U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 2000
Commission File Number 000-25999
WAKE FOREST BANCSHARES, INC.
(Name of small business issuer in its charter)
UNITED STATES 56-2131079
State or other jurisdiction of IRS Employer Identification No.
Incorporation
302 South Brooks Street
Wake Forest, North Carolina 27587
(Address of Principal Executive Offices)
Issuer's telephone, including area code: (919) 556-5146
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-KSB or
any amendment to this Form 10-KSB. |X|
The revenues for the issuer's fiscal year ended September 30, 2000 were
$6,847,800.
The issuer had 1,171,062 shares of common stock outstanding as of
September 30, 2000. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the common stock as of December 7, 2000 was $5,738,800 and
$6,148,700, respectively.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Stockholders for the year ended
September 30, 2000 are incorporated by reference into Parts I and II of this
Form 10-KSB.
Portions of the Proxy Statement for the 2001 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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TABLE OF CONTENTS
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<S> <C>
PART I
FORWARD-LOOKING STATEMENTS.............................................................................-1-
ITEM 1. DESCRIPTION OF BUSINESS.....................................................................-1-
ITEM 2. PROPERTIES.................................................................................-28-
ITEM 3. LEGAL PROCEEDINGS..........................................................................-28-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................-28-
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS....................................-28-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.......................................................-29-
ITEM 7. FINANCIAL STATEMENTS.......................................................................-29-
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................................................-29-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.....................................................-29-
ITEM 10. EXECUTIVE COMPENSATION.....................................................................-29-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................-29-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................-29-
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K....................................................-30-
SIGNATURES
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PART I
FORWARD-LOOKING STATEMENTS
This document, including information incorporated by reference,
contains, and future filings by Wake Forest Bancshares, Inc. (the "Company") on
Form 10-QSB and Form 8-K and future oral and written statements by the Company
and its management may contain forward-looking statements about the Company and
its subsidiary which we believe are within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by management. Words
such as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward-looking statements. Forward-looking statements by the Company and
its management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report to Shareholders (attached to this document as
Exhibit 13) and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:
o the strength of the United States economy in general and the strength
of the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board ("FRB");
o inflation, interest rate, market and monetary fluctuations;
o the timely development and acceptance of our new products and services
and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to
competitors' products and services;
o the willingness of users to substitute our products and services for
products and services of our competitors;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Wake Forest Bancshares, Inc. is a federally-chartered stock holding
company for Wake Forest Federal Savings & Loan Association (the "Association"),
a federally chartered stock savings and loan association which conducts business
from its one office located in Wake Forest, North Carolina. The office is
located in Wake County, North Carolina. The Company was formed on May 7, 1999
pursuant to an Agreement and Plan of Reorganization whereby the Company
exchanged its common stock for all outstanding common stock of the Association.
The Company is a majority owned subsidiary of Wake Forest Bancorp, M.H.C., a
federal mutual holding company (the "MHC"). The Association was founded in 1922
as a building and loan association. In 1982, the Association converted from a
North Carolina chartered mutual savings and loan association to a federally
chartered mutual savings and loan association. During fiscal year 1996, the
Association converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association. The
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Association is the Company's sole subsidiary. The Association's deposits are
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC") to the maximum extent permitted by law. At
September 30, 2000, the Company had total assets of $83.3 million, total
deposits of $67.9 million and total stockholders' equity of $14.2 million.
The Company conducts no business other than holding stock in the
Association, investing dividends received from the Association, repurchasing its
common stock from time to time, and distributing dividends on its common stock
to its shareholders.
The primary focus of the Association is to provide financing for single
family housing in its market area of northern Wake County and southern Franklin
Counties. The Association has concentrated its lending activities on real estate
loans secured by single family residential properties and construction loans on
primarily residential properties. To a lesser extent, the Association invests in
commercial real estate, land, multifamily residential and savings account loans.
The Association also invests its excess funds primarily in Federal Home Loan
Bank stock, Federal Home Loan Mortgage Corporation ("FHLMC") stock, U.S.
Treasury and Agency obligations, and other short term interest-bearing deposits.
The Association's principal sources of funds are deposits and principal and
interest payments on loans. The principal source of income is interest on loans
and investment securities. The Association's principal expenses are interest
paid on deposits and compensation and benefits.
The Association's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and interest expense
on its interest-bearing liabilities, such as deposits. The Association also
generates non-interest income such as service charges and other fees. The
Association's non-interest expenses primarily consist of compensation and
benefits, occupancy expenses, data processing fees and other operating expenses.
The Association's results of operations are also significantly affected by
general economic and competitive conditions (particularly changes in market
interest rates), government policies, changes in accounting standards and
actions of regulatory agencies. The Association exceeded all of its regulatory
capital requirements at September 30, 2000. See "Regulation -- Regulation of
Federal Savings Association -- Capital Requirements."
The Association is primarily engaged in the business of attracting
retail deposits from the general public in the Association's marketing area, and
investing those deposits, together with other sources of funds, primarily in
loans secured by one- to four-family residential real estate for retention in
its loan portfolio. For further details, see below under "Lending Activities."
REORGANIZATION
On October 23, 1995, the Board of Directors adopted the Plan of
Reorganization from Mutual Savings and Loan Association to Mutual Holding
Company, pursuant to which the Association (i) exchanged its federal mutual
savings and loan association charter for a federal stock savings and loan
association charter and (ii) formed the MHC, a federally chartered mutual
holding company which owned in excess of 50% of the common stock of the
Association. In connection with the reorganization, the Association sold shares
of its common stock to certain depositors of the Association and the
Association's Employee Stock Ownership Plan ("ESOP"). The Association completed
the reorganization on April 3, 1996.
The Board of Directors of the Association approved an Agreement and
Plan of Reorganization (the "Plan of Reorganization") on November 16, 1998. The
Plan of Reorganization provided for the establishment of the Company as a stock
holding company parent of the Association. The Company is majority owned
(approximately 53%) by the MHC. The reorganization into the "two-tier" mutual
holding company structure (the "Reorganization") was approved by the
Association's stockholders at their annual meeting held on February 23, 1999 and
by regulatory authorities on April 9, 1999. The formation of the Company was
consummated on May 7, 1999.
As part of the Reorganization each outstanding share of Association's
common stock was converted into one share of common stock par value $.01 per
share of the Company and the holders of the Association's common
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stock became the holders of all the outstanding shares of the Company's common
stock. Accordingly, as a result of the Reorganization, the Association's
minority shareholders became minority shareholders of the Company. The Company
was formed solely for the purpose of becoming a savings and loan holding company
and is regulated by the Office of Thrift Supervision (the "OTS"). It had no
prior operating history. The Reorganization had no impact on the operations of
the Association or the MHC. The Association continues to operate at the same
location with the same management and subject to all the rights, obligations and
liabilities of the Association existing immediately prior to the Reorganization.
The Board of Directors of the Association initially capitalized the
Company with $100,000. Future capitalization of the Company will depend upon
dividends declared by the Association based on future earnings or the raising of
additional capital by the Company through a future issuance of securities, debt
or by other means. The Board of Directors of the Company has no present plans or
intentions with respect to any future issuance of securities or debt at this
time. Furthermore, as long as it is in existence, the MHC must own at least a
majority of the Company's outstanding voting stock.
The Reorganization was treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and expenses of the Company immediately following the
Reorganization were substantially the same as those of the Association
immediately prior to consummation of the Reorganization, all of which were shown
on the Company's books at their historical recorded values.
MARKET AREA AND COMPETITION
The Association is a community-oriented savings institution which
primarily gathers deposits and originates one- to four-family residential
mortgage loans and construction loans within its market area. The Association's
market area for deposit gathering and lending is concentrated in northern Wake
County and southern Franklin Counties, North Carolina.
The Association's market area has benefitted from its close proximity
to the "Research Triangle Park" which includes the cities of Chapel Hill, Durham
and Raleigh. The commuting distance from the Research Triangle Park to the town
of Wake Forest is approximately 20 miles. While most of the commercial
development within the Research Triangle Park has been in Durham County, most of
the residential development for the employees of the Research Triangle Park has
taken place in Wake County. Northern Wake County is expected to benefit from the
continued expansion of this area.
Currently, employment within the region varies, from a more high tech
and service-oriented industry near the Research Triangle Park to a more
agricultural/manufacturing base further away from the Research Triangle Park.
The largest employers in the northern Wake County area include Weavexx, and
Mallinckrodt. Proximity to the Research Triangle Park, to Raleigh-Durham
International Airport and to the City of Raleigh, the state capital, should
result in the future growth in the Association's market area.
The population of the Association's market area grew rapidly during the
1990's and is expected to continue its growth over the next five years. Based on
information provided by the Economic Development Program of the Wake Forest
Chamber of Commerce, the town of Wake Forest's population was 5,851 in 1990 and
doubled in size to 11,750 during 2000. This data also provides that the current
population within a five mile radius of Wake Forest is 24,482 and is expected to
grow by approximately 20% over the next five years. Residential owner-occupied
households totaled 6,820 within a five mile radius of Wake Forest and are
expected to increase by approximately 22% over the next five years.
The Association faces substantial competition for both the deposits it
accepts and the loans it makes. Located within the Wake Forest area are branch
offices of six other depository institutions, all six of which are commercial
banks. The Association also encounters significant competition for deposits from
commercial banks, savings banks, savings and loan associations and credit unions
located in the Raleigh-Durham area. Due to the Association's size relative to
its competitors, the Association offers a more limited product line, with an
emphasis on product delivery and customer service. The Association competes for
deposits by offering a variety of customer
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services and deposit accounts at competitive interest rates. The Association, as
well as its competitors, is affected by general economic conditions,
particularly changes in market interest rates, real estate market values,
government policies and regulatory authorities' actions. Changes in the ratio of
the demand for loans relative to the availability of credit may affect the level
of competition from financial institutions which may have greater resources than
the Association, but which have not generally engaged in lending activities in
the Association's market area in the past. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions. See "--Regulation."
