 Elkin, NC 28621
STOCK TRANSFER AGENT LEGAL COUNSEL
ChaseMellon Shareholders Services, LLC Vannoy & Reeves
Overpeck Centre 306 East Main Street
85 Challenger Road West Jefferson, North Carolina 28694
Ridgefield Park, New Jersey 07660
www.chasemellon.com Thacher Proffitt & Wood
1700 Pennsylvania Avenue
AUDITORS Washington, DC 20006
McGladrey & Pullen, LLP
One Morrocroft Centre FORM 10-KSB
6805 Morrison Boulevard, Suite 200
Charlotte, North Carolina 28211 A copy of Form 10-KSB as filed with the
Office of Thrift Supervision will be
ANNUAL MEETING furnished without charge to shareholders upon
written request to James A. Todd, President, AF
The 2000 annual meeting of stockholders of Bankshares, Inc., 21 East Ashe Street,
AF Bankshares, Inc. will be held on November 6, P.O. Box 26, West Jefferson, NC 28694.
2000 at 6:00 p.m. at the Corporate Office, 21 East
Ashe Street, West Jefferson, North Carolina.
</TABLE>
55
<PAGE>
COMMON STOCK
The Company had 1,049,378 shares of common stock outstanding at August 31, 2000,
which are held by 429 shareholders of record. The majority of the outstanding
shares are held by the mutual holding company AsheCo, MHC. The remaining 515,457
shares are owned by minority shareholders including the Company's ESOP. Shares
are quoted on the OTC Electronic Bulletin Board under the symbol "ASFE."
MARKET FOR THE COMMON STOCK
There is no established market for the Company's common stock, excluding
occasional quotations, although the Company's common stock is quoted on the OTC
Electronic Bulletin Board. The table below reflects the stock trading and
dividend payment frequency of the Company for the years ended June 30, 2000 and
1999. For further information regarding the Company's dividend policy and
restrictions on dividends paid, please refer to note 7 of the notes to the
consolidated financial statements. Stock prices reflect bid prices between
broker/dealer, prior to any markups, markdowns or commissions, is based upon
information provided to management of the Company by certain securities firms
effecting transactions in the Company's stock on an ongoing basis, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
STOCK PRICE
2000: DIVIDENDS HIGH LOW
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 0.05 $ 11.88 $ 10.00
Second Quarter 0.05 12.00 8.13
Third Quarter 0.05 9.38 8.50
Fourth Quarter 0.05 8.00 6.13
<CAPTION>
STOCK PRICE
1999: DIVIDENDS HIGH LOW
------------------------------------------------------------------- -------------------------------- ---------------
<S> <C> <C> <C>
First Quarter $ 0.05 $ 22.00 $ 14.00
Second Quarter 0.05 19.00 11.50
Third Quarter 0.05 17.25 12.00
Fourth Quarter 0.05 13.50 9.50
</TABLE>
DISCLAIMER: This statement has not been reviewed, or confirmed for accuracy or
relevance, by the Office of Thrift Supervision.
56