LENDING ACTIVITIES
Loan Portfolio Composition. The Association's loan portfolio consists
primarily of conventional one- to four-family first mortgage loans and
construction loans. To a lesser extent, the Association also makes multi- family
residential loans, commercial real estate loans, land loans, and loans secured
by savings accounts at the Association.
The types of loans that the Association may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans, the supply of
money available for lending purposes and the rates offered by competitors. These
factors are in turn affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
The following table sets forth the composition of the Association's
mortgage and other loan portfolios in dollar amounts and percentages at the
dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------
2000 1999
------------------------ -----------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
---------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of loans:
One- to four-family residential ......................... $27,073 37.31% $24,394 39.71%
Multi-family residential ................................ 187 0.26 184 0.30
Commercial real estate .................................. 10,595 14.60 8,460 13.76
Land .................................................... 6,342 8.74 8,232 13.39
Commercial Construction ................................. 3,933 5.42 2,351 3.82
Residential Construction ................................ 26,859 37.01 24,693 40.17
Equity Line Mortgages ................................... 3,338 4.60 3,107 5.05
Lines of Credit ......................................... 5,786 7.97 2,719 4.42
Savings Account ......................................... 644 0.89 222 0.36
------- ------ ------- ------
Total loans ................................................ 84,757 116.80 74,362 120.98
------- ------ ------- ------
Less:
Deferred loan fees ...................................... 204 0.28 172 0.28
Undisbursed portion of loans in process ................. 11,709 16.14 12,460 20.27
Allowance for loan losses ............................... 280 0.38 263 0.43
------- ------ ------- ------
12,193 16.80 12,895 20.98
------- ------ ------- ------
Total loans receivable, net ................................ $72,564 100.00% $61,467 100.00%
======= ====== ======= ======
</TABLE>
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Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 2000. The table reflects the entire
unpaid principal balance in the maturity period that includes the final loan
payment date and, accordingly, does not give effect to periodic principal
repayments or possible prepayments. Principal repayments and prepayments totaled
$36.4 million and $45.8 million for the years ended September 30, 2000 and 1999,
respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000
-------------------------------------------------------------------------------------------------------
RESIDENTIAL RESIDENTIAL
1 TO 4- MULTI- COMMERCIAL COMMERCIAL RESIDENTIAL
FAMILY FAMILY REAL ESTATE LAND CONSTRUCTION(1) CONSTRUCTION(1)
----------- ----------- ---------- -------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Contractual maturity:
One year or less $ 3,541 $ -- $ -- $ 1,267 $ 3,138 $ 26,859
-------- -------- -------- -------- -------- --------
After one year:
1 year to 3 years 17,258 -- 58 81 -- --
3 years to 5 years 4,273 -- 45 31 -- --
5 years to 10 years 964 -- 1,128 4,528 -- --
10 years to 20 years 1,037 -- 7,800 435 795 --
Over 20 years -- 187 1,564 -- -- --
-------- -------- -------- -------- -------- --------
Total after one year 25,532 187 10,595 5,075 795 --
-------- -------- -------- -------- -------- --------
Total amount due 27,073 187 10,595 6,342 3,933 26,859
Less undisbursed loans -- -- -- (169) (2,024) (9,516)
-------- -------- -------- -------- -------- --------
Net loans outstanding $ 27,073 $ 187 $ 10,595 $ 6,173 $ 1,909 $ 17,343
======== ======== ======== ======== ======== ========
<CAPTION>
AT SEPTEMBER 30, 2000
---------------------------------------------------------------
EQUITY SAVINGS
LINE LINES OF ACCOUNT
MORTGAGES CREDIT LOANS TOTAL
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Contractual maturity:
One year or less $ -- $ 5,786 $ 171 $ 40,762
-------- -------- -------- --------
After one year:
1 year to 3 years -- -- 456 17,853
3 years to 5 years -- -- 17 4,366
5 years to 10 years -- -- -- 6,620
10 years to 20 years 3,338 -- -- 13,405
Over 20 years -- -- -- 1,751
-------- -------- -------- --------
Total after one year 3,338 -- 473 43,995
-------- -------- -------- --------
Total amount due 3,338 5,786 644 84,757
Less undisbursed loans -- -- -- (11,709)
-------- -------- -------- --------
Net loans outstanding $ 3,338 $ 5,786 $ 644 $ 73,048
======== ======== ======== ========
------------------------
(1) Net of undisbursed loans in process. Certain construction loans which mature in periods beyond one year are lines of credit
to contractors, the purpose of which is to provide for construction related funds.
</TABLE>
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The following table sets forth the dollar amounts in each loan category
at September 30, 2000 that are contractually due after September 30, 2001, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 2001
-------------------------------------------------------
FIXED RATES ADJUSTABLE RATES TOTAL
---------------- ------------------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family residential .................................. $ 2,070 $21,462 $23,532
Multi-family residential ......................................... 187 -- 187
Commercial Real Estate ........................................... 634 9,961 10,595
Land ............................................................. 187 4,888 5,075
Commercial Construction .......................................... -- 795 795
Residential Construction ......................................... -- -- --
Equity line mortgages ............................................ -- 3,338 3,338
Lines of credit .................................................. -- -- --
Savings account loans ............................................ 473 -- 473
------- ------- -------
Total ............................................................ $ 3,551 $40,444 $43,995
======= ======= =======
</TABLE>
Origination, Purchase, Sale and Servicing of Loans. The Association's
lending activities are conducted through its office in Wake Forest, North
Carolina. The Association originates both adjustable-rate mortgage loans and
fixed-rate mortgage loans. Adjustable-rate mortgage loans and fixed-rate
mortgage loans carry maximum maturities of 30 years and 15 years, respectively.
The Association's ability to originate loans is dependent upon the relative
customer demand for fixed-rate or adjustable-rate mortgage loans, which is
affected by the current and expected future levels of interest rates. The
Association currently holds for its portfolio all loans it originates and, from
time to time, purchases participations in mortgage loans originated by other
institutions or affordable housing consortiums. The determination to purchase
participations in specific loans or pools of loans is based upon criteria
substantially similar to the Association's underwriting policies, which consider
the financial condition of the borrower, the location of the underlying property
and the appraised value of the property, among other factors. The Association
has no current plans to sell loans it originates. The Association does not
service loans for others and has no current plans to begin such activities.
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One- to Four-Family Mortgage Lending. The Association offers both
fixed-rate and adjustable-rate mortgage loans, with maturities up to 15 years
and 30 years, respectively, which are secured by one- to four- family
residences, which generally are owner-occupied. Substantially all such loans are
secured by property located in northern Wake County and southern Franklin
Counties, North Carolina. Loan originations are generally obtained from existing
or past customers and members of the local communities. See "--Origination,
Purchase, Sale and Servicing of Loans."
At September 30, 2000, the Association's total loans were $72.6
million, of which $27.1 million, or 37.31% were one- to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 7.75%, or $2.1 million, were fixed-rate loans and
92.25%, or $25.0 million, were adjustable-rate loans. The Association offers
three to five year balloon loans, which are either called or modified based on
the Association's interest rates currently in effect at the balloon date. These
loans are similar to adjustable rate loans in that the loans generally amortize
over terms of up to 30 years but are not indexed to any widely recognized rate,
such as the one year U.S. Treasury securities rate, and do not have interest
rate caps or floors. Instead, the majority of such loans are modified at the
balloon date and the rate is adjusted to the Association's current rate offered
for similar loans being originated on such dates. For purposes of the tabular
presentations throughout this document, such loans are considered to be
adjustable. Such loans involve risks similar to more traditional adjustable rate
loans because the Association modifies the loan documents at the end of the
three and five year terms to adjust for rates currently offered by the
Association for similar loans being originated on such dates. The loans are not
generally underwritten again at modification unless the Association is aware of
collateral or ability-to-pay issues.
In view of its operating strategy, the Association adheres to its Board
approved underwriting guidelines for loan origination, which, though prudent in
approach to credit risk and evaluation of collateral, allow management
flexibility with respect to documentation of certain matters and certain credit
requirements. As a result, such underwriting guidelines in certain lending
situations are less rigid than comparable Federal National Mortgage Association
("Fannie Mae") or FHLMC underwriting guidelines. The Association's loans are
typically originated under terms, conditions and documentation which permit them
to be sold to U.S. government sponsored agencies such as the Fannie Mae or the
FHLMC. The Association, however, has no intention to sell loans in the secondary
market. The Association's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan. Mortgage loans originated by
the Association generally include due-on-sale clauses which provide the
Association with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property without
the Association's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Association's fixed-rate mortgage loan portfolio and
the Association has generally exercised its rights under these clauses.
Construction Lending. The Association originates loans for construction
to local real estate contractors in its market area, generally with whom it has
an established relationship and to individuals for construction of one- to
four-family residences. The Association's construction loans primarily have been
made to finance the construction of one- to four-family residential properties
which are generally owner-occupied. These loans are generally fixed-rate loans
with maturities of six months with an automatic six month renewal. The
Association's policies provide that construction loans may be made in amounts up
to 80% of the appraised value of the property or the cost of construction,
whichever is less, for construction of one- to four-family residences. All
construction loans are subject to the limitation on loans-to-one-borrower and
the Association considers the location of the proposed construction in order to
avoid over-concentration in a single area. Prior to making a commitment to fund
a construction loan, the Association requires an independent appraisal of the
property by a state-certified appraiser if the requested amount exceeds
$125,000. The Association's Chairman of the Board generally inspects each
project at the commencement of construction and throughout the term of the
construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant based upon a percentage of completion. At
September 30, 2000, the Association had $17.3 million (net of undisbursed loan
funds of $9.5 million) of residential construction loans which amounted to
23.90% of the Association's net loans outstanding. The largest residential
construction loan in the Association's portfolio at September 30, 2000 was $1.0
million, is secured by a single family residence under construction and is
performing according to its terms.
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Construction loans to individuals are typically made in connection with
the granting of the permanent loan on the property. Such loans convert to a
fully amortizing adjustable- or fixed-rate loan at the end of the construction
term. In most cases, the Association requires that the closing with respect to
permanent financing occur simultaneously with the closing of any construction
loan to an individual.
The Association's construction loans to local builders are made on
either a pre-sold or speculative (unsold) basis. However, the Association
generally limits the number of unsold homes under construction by its builders,
with the amount dependent on the reputation of the builder, the present exposure
of the builder, the location of the property, the size of the loan and prior
sales of homes in the development. The Association estimates that approximately
75% of its construction loans to builders are on a speculative basis.
The Association also originates construction loans on commercial
properties. The underwriting requirements are similar to those required for
construction loans on residential properties. However, the loan to value may not
exceed 75% of the property's appraised value, certain debt service and income
ratios are considered, and financial projections and business plans are
reviewed. At September 30, 2000, the Association had $1.9 million (net of
undisbursed loan funds of $2.0 million) of commercial construction loans which
amounted to 2.63% of the Association's net loans outstanding. The largest
commercial construction loan in the Association's portfolio at September 30,
2000 was $1.8 million, is secured by an area church property and is performing
according to its terms.
Construction loans are generally considered to involve a higher degree
of credit risk than one- to four- family residential mortgage loans because
circumstances outside the borrower's control may adversely affect the market
value of the property. The Association has attempted to minimize these risks by,
among other things, limiting the extent of its construction lending as a
proportion of lending and by limiting its construction lending to primarily
residential properties. In addition, the Association has adopted underwriting
guidelines which impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk, by limiting the geographic area in which the Association will do business
to its existing market and by working with builders with whom it has established
relationships. It is also the Association's general policy to obtain personal
guarantees from the principal of its corporate borrowers on its construction
loans.
Commercial Real Estate Mortgage Lending. The Association originates
commercial real estate mortgage loans that are generally secured by properties
used for business purposes and retail facilities, such as small office
buildings, located in the Association's market area as well as a significant
number of church loans. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised value or purchase price of the property and (ii)
the Association's current loans-to-one-borrower limit. These loans are generally
originated as three or five year balloon loans with amortization periods of up
to 20 years. The Association's underwriting standards and procedures for these
loans are similar to those applicable to its construction lending, whereby the
Association considers factors such as the borrower's expertise, credit history
and profitability. At September 30, 2000, the Association's commercial real
estate mortgage portfolio was $10.6 million, or 14.60% of total loans
outstanding. The largest commercial real estate loan in the Association's
portfolio at September 30, 2000 was $1.5 million and is secured by a local
church property.
Mortgage loans secured by commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. This risk is attributable to the uncertain
realization of projected income-producing cash flows which are affected by
vacancy rates, the ability to maintain rent levels against competitively-priced
properties and the ability to collect rent from tenants on a timely basis.
Because payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Association seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's income and debt service ratio.
-7-
<PAGE>
Equity Lines and Commercial Lines of Credit. The Association originates
equity line loans on one- to four- residential properties and line of credit
loans on commercial real estate. The Association's underwriting policies require
that equity line loans on one-to four- residential properties be secured by real
estate where the Association may or may not have the first mortgage on the
property. The equity line loans on one-to four- residential properties may be
made in amounts up to 80% of the appraised value or adjusted tax value of the
property, and take into consideration any outstanding first mortgage liens in
determining the loan-to-value ratio. Equity line loans are originated at prime
plus 1% and adjust for changes in prime thereafter on the first day of the month
following a change in prime. The terms on the equity line loans on one- to four-
residential properties are for a period of 15 years. At September 30, 2000, the
Association's equity line portfolio was $3.3 million, or 4.60% of total loans
outstanding.
The risks associated with equity line loans on one- to four-
residential properties are generally similar to the risks associated with other
forms of single-family residential lending due to the loan-to value limits
placed on such loans. The lines are revolving and may or may not be fully
disbursed at any given time.
The Association's underwriting policies require that commercial lines
of credit be secured by commercial real estate where the Association has a first
mortgage position. Commercial lines of credit are made in amounts up to 75% of
the appraised value of developed commercial real estate or 65% of the appraised
value of undeveloped land. Commercial lines of credit are made with terms of
between 3 and 10 years at prime plus 1%, with adjustments to prime made on the
first day of the month following a change in prime. At September 30, 2000, the
Association's commercial line of credit portfolio was $5.8 million, or 7.97% of
total loans outstanding.
The risks associated with lines of credit on commercial real estate is
substantially the same as the risks described above on the Association's other
forms of commercial real estate lending.
Other Mortgage Lending. The Association also offers loans secured by
land and multi-family residences. Land loans generally consist of residential
building lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for speculative purposes and a
minor amount of farm land. Multi-family loans generally consist of residential
properties with more than four units, typically apartment complexes, in which
the Association has a participating interest through an affordable housing
consortium. The Association does not solicit such loans which do not constitute
an active part of its business, and generally offers such loans to accommodate
its present customers or to fulfill commitments to affordable housing
consortiums. At September 30, 2000, the Association's total land loan portfolio
was $6.3 million or 8.74% of total loans and its multi-family loan portfolio was
$187,000 or 0.26% of total loans.
The Association requires appraisals of all properties securing
multi-family residential loans. Appraisals are performed by an independent
appraiser designated by the Association, all of which are reviewed by
management. The Association considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property.
The Association originates multi-family residential loans with both
fixed and adjustable interest rates which vary as to maturity. Such loans are
typically income-producing investment loans. Loan to value ratios on the
Association's multi-family residential loans are generally limited to 75%. As
part of the criteria for underwriting these loans, the Association's general
policy is to obtain personal guarantees from the principals of its corporate
borrowers.
Multi-family residential lending entails significant additional risks
as compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand, conditions in the market for
multi-family residential properties as well as regional and economic conditions
generally.
Savings Account Loans. The Association offers loans secured by savings
accounts at the Association. Interest rates charged on such loans are set at
competitive rates, taking into consideration the amount and term of
-8-
<PAGE>
the loan and are available in amounts up to 95% of the value of the account.
Savings account loans are reviewed and approved in conformity with standards
approved by the Association's Board of Directors. At September 30, 2000, the
Association's savings account loan portfolio totaled $644,000 or 0.89% of total
loans outstanding.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Association and reviews properties
offered as security. The Board of Directors has established the following
lending authority: the lending officers may approve loans in amounts up to
$500,000 while loans above $500,000 require Board approval. The foregoing
lending limits are reviewed annually and, as needed, revised by the Board of
Directors. The Board ratifies all loans on a monthly basis.
For all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency, and, if necessary, additional financial information is required to be
submitted by the borrower. An appraisal of any real estate intended to secure
the proposed loan is required, which appraisal currently is performed by an
independent appraiser designated and approved by the Association. Loans of up to
$125,000 may be approved by the Association's loan officers using property tax
values and drive-by appraisals. The Board annually approves the independent
appraisers used by the Association and approves the Association's appraisal
policy. It is the Association's policy to obtain title and hazard insurance on
all real estate loans. In connection with a borrower's request for a renewal of
a mortgage loan, the Association evaluates the borrower's ability to service the
renewed loan applying an interest rate that reflects prevailing market
conditions. The current value of the underlying collateral property is
considered and the Association reserves the right to reappraise the property.
ASSET QUALITY
Non-Performing Loans. Loans are considered non-performing if they are
in foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Association with respect to delinquencies vary depending on the nature of
the loan and period of delinquency. The Association's policies generally provide
that delinquent mortgage loans be reviewed and that a written late charge notice
be mailed no later than the 30th day of delinquency. The Association's policies
provide that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Association attempts to obtain
full payment or work out a repayment schedule with the borrower to avoid
foreclosure.
It is the Association's general policy to place all loans which are 90
days past due on nonaccrual status through the establishment of a reserve for
uncollected interest unless collectibility of all delinquent interest is
assured. Exceptions to placing a loan on non-accrual status are made when the
loan officer or management believe that no loss will be incurred on such loan.
Any such exceptions are reported to the Board of Directors on a monthly basis.
Circumstances under which such an exception may be granted include when the
underlying property is being actively marketed for sales, when a sales contract
has been executed and is pending closing or when the Association and the
borrower are actively negotiating a work-out schedule and all such interest is
considered collectible.
The Association, as part of its loan review process, including the
decision whether to place a loan on nonaccrual status, attempts to determine the
underlying cause of the borrower's delinquency and ability to repay the loan.
The Association has been able to take this approach because it is a relatively
small institution and its problem loans have been historically insignificant as
a percentage of the Association's total loan portfolio. As the Association
grows, it may be necessary for the Association to take a more rigid approach and
automatically place loans on non-accrual status upon becoming 90 days or more
past due and evaluate only those loans that trigger certain mechanisms that
might indicate that an exception is warranted. However, management believes that
its current approach keeps it better informed as to the progress of a problem
loan and its underlying difficulties and that its non-accrual policy results in
an accurate depiction of loans that are collectible or likely to result in a
loss. There can be no assurances that the Association will be able to maintain
its problem loans at or below historical levels.
-9-
<PAGE>
Non-Accrual and Other Past Due Loans. The following table sets forth
information regarding non- accrual loans, other past due loans and REO. There
were no troubled debt restructurings within the meaning of SFAS No. 15 at any of
the dates presented below.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999
------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans: ................................................................... $ -- $ --
Accruing loans past due 90 days or more:
Single family, One- to four-family residential ............................... $ -- 294
------- -------
Total non-performing loans ........................................................... $ -- $ 294
======= =======
Allowance for loan losses ............................................................ $ 280 $ 263
======= =======
Real estate owned, net ............................................................... $ -- $ --
======= =======
Ratios:
Non-accrual loans to total loans ................................................. 0.00% 0.00%
Non-performing loans to total loans .............................................. 0.00% 0.48%
Non-performing loans and real estate owned to
total assets ................................................................... 0.00% 0.41%
Allowance for loan losses to:
Non-accrual loans .............................................................. 0.00% 0.00%
Non-performing loans ........................................................... 0.00% 89.51%
Total loans .................................................................... 0.38% 0.42%
Contractual interest income that would have been
recognized on non-accrual loans .................................................... $ -- $ --
Actual interest income recognized .................................................... -- --
------- -------
Interest income not recognized ....................................................... $ -- $ --
======= =======
</TABLE>
Classified Assets. Federal regulations and the Association's
Classification of Assets Policy require that the Association utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Association has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Association
currently classifies problem and potential problem assets as "Special Mention,"
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current equity and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish an allowance
for loan losses in an amount deemed prudent by management. Allowance for loan
losses represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or proportions thereof, as
"Loss," it is required either to establish a specific allowance for loan losses
equal to 100% of the amount of the asset so classified or to charge off such
amount.
A savings institution's determination as to the classification of its
assets and the amount of its allowance for loan losses is subject to review by
the OTS which can order the establishment of additional allowances. The OTS, in
conjunction with the other federal banking agencies, recently adopted an
interagency policy statement on
-10-
<PAGE>
allowance for loan losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of valuation guidelines. Generally, the
policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. While the Association believes that it has established an
adequate allowance for loan losses, there can be no assurance that regulators,
in reviewing the Association's loan portfolio as part of a future regulatory
examination, will not request the Association to materially increase its
allowance for loan losses, thereby negatively affecting the Association's
financial condition and earnings at that time. Although management believes that
adequate allowance for loan losses have been established, actual losses are
dependent upon future events and, as such, further additions to the level of
specific or allowance for loan losses may become necessary.
The Association's management reviews and classifies the Association's
assets quarterly and reports the results to the Association's Board of Directors
on a quarterly basis. The Association classifies assets in accordance with the
management guidelines described above. The Association had no assets classified
as substandard or classified as Special Mention, Doubtful or Loss at September
30, 2000. The Association had $293,800 of assets classified as Substandard and
no assets classified as Special Mention, Doubtful or Loss at September 30, 1999.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Association's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and estimable. The
allowance is based upon a number of factors, including asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, and the
Association's underwriting policies. At September 30, 2000, the Association's
allowance for loan losses was $280,000, or 0.38% of total loans, as compared to
$263,000 or 0.43%, at September 30, 1999. The Association had non-performing
loans of $0 and $293,800 at September 30, 2000 and September 30, 1999,
respectively. The Association's level of nonperforming loans has historically
been low. The Association provided $34,250 in additional loan loss provisions
during 2000. During the current year, the Association charged off $17,300
against its loan loss allowance for a non-performing loan which was subsequently
paid off during the period. The Association's management determined that its
loan loss allowances were adequate during 1999 and, accordingly, no additional
provisions were provided in 1999. There were no loans charged off against the
allowances during 1999. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revisions as more information
becomes available. Various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. These agencies may require the Association to establish additional
valuation allowances, based on their judgments of the information available at
the time of the examination.
Real Estate Owned. Property acquired by the Association as a result of
foreclosure on a mortgage loan is classified as real estate owned and is
initially recorded at the fair value of the property at the date of acquisition,
establishing a new cost basis with any resulting writedown charged to the
allowance for loan losses. Thereafter, an allowance for losses on real estate
owned is established if the cost of a property exceeds its current fair value
less estimated sales costs. The Association obtains an appraisal on a real
estate owned property as soon as practicable after it takes possession of the
real property. The Association will generally reassess the value of real estate
owned at least quarterly thereafter. The policy for loans secured by real
estate, which comprise the bulk of the Association's portfolio, is to establish
loss reserves in accordance with the Association's asset classification process,
based on GAAP. At September 30, 2000, the Association held no real estate owned.
-11-
<PAGE>
The following table sets forth activity in the Association's allowance
for loan losses and the allowance for losses on real estate owned at or for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
2000 1999
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year ........................................................... $ 263 $ 263
Provision for loan losses .............................................................. 34 --
Charge-offs ............................................................................ (17) --
Recoveries ............................................................................. -- --
----- -----
Balance at end of year ................................................................. $ 280 $ 263
===== =====
Ratio of net charge-offs to average loans outstanding .................................. 0.03% --
===== =====
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
Balance at beginning of year ........................................................... $ -- $ --
Provision for losses ................................................................... -- --
Recoveries ............................................................................. -- --
Charge-offs ............................................................................ -- --
----- -----
Balance at end of year ................................................................. $ -- $ --
===== =====
</TABLE>
Accrued interest receivable on accruing loans past due by 90 days or
more amounted to $0 and $28,300 at September 30, 2000 and 1999, respectively.
Accordingly, if the Association had placed all such loans on non- accrual status
at those dates, interest income for the fiscal years ended September 30, 2000
and 1999 would have decreased by $0 and $12,800, respectively.
The following table sets forth the Association's allowance for loan
losses allocated by loan category and the percent of loans in each category to
total loans at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
ALLOWANCE TO TOTAL TO TOTAL ALLOWANCE TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four- family residential ............. $ 36 12.86% 31.94% $ 35 13.31% 32.80%
Multi-family residential ..................... 2 0.71 0.22 3 1.14 0.24
Commercial real estate ....................... 65 23.21 12.50 55 20.91 11.38
Land ......................................... 30 10.71 7.48 37 14.07 11.07
Commercial construction ...................... 12 4.29 4.64 10 3.80 3.16
Residential construction ..................... 120 42.86 31.69 113 42.97 33.21
Equity line mortgages ........................ 5 1.79 3.94 5 1.90 4.18
Lines of Credit .............................. 10 3.57 6.83 5 1.90 3.66
---- ------ ------ ---- ------ ------
Total mortgage loans ........................... 280 100.00 99.24 263 100.00 99.70
Savings account loans .......................... -- -- 0.76 -- -- 0.30
---- ------ ------ ---- ------ ------
Total allowance for loan losses ................ $280 100.00% 100.00% $263 100.00% 100.00%
==== ====== ====== ==== ====== ======
</TABLE>
-12-
<PAGE>
INVESTMENT ACTIVITIES
The Association's investment policy permits it to invest in U.S.
government obligations, certain securities of various government-sponsored
agencies, certificates of deposit of insured banks and savings institutions,
federal funds, and overnight deposits at the Federal Home Loan Bank. At
September 30, 2000, the Association held: FHLMC stock with an amortized cost of
$15,200 and a current market value of $838,150 and Federal Home Loan Bank stock
with a cost and market value of $290,700. At September 30, 2000, the Association
held $9.6 million in investments, including short-term interest earning
deposits.
The following table sets forth activity in the Association's
investments portfolio for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Amortized cost at beginning of period ........................................ $ 8,872 $ 16,758
Purchases/(Maturities or Sales), net ......................................... (66) (7,885)
Premium and discount amortization, net ....................................... -- (1)
-------- --------
Amortized cost at end of period .............................................. 8,806 8,872
Net unrealized gain(1) ....................................................... 801 763
-------- --------
Total securities, net ........................................................ $ 9,607 $ 9,635
======== ========
</TABLE>
-------------------
(1) The net unrealized gain at September 30, 2000 and 1999 relates to available
for sale securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115. The net unrealized gain is presented in order
to reconcile the "Amortized Cost" of the Association's securities portfolio
to the "Carrying Cost," as reflected in the Statements of Financial
Condition.
The following table sets forth the amortized cost and fair value of the
Association's investments at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
2000 1999
--------------------------- ---------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal Home Loan Bank Overnight Deposits ...................... $6,250 $6,250 $5,827 $5,827
U.S. Treasury Obligations ...................................... 2,250 2,228 2,750 2,722
Equity securities(1) ........................................... 15 838 15 806
Federal Home Loan Bank Stock ................................... 291 291 280 280
------ ------ ------ ------
Total Investments, net(2) ...................................... $8,806 $9,607 $8,872 $9,635
====== ====== ====== ======
-------------------
(1) Equity securities consist of FHLMC common stock.
(2) The difference between "Amortized Cost" and "Fair Value" represents net unrealized gains at September 30, 2000 and 1999
on available for sale securities in accordance with SFAS No. 115.
</TABLE>
-13-
<PAGE>
The following table sets forth the amortized cost and fair value of the
Association's investments, by accounting classification and by type of security,
at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
2000 1999
--------------------------- ---------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held to Maturity:
Debt securities ............................................. $ -- $ -- $ -- $ --
------ ------ ------ ------
Total held to maturity ................................... -- -- -- --
------ ------ ------ ------
Available-for-Sale:
Debt securities ............................................. 2,250 2,228 2,750 2,722
Equity securities ........................................... 15 838 15 806
------ ------ ------ ------
Total available-for-sale ................................. 2,265 3,066 2,765 3,528
------ ------ ------ ------
Federal Home Loan Bank Overnight deposits ...................... 6,250 6,250 5,827 5,827
------ ------ ------ ------
Federal Home Loan Bank Stock ................................... 291 291 280 280
------ ------ ------ ------
Total Investments, net(1) ................................ $8,806 $9,607 $8,872 $9,635
====== ====== ====== ======
---------------
(1) The difference between "Amortized Cost" and "Fair Value" represents net unrealized gains at September 30, 2000 and 1999 on
available for sale securities in accordance with SFAS No. 115.
</TABLE>
The following table sets forth certain information regarding the
amortized cost, fair value and weighted average yield of the Association's debt
securities at September 30, 2000, by remaining period to contractual maturity.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000
-------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE
-------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
--------- -------- ------- --------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury:
Due within 1 year ................................ $ -- $ -- --% $1,500 $1,485 5.34%
Due after 1 year but within 5 years .............. -- -- -- 750 743 5.65
Due after 5 years but within 10 years ............ -- -- -- -- -- --
Due after 10 years ............................... -- -- -- -- -- --
----- ----- ----- ------ ------ ------
Total ......................................... -- -- -- 2,250 2,228 --
Equity Securities ................................... -- -- -- 15 838 --
Federal Home Loan Bank stock ........................ -- -- 291 291
Federal Home Loan Bank deposits ..................... -- -- -- 6,250 6,250 --
----- ----- ----- ------ ------ ------
Total ......................................... $ -- $ -- --% $8,806 $9,607 5.44%
===== ===== ===== ====== ====== ======
</TABLE>
-14-
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan and security repayments and prepayments and
cash flows generated from operations are the primary sources of the
Association's funds for use in lending and for other general purposes.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of regular
(passbook) savings accounts, NOW accounts, checking accounts, money market
deposit accounts, IRAs and certificates of deposit. In recent years, the
Association has offered certificates of deposit with maturities of up to 60
months. At September 30, 2000, the Association's core deposits (which the
Association considers to consist of NOW accounts, money market deposit accounts
and regular savings accounts) constituted 19.61% of total deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market rates, prevailing interest rates and competition. The Association's
deposits are obtained predominantly from the areas located near its office
location. The Association relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits. However,
market interest rates and rates offered by competing financial institutions
significantly affect the Association's ability to attract and retain deposits.
The Association does not use brokers to obtain deposits.
The following table presents the deposit activity of the Association
for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total deposits at beginning of period ............................................. $ 57,654 $ 60,038
Net increase (decrease) before interest credited .................................. 7,737 (4,315)
Interest credited ................................................................. 2,483 1,931
-------- --------
Total deposits at end of period ................................................... $ 67,874 $ 57,654
======== ========
</TABLE>
At September 30, 2000, the Association had approximately $13.5 million
in "Jumbo" certificate of deposits (accounts in amounts over $100,000) maturing
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
MATURITY PERIOD
----------------------------------------------------------------------------------
Within three months .............................................................. 1,448 5.75%
After three but within six months ................................................ 672 5.68
After six but within twelve months ............................................... 2,994 5.97
After twelve but within twenty-four months ....................................... 4,668 6.99
After twenty-four months ......................................................... 3,697 6.68
-------
Total ................................................................. $13,479 6.48%
=======
</TABLE>
-15-
<PAGE>
The following table sets forth the distribution of the Association's
deposit accounts and the related weighted average interest rates at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------- ------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts .......................... $ 3,276 4.83% 3.00% $ 3,554 6.16% 3.00%
MMDA accounts .............................. 7,766 11.44% 4.65% 7,923 13.74% 4.15%
NOW accounts ............................... 1,590 2.34% 2.50% 1,413 2.45% 2.50%
Noninterest-bearing accounts ............... 681 1.00% -- 304 0.53% --
Certificate accounts ....................... 54,505 80.30% 6.27% 44,402 77.01% 5.35%
Accrued Interest .............. 56 0.09% 58 0.11%
------- ------ ------- ------
Totals ..................... $67,874 100.00% 5.77% $57,654 100.00% 4.98%
======= ====== ======= ======
</TABLE>
The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at the dates indicated and the period to
maturity of the certificate accounts outstanding at September 30, 2000.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT SEPTEMBER 30, 2000 TOTAL AT
----------------------------------------------------------------------------------------------------- SEPTEMBER 30,
INTEREST RATE RANGE 2001 2002 2003 THEREAFTER TOTAL 1999
------------------------------------ ------- ------- ------- ---------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
3.00% to 5.00% ..................... $ 4,766 $ 164 $ 28 $ 176 $ 5,134 16,919
5.01% to 7.00% ..................... 20,827 10,566 3,051 7,878 42,322 27,379
7.01% to 8.00% ..................... 100 6,419 -- 530 7,049 104
------- ------- ------- ------- ------- -------
Total ........................... $25,693 $17,149 $ 3,079 $ 8,584 $54,505 44,402
======= ======= ======= ======= ======= =======
</TABLE>
Borrowings. The Association historically has not used borrowings as a
source of funds. However, the Association may obtain advances from the Federal
Home Loan Bank as an alternative to retail deposit funds and may do so in the
future as part of its operating strategy. These advances would be collateralized
primarily by certain of the Association's mortgage loans and secondarily by the
Association's investment in capital stock of the Federal Home Loan Bank. See
"Regulation--Regulation of Federal Savings Associations--Federal Home Loan Bank
System." Such advances may be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the Federal Home Loan Bank will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the OTS and the Federal Home Loan Bank. At
September 30, 2000, neither the Company nor the Association had any borrowings
outstanding.
PERSONNEL
As of September 30, 2000, the Company had no employees who were
compensated through the Company.
As of September 30, 2000, the Association had 11 full-time employees.
In the last three years, the Association has experienced a low turnover rate
among its employees and, as of September 30, 2000, eight of the Association's
employees had been with the Association for more than six years. The employees
are not represented by a collective bargaining unit and the Association
considers its relationship with its employees to be good. See Part III, Item 10
"Executive Compensation" for a description of certain compensation and benefit
programs offered to the Association's employees.
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<PAGE>
REGULATION
The Company, the MHC and the Association are subject to extensive
regulation, examination and supervision by the OTS, as their chartering agency.
The Association's deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund and it is a member of the Federal Home Loan
Bank of Atlanta. The Association must file reports with the OTS concerning its
activities and financial condition and it must obtain regulatory approvals prior
to entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions. The OTS conducts periodic examinations to assess
the Association's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings institution can engage and is intended primarily for the
protection of the deposit insurance fund and depositors. The Company and the
MHC, as savings and loan holding companies, are required to file certain reports
with, and otherwise comply with, the rules and regulations of the OTS.
The OTS has significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS or the Congress, could have a material adverse
impact on the Company, the Association or the MHC.
On November 12, 1999, President Clinton signed into law landmark
financial services legislation, titled the Gramm-Leach-Bliley Act. The
Gramm-Leach-Bliley Act repeals depression-era laws restricting affiliations
among banks, securities firms, insurance companies and other financial services
providers. The impact of the Gramm-Leach-Bliley Act on the Company and the
Association, where relevant, is discussed throughout the regulation section
below.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings institutions and it does not
purport to be a comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Association derives its lending and
investment powers from the Home Owner's Loan Act and the regulations of the OTS
thereunder. Under these laws and regulations, the Association may invest in
mortgage loans secured by residential and non-residential real estate,
commercial and consumer loans, certain types of debt securities and certain
other assets. The Association may also establish service corporations that may
engage in activities not otherwise permissible for the Association, including
certain real estate equity investments and securities and insurance brokerage.
These investment powers are subject to various limitations, including (a) a
prohibition against the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories; (b) a limit of 400% of an
association's capital on the aggregate amount of loans secured by
non-residential real estate property; (c) a limit of 20% of an association's
assets on commercial loans, with the amount of commercial loans in excess of 10%
of assets being limited to small business loans; (d) a limit of 35% of an
association's assets on the aggregate amount of consumer loans and acquisitions
of certain debt securities; (e) a limit of 5% of assets on non-conforming loans
(loans in excess of the specific limitations of the Home Owner's Loan Act); and
(f) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.
Loans to One Borrower. Under the Home Owner's Loan Act, savings
institutions are generally subject to the same limits on loans to one borrower
as are imposed on national banks. Generally, under these limits, a savings
institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of the association's unimpaired capital and surplus.
Additional amounts may be lent, not exceeding 10% of an association's unimpaired
capital and surplus, if such loans and extensions of credit are fully secured by
readily-marketable collateral. Such collateral is defined to include certain
debt and equity securities and bullion, but generally does not include real
estate. At September 30, 2000, the Association's limit on loans to one borrower
was approximately $2.1 million. At September 30, 2000, the Association's largest
aggregate amount of loans to one borrower was $1.9 million, consisting of
various loans secured by farm and residential tracts. The second largest
borrower had an aggregate balance of approximately $1.8 million, secured by
various residential and
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<PAGE>
commercial tracts. At September 30, 2000, all of the loans in both of these
lending relationships were performing in accordance with their terms.
QTL Test. The Home Owner's Loan Act requires a savings institution
to meet a Qualified Thrift Lender ("QTL") test. Under the QTL test, a savings
institution is required to maintain at least 65% of its "portfolio assets" in
certain "qualified thrift investments" in at least nine months of the most
recent 12-month period. "Portfolio assets" means, in general, an association's
total assets less the sum of (a) specified liquid assets up to 20% of total
assets, (b) goodwill and other intangible assets, and (c) the value of property
used to conduct an association's business. The term "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, consumer loans, small business loans,
education loans, and credit card loans. A savings association may also satisfy
the QTL test by qualifying as a "domestic building and loan association" as
defined in the Internal Revenue Code of 1986. At September 30, 2000, the
Association maintained 72.84% of its portfolio assets in qualified thrift
investments. The Association had also met the QTL test in each of the prior 12
months and, therefore, was a qualified thrift lender.
A savings association that fails the QTL test must either operate
under certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from any
Federal Home Loan Bank; and (d) establishing any new branch in a location not
permissible for a national bank in an association's home state. In addition,
within one year of the date a savings association ceases to meet the QTL test,
any company controlling the association would have to register under, and become
subject to the requirements of, the Bank Holding Company Act of 1956, as
amended. If the savings association does not requalify under the QTL test within
the three-year period after it failed the QTL test, it would be required to
terminate any activity and to dispose of any investment not permissible for a
national bank and would have to repay as promptly as possible any outstanding
advances from a Federal Home Loan Bank. A savings association that has failed
the QTL test may requalify under the QTL test and be free of such limitations,
but it may do so only once.
Capital Requirements. The OTS regulations require savings
institutions to meet three minimum capital standards: a tangible capital ratio
requirement of 1.5% of total assets as adjusted under the OTS regulations, a
leverage ratio requirement of 3% of core capital to such adjusted total assets
and a risk-based capital ratio requirement of 8% of total risk-based capital to
total risk-weighed assets. In determining the amount of risk-weighted assets for
purposes of the risk-based capital requirement, a savings institution must
compute its risk-based assets by multiplying its assets and certain off-balance
sheet items by risk-weights, which range from 0% for cash and obligations issued
by the United States Government or its agencies to 100% for consumer and
commercial loans, as assigned by the OTS capital regulation based on the risks
that the OTS has determined to be inherent in the type of asset. Tangible
capital is defined, generally, as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
earnings and minority interests in equity accounts of fully consolidated
subsidiaries, less intangibles other than certain mortgage servicing rights and
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. Core capital is defined similarly to tangible capital, but
core capital also includes certain qualifying supervisory goodwill and certain
purchased credit card relationships. Supplementary capital currently includes
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock and
the ALL. The ALL includible in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets, and the amount of supplementary capital that may
be included as total capital cannot exceed the amount of core capital.
The OTS regulations require that a savings institution with "above
normal" interest rate risk, when determining its compliance with the
risk-based-capital requirement, to deduct a portion of such capital from its
total capital to account for the "above normal" interest rate risk. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
resulting from a hypothetical 2% increase or decrease in market rates of
interest, divided by the estimated economic value of an association's assets, as
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calculated in accordance with guidelines set forth by the OTS. At the times when
the 3-month Treasury bond equivalent yield falls below 4%, an association may
compute its interest rate risk on the basis of a decrease equal to one-half of
that Treasury rate rather than on the basis of 2%. A savings institution whose
measured interest rate risk exposure exceeds 2% would be considered to have
"above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between an association's measured interest rate risk
and 2%, multiplied by the estimated economic value of an association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the institution's financial data on
which the interest rate risk was computed. A savings institution with assets of
less than $300 million and a risk-based capital ratio in excess of 12% is not
required, unless the OTS determines otherwise, to comply with the standard
reporting requirements for the interest rate risk component, and the institution
may provide such selected information as the OTS determines. Currently, the
Association qualifies for this exemption from the filing requirements but as
part of its interest rate risk management strategy, the Association voluntarily
files these reports with the OTS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset/Liability Management." The
regulations also authorize the Director of the OTS to waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS has
indefinitely deferred the implementation of the IRR component in the computation
of an institution's risk-based capital requirement. The OTS continues to monitor
the IRR of individual institutions and retains the right to impose additional
capital on individual institutions.
At September 30, 2000, the Association met each of its capital
requirements.
The table below presents the Association's regulatory capital as
compared to the OTS regulatory capital requirements at September 30, 2000:
<TABLE>
<CAPTION>
CAPITAL EXCESS
AMOUNT REQUIREMENTS CAPITAL
-------- ---------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Tangible capital ........................................ $13,399 $ 1,237 $12,162
Core capital ............................................ 13,399 2,474 10,925
Risk-based capital ...................................... 13,679 4,685 8,994
</TABLE>
A reconciliation between regulatory capital and GAAP capital at
September 30, 2000 in the accompanying financial statements is presented below:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
GAAP capital .......................................................................... $ 14,172 $ 14,172 $ 14,172
Standalone equity in Holding Company .................................................. (277) (277) (277)
Net unrealized gain on available for sale investment securities, net of tax ........... (496) (496) (496)
Allowance for loan losses included as supplementary capital ........................... -- -- 280
-------- -------- --------
Regulatory capital .................................................................... $ 13,399 $ 13,399 $ 13,679
======== ======== ========
</TABLE>
Limitation on Capital Distributions. Under OTS capital distribution
regulations, certain savings associations will be permitted to pay capital
distributions during a calendar year that do not exceed the association's net
income for that year plus its retained net income for the prior two years,
without notice to, or the approval of, the OTS. However, a savings association
subsidiary of a savings and loan holding company, such as the Association, will
continue to have to file a notice unless the specific capital distribution
requires an application.
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<PAGE>
In addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to meet its minimum capital requirements, as described above.
See "--Prompt Corrective Regulatory Action."
Liquidity. The Association is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified United States Government, state and federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Association's average
liquidity ratio for the month ended September 30, 2000 was 28.12% which exceeded
the applicable requirements. The Association has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semiannual basis, is computed by totaling three
components: the size of the association, on which the basic assessment would be
based; the association's supervisory condition, which would result in an
additional assessment based on a percentage of the basic assessment for any
savings institution with a composite rating of 3, 4 or 5 in its most recent
safety and soundness examination; and the complexity of the association's
operations, which would result in an additional assessment based on a percentage
of the basic assessment for any savings association that managed over $1.0
billion in trust assets, serviced for others loans aggregating more than $1.0
billion, or had certain off-balance sheet assets aggregating more than $1.0
billion. In order to avoid a disproportionate impact on the smaller savings
institutions, which are those whose total assets never exceeded $100.0 million,
the OTS regulations provide that the portion of the assessment based on asset
size will be the lesser of the assessment under the amended OTS regulations or
the regulations before the amendment. Management believes that any change in its
rate of OTS assessments under the amended OTS regulations will not be material.
The deposit insurance premium expense, including operating assessments incurred
by the Association for the fiscal years ended September 30, 2000 and 1999
totaled $42,300 and $59,850, respectively.
Branching. Subject to certain limitations, the Home Owner's Loan Act
and the OTS regulations permit federally chartered savings institutions to
establish branches in any state of the United States. The authority to establish
such a branch is available: (a) in states that expressly authorize branches of
savings institutions located in another state and (b) to an association that
qualifies as a "domestic building and loan association" under the Internal
Revenue Code of 1986, which imposes qualification requirements similar to those
for a "qualified thrift lender" under the Home Owner's Loan Act. See "QTL Test."
The authority for a federal savings institution to establish an interstate
branch network would facilitate a geographic diversification of an association's
activities. This authority under the Home Owner's Loan Act and the OTS
regulations preempts any state law purporting to regulate branching by federal
savings institutions.
Community Reinvestment. Under the Community Reinvestment Act, as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with its examination of a savings institution, to assess the
association's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
association. The Community Reinvestment Act also requires all
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<PAGE>
institutions to make public disclosure of their Community Reinvestment Act
ratings. The Association received a "Satisfactory" Community Reinvestment Act
rating in its most recent examination on June 15, 1998.
The Community Reinvestment Act regulations establish an assessment
system that bases an association's rating on its actual performance in meeting
community needs. In particular, the assessment system focuses on three tests:
(a) a lending test, to evaluate the institution's record of making loans in its
assessment areas; (b) an investment test, to evaluate the institution's record
of investing in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs, and other offices.
Transactions with Related Parties. The Association's authority to
engage in transactions with its "affiliates" is limited by the OTS regulations
and by Sections 23A and 23B of the Federal Reserve Act. In general, an affiliate
of the Association is any company that controls the Association or any other
company that is controlled by a company that controls the Association, excluding
the Association's subsidiaries other than those that are insured depository
institutions. The OTS regulations prohibit a savings institution: (a) from
lending to any of its affiliates that is engaged in activities that are not
permissible for bank holding companies under Section 4(c) of the BHC Act and (b)
from purchasing the securities of any affiliate other than a subsidiary. Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and surplus of the savings institution and also limits the
aggregate amount of transactions with all affiliates to 20% of the savings
institution's capital and surplus. Extensions of credit to affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies.
The Association's authority to extend credit to its directors,
executive officers, and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board
thereunder. Among other things, these provisions require that extensions of
credit to insiders (a) be made on terms that are substantially the same as, and
follow credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not
involve more than the normal risk of repayment or present other unfavorable
features and (b) not exceed certain limitations on the amount of credit extended
to such persons, individually and in the aggregate, which limits are based, in
part, on the amount of the association's capital. In addition, extensions of
credit in excess of certain limits must be approved by the association's board
of directors.
Enforcement. Under the Federal Deposit Insurance Act, the OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings institution.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the Federal
Deposit Insurance Act, the FDIC has the authority to recommend to the Director
of OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director of the OTS, the FDIC has
authority to take such action under certain circumstances.
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<PAGE>
Standards for Safety and Soundness. The Federal Deposit Insurance Act,
as amended by Federal Deposit Insurance Corporation Improvement Act of 1991 FDIC
Improvement Act and the Riegle Community Development and Regulatory Improvement
Act of 1994 ("Community Development Act"), the OTS and the federal bank
regulatory agencies have adopted, a set of guidelines prescribing safety and
soundness standards pursuant to FDIC Improvement Act, as amended. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal shareholder. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of FDIC
Improvement Act. If an institution fails to comply with such an order, the OTS
may seek to enforce such order in judicial proceedings and to impose civil money
penalties. In addition, the OTS and the other federal bank regulatory agencies
have guidelines for identifying and monitoring asset quality and earnings
standards.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings institution to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings institutions.
For this purpose, a savings institution would be placed in one of five
categories based on the association's capital. Generally, a savings institution
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk-weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution will be treated as "adequately capitalized"
if its ratio of total capital to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association receives
the highest rating on the CAMEL financial institutions rating system). A savings
institution that has a total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings institution
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements." At
September 30, 2000, the Association met the criteria for being considered
"well-capitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association
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<PAGE>
is required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets, be acquired by a depository association holding company
or combine with another depository association. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depositary association. Under FDIC Improvement Act, the OTS is
required to appoint a receiver (or with the concurrence of the FDIC, a
conservator) for a critically undercapitalized association within 90 days after
the association becomes critically undercapitalized or, with the concurrence of
the FDIC, to take such other action that would better achieve the purposes of
the prompt corrective action provisions. Such alternative action can be renewed
for successive 90- day periods. However, if the association continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the OTS makes certain findings with which the FDIC concurs and the
Director of the OTS and the Chairman of the FDIC certify that the association is
viable. In addition, an association that is critically undercapitalized is
subject to more severe restrictions on its activities, and is prohibited,
without prior approval of the FDIC from, among other things, entering into
certain material transactions or paying interest on new or renewed liabilities
at a rate that would significantly increase the association's weighted average
cost of funds.
Where appropriate, the OTS can impose corrective action by a savings
and loan holding company under the "prompt corrective action" provisions of FDIC
Improvement Act.
Insurance of Deposit Accounts. Pursuant to FDIC Improvement Act, the
FDIC established a new risk-based assessment system for determining the deposit
insurance assessments to be paid by insured depositary institutions. Under the
new assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the quarter
ending three months before the beginning of the assessment. The three capital
categories consist of: (a) well capitalized, (b) adequately capitalized, or (c)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Under the regulation, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. Assessment rates for both the Bank
Insurance Fund and the Savings Association Insurance Fund currently range from
0.00% of deposits for an institution in the highest category (i.e., well
capitalized and financially sound, with no more than a few minor weaknesses) to
0.27% of deposits for an institution in the lowest category (i.e.,
undercapitalized and substantial supervisory concern). The FDIC is authorized to
raise the assessment rates as necessary to maintain the required reserve ratio
of 1.25%. As a result of the Deposit Insurance Funds Act of 1996, both the Bank
Insurance Fund and the Savings Association Insurance Fund currently satisfy the
reserve ratio requirement. The Deposit Insurance Funds Act authorized the FDIC
to impose a special one-time assessment on all institutions with Savings
Association Insurance Fund-assessable deposits in the amount necessary to
recapitalize the Savings Association Insurance Fund-assessable deposits as of
March 31, 1995.
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<PAGE>
The 1996 Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Association has not been so classified by the FDIC or
the OTS. Accordingly, assuming that the designated reserve ratio is maintained
by the Bank Insurance Fund and by the Savings Association Insurance Fund after
the collection of the special Savings Association Insurance Fund assessment, the
Association will have to pay substantially lower regular assessments on its
deposits compared to those paid in recent years, as long as the Association
maintains its regulatory status.
Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. The management of the Association does
not know of any practice, condition or violation that might lead to termination
of deposit insurance.
Federal Home Loan Bank System. The Association is a member of the
Federal Home Loan Bank of Atlanta, which is one of the regional Federal Home
Loan Banks composing the Federal Home Loan Bank System. Each Federal Home Loan
Bank provides a central credit facility primarily for its member institutions.
The Association, as a member of the Federal Home Loan Bank of Atlanta, is
required to acquire and hold shares of capital stock in the Federal Home Loan
Bank of Atlanta in an amount at least equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank of Atlanta. The Association was in compliance
with this requirement with an investment in Federal Home Loan Bank of Atlanta
stock at September 30, 2000, of $290,700. Any advances from a Federal Home Loan
Bank must be secured by specified types of collateral, and all long-term
advances may be obtained only for the purpose of providing funds for residential
housing finance.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the
Federal Home Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. For the fiscal years ended September 30, 2000 and
1999 dividends from the Federal Home Loan Bank of Atlanta to the Association
amounted to $22,150 and $24,500, respectively. If dividends were reduced, or
interest on future Federal Home Loan Bank advances increased, the Association's
net interest income would likely also be reduced.
Under the Gramm-Leach-Bliley Act, membership in the Federal Home Loan
Bank is now voluntary for all federally-chartered savings associations, such as
the Association. The Gramm-Leach-Bliley Act also replaces the existing
redeemable stock structure of the Federal Home Loan Bank System with a capital
structure that requires each Federal Home Loan Bank to meet a leverage limit and
a risk-based permanent capital requirement. Two classes of stock are authorized:
Class A (redeemable on 6-months notice) and Class B Update (redeemable on
5-years notice).
Federal Reserve System. The Association is subject to provisions of the
Federal Reserve Act and the Federal Reserve Bureau's regulations pursuant to
which depositary institutions may be required to maintain non-interest-earning
reserves against their deposit accounts and certain other liabilities.
Currently, reserves must be maintained against transaction accounts (primarily
NOW and regular checking accounts). The Federal Reserve Board regulations
generally require that reserves be maintained in the amount of 3% of the
aggregate of transaction accounts up to $46.5 million. The amount of aggregate
transaction accounts in excess of $46.5 million are currently subject to a
reserve ratio of 10%, which ratio the Federal Reserve Board may adjust between
8% and 12%. The Federal Reserve Board regulations currently exempt $4.9 million
of otherwise reservable balances from the reserve requirements, which exemption
is adjusted by the Federal Reserve Board at the end of each year. The
Association is in compliance with the foregoing reserve requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce
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<PAGE>
the Association's interest-earning assets. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS. Federal Home Loan Bank System members
are also authorized to borrow from the Federal Reserve "discount window," but
Federal Reserve Board regulations require such institutions to exhaust all
Federal Home Loan Bank sources before borrowing from a Federal Reserve
Association.
New Privacy Regulations. Pursuant to the Gramm-Leach-Bliley Act, the
OTS has published final regulations implementing the privacy protection
provisions of the Gramm-Leach-Bliley Act. These regulations, effective as of
November 13, 2000 with full compliance required by July 1, 2001, require each
financial institution to adopt procedures to protect customers' "nonpublic
personal information." The new regulations generally require that the
Association disclose its privacy policy, including identifying with whom it
shares a customer's "nonpublic personal information" to customers at the time of
establishing the customer relationship and annually thereafter. In addition, the
Association will be required to provide its customers with the ability to
"opt-out" of having it share their personal information with unaffiliated third
parties and not to disclose account numbers or access codes to nonaffiliated
third parties for marketing purposes. The Association currently has a privacy
protection policy in place and intends to review and amend that policy, if
necessary, for compliance with the regulations.
REGULATION OF OTS HOLDING COMPANIES
General. The Company and the MHC are federal holding companies
chartered under Section 10(o) of the Home Owner's Loan Act. As such, the Company
and the MHC are registered with and subject to OTS examination and supervision
as well as certain reporting requirements. In addition, the OTS has enforcement
authority over the Company, the MHC and any of their non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the financial
safety, soundness, or stability of a subsidiary savings institution. Unlike bank
holding companies, federal mutual holding companies are not subject to any
regulatory capital requirements or to supervision by the Federal Reserve System.
Restrictions Applicable to Activities of Mutual Holding Companies.
Pursuant to Section 10(o) of the Home Owner's Loan Act, a mutual holding company
may engage only in the following activities: (i) investing in the stock of a
savings institution; (ii) acquiring a mutual association through the merger of
such association into a savings institution subsidiary of such holding company
or an interim savings institution subsidiary of such holding company; (iii)
merging with or acquiring another holding company, one of whose subsidiaries is
a savings institution; (iv) investing in a corporation the capital stock of
which is available for purchase by a savings institution under federal law or
under the law of any state where the subsidiary savings institution or
associations have their home offices; (v) furnishing or performing management
services for a savings institution subsidiary of such holding company; (vi)
holding, managing, or liquidating assets owned or acquired from a savings
institution subsidiary of such company; (vii) holding or managing properties
used or occupied by a savings institution subsidiary of such company; (viii)
acting as trustee under a deed of trust; (ix) any other activity (a) that the
Federal Reserve Board, by regulation, has determined to be permissible for bank
holding companies under Section 4(c) of the BHC Act, unless the Director of the
OTS, by regulation, prohibits or limits any such activity for savings and loan
holding companies, or (b) in which multiple savings and loan holding companies
were authorized by regulation to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such holding company
is approved by the Director of the OTS. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed above, and it has a period of two years to cease any
non- conforming activities and divest any non-conforming investments.
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<PAGE>
Restrictions Applicable to All Savings and Loan Holding Companies. The
Home Owner's Loan Act prohibits a savings and loan holding company, including a
federal mutual holding company, directly or indirectly, from acquiring (i)
control (as defined under The Home Owner's Loan Act) of another savings
institution (or a holding company parent thereof) without prior OTS approval;
(ii) more than 5% of the voting shares of another savings institution (or
holding company parent thereof) that is not a subsidiary, subject to certain
exceptions; (iii) through merger, consolidation, or purchase of assets, another
savings institution or a holding company thereof, or acquiring all or
substantially all of the assets of such institution (or a holding company
thereof) without prior OTS approval; or (iv) control of any depository
institution not insured by the FDIC (except through a merger with and into the
holding company's savings institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except (i) in the case of certain emergency acquisitions (as defined under The
Home Owner's Loan Act) approved by the FDIC; (ii) if such holding company
controls a savings institution subsidiary that operated a home or branch office
in such additional state as of March 5, 1987, and (iii) if the laws of the state
in which the savings institution to be acquired is located specifically
authorize a savings institution chartered by that state to be acquired by a
savings institution chartered by the state where the acquiring savings
institution or savings and loan holding company is located or by a holding
company that controls such a state chartered association. The conditions imposed
upon interstate acquisitions by those states that have enacted authorizing
legislation vary. Some states impose conditions of reciprocity, which have the
effect of requiring that the laws of both the state in which the acquiring
holding company is located (as determined by the location of its subsidiary
savings institution) and the state in which the association to be acquired is
located, have each enacted legislation allowing its savings institutions to be
acquired by out-of-state holding companies on the condition that the laws of the
other state authorize such transactions on terms no more restrictive than those
imposed on the acquiror by the state of the target association. Some of these
states also impose regional limitations, which restrict such acquisitions to
states within a defined geographic region. Other states allow full nationwide
banking without any condition of reciprocity. Some states do not authorize
interstate acquisitions of savings institutions. In evaluating an application by
a holding company to acquire a savings institution, the OTS must consider the
financial and managerial resources and future prospects of the company and
savings institution involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community, and competitive
factors.
If the savings institution subsidiary of a federal mutual holding
company fails to meet the QTL test set forth in Section 10(m) of the Home
Owner's Loan Act and regulations of the OTS, the holding company must register
with the Federal Reserve Board as a bank holding company under the BHC Act
within one year of the savings institution's failure to so qualify. For
additional information in this regard, see "-- Regulation of Federal Savings
Associations -- QTL Test."
For a description of certain restrictions on transactions between the
Association and its affiliates, including, without limitation, the Company and
the MHC, see "-- Regulation of Federal Savings Associations -- Transactions with
Related Parties."
FEDERAL SECURITIES LAW
The Company's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended. The Company is subject
to information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company, the Association or the MHC. The Association was last
audited for its taxable year ended September 30, 1993.
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<PAGE>
For federal income tax purposes, the Company and the Association report
their income using a taxable year ending September 30 and the accrual method of
accounting. The Company, the Association and the MHC file separate income tax
returns and each reports its income on the same basis as the Association now
reports its income. Because the MHC owns less than 80% of the outstanding common
stock of the Company, the MHC and the Company are not permitted to file such
returns on a consolidated basis. The Company and the Association may file their
returns on a consolidated basis, but during have elected to file separately. The
Company and the Association have entered into a tax sharing agreement which
governs the apportionment of taxable income between the entities. The Company,
the MHC and the Association are subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly the
Association's tax reserve for bad debts discussed below.
Bad Debt Reserves. The Association, as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general, are
loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing the Association's taxable income. Pursuant to the
Small Business Job Protection Act of 1996, the Association is now recapturing
(taking into income) over a multi-year period a portion of the balance of its
bad debt reserve as of September 30, 1998.
Distributions. To the extent that the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's "base year reserve," i.e., its reserve as of
September 30, 1988, and then from the Association's supplemental reserve for
losses on loans, to the extent thereof, and an amount based on the amount
distributed (but not in excess of the amount of such reserves) will be included
in the Association's income. Non-dividend distributions include distributions in
excess of the Association's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Association's current or accumulated earnings and profits will not be so
included in the Association's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Reorganization, the Association makes a non-dividend distribution to the Holding
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includible in income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Association does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Association
currently has none. AMTI is adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. Thus, the Association's AMTI is increased by an
amount equal to 75% of the amount by which the Association's adjusted current
earnings exceeds its AMTI (determined without regard to this adjustment and
prior to reduction for net operating losses). The Association does not expect to
be subject to the AMT.
Although the corporate environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2.0 million has expired, under current
Administration proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.
Dividends Received Deduction. As the owner of more than 20% of the
stock of the Company, the MHC may deduct from its income 80% of dividends
received from the Company. (A 70% dividends received deduction generally applies
with respect to dividends received by a corporation if such corporation owns
less than 20% of the stock of the corporation paying the dividend).
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<PAGE>
STATE TAXATION
Under North Carolina law, the corporate income tax is 7.00% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of .0015 applied
to the greatest of the institution's (i) capital stock, surplus and undivided
profits, (ii) investment in tangible property in North Carolina or (iii) 55% of
the appraised valuation of property in North Carolina.
ITEM 2. PROPERTIES
The Company conducts its business through its sole office, located in
Wake Forest, North Carolina, which was renovated in 1995. The Company owns the
main office with net book value for property and equipment of $432,900 as of
September 30, 2000. Management believes that the Company's current facilities
are adequate to meet the present and immediately foreseeable needs of the
Company, the Association and the MHC. However, the Company may consider opening
a branch office in the future.
<TABLE>
<CAPTION>
NET BOOK
VALUE AT
LEASED OR DATE SEPTEMBER 30,
OWNED ACQUIRED 2000
------------ ------------ ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Main Office................... Owned 1961 $409
302 S. Brooks Street
Wake Forest, NC 27587
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
At September 30, 2000, there were no material legal proceedings to
which the Company was a party or to which any of its property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Company's common equity and
related stockholder matters appears under "Common Stock Information" in the
Company's 2001 Annual Report to Stockholders on page 38, and is incorporated
herein by reference.
Information relating to the payment of dividends by the Company appears
under "Common Stock Information" in the Company's 2001 Annual Report to
Stockholders on page 38, and is incorporated herein by reference. A dividend
declared by the Board of Directors of the Company is considered a capital
distribution from the Company to the stockholders, including the MHC, its mutual
holding company. Under the requirements of the OTS, there are certain
restrictions on the ability of the Company to pay a capital distribution. See
"Regulation--Limitation on Capital Distributions."
The Association's dividend payout ratios were 41.87% and 47.06% and the
equity to asset ratios were 17.74% and 18.35% for years ended September 30, 2000
and 1999, respectively.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain of the above-captioned information appears under "Management's
Discussion and Analysis" in the Registrant's 2001 Annual Report to Stockholders
on pages 3 through 13 and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are incorporated by reference to the
indicated pages of the 2001 Annual Report to Stockholders.
Page(s) in
Annual Report
-------------
o Independent Auditor's Report...............................14
o Consolidated Statements of Financial Condition,
September 30, 2000 and 1999............................15
o Consolidated Statements of Income,
Years Ended September 30, 2000 and 1999................16
o Consolidated Statements of Stockholders' Equity,
Years Ended September 30, 2000 and 1999.............17-18
o Consolidated Statements of Cash Flows,
Years Ended September 30, 2000 and 1999.............19-20
o Notes to Consolidated Financial Statements..............21-37
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information relating to changes in accountants is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on February 20, 2001 ("Proxy Statement").
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information relating to Directors and Executive Officers of the
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on February 20, 2001. The
information related to Section 16(a) of the Exchange Act is also incorporated
herein by reference to the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated
herein by reference to the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Company's Proxy
Statement under the heading "Security Ownership of Beneficial Owners and
Management".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Company's Proxy
Statement
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<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Plan of Reorganization (Incorporated by reference to
Exhibit 2.1 of the Company's Registration Statement
on Form 8-A, filed with the SEC on May 7, 1999).
3.1 Federal Stock Charter of the Company (Incorporated by
reference to Exhibit 3.1 of the Form 8-A filed with
the SEC on May 7, 1999).
3.2 Bylaws of the Company (Incorporated by reference to
Exhibit 3.2 of the Form 8-A filed with the SEC on May
7, 1999 ).
4.3 Common Stock Certificate of the Company (Incorporated
by reference to Exhibit 4.3 of the Form 8-A filed
with the SEC on May 7, 1999).
10.1 Employment Agreement with Anna O. Sumerlin, President
and Chief Executive Officer. (Incorporated by
reference to Exhibit 10.1 of the Form 10-KSB for the
fiscal year ended September 30, 1999 filed with the
SEC on December 28, 1999).
10.2 Employment Agreement with Carlton E. Chappell, Vice
President, Secretary and Treasurer. (Incorporated by
reference to Exhibit 10.2 of the Form 10-KSB for the
fiscal year ended September 30, 1999 filed with the
SEC on December 28, 1999).
10.3 Employment Agreement with Robert C. White, Vice
President and Chief Financial Officer. (Incorporated
by reference to Exhibit 10.3 of the Form 10-KSB for
the fiscal year ended September 30, 1999 filed with
the SEC on December 28, 1999).
10.4 Employee Stock Ownership Plan of Wake Forest Federal
Savings & Loan Association. (Incorporated by
reference to Exhibit 10.4 of the Form 10-KSB for the
fiscal year ended September 30, 1999 filed with the
SEC on December 28, 1999).
10.5 Wake Forest Federal Savings & Loan Association 1997
Recognition and Retention Plan (Incorporated by
reference to the Form S-8 filed with the SEC on July
27, 1999).
10.6 Wake Forest Federal Savings & Loan Association 1997
Stock Option Plan (Incorporated by reference to the
Form S-8 filed with SEC on July 27, 1999).
13.1 2001 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant (Incorporated by
reference to Part 1 - "General" and
"Reorganization").
23.1 Independent Auditor's Consent
27.1 Financial Data Schedule (filed in electronic format
only)
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<PAGE>
(B) REPORTS ON FORM 8-K
1. The Company filed a Current Report on Form 8-K dated August
21, 2000 announcing the termination of the firm of McGladrey &
Pullen, LLP as the Company's independent auditors and
appointing the firm of Dixon Odom PLLC as the Company's
independent auditors for the fiscal year ending September 30,
2000.
2. The Company filed an amended Current Report on Form 8-K dated
August 29, 2000 announcing that the firm of McGladrey & Pullen
LLP responded in a letter dated August 25, 2000 that they were
in agreement with the Company's statements included in its
Form 8-K dated August 21, 2000.
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<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
WAKE FOREST BANCSHARES, INC.
(Registrant)
Date: December 27, 2000 By: /s/ Anna O. Sumerlin
----------------------------- -------------------------------------
Anna O. Sumerlin
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Anna O. Sumerlin December 27, 2000
------------------------------------------------ -----------------
Anna O. Sumerlin Date
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Robert C. White December 27, 2000
------------------------------------------------ -----------------
Robert C. White Date
Chief Financial Officer and Vice President
(Principal Accounting Officer)
/s/ Paul K. Brixhoff December 27, 2000
------------------------------------------------ -----------------
Paul K. Brixhoff - Director Date
/s/ Harold R. Washington December 27, 2000
------------------------------------------------ -----------------
Harold R. Washington - Director Date
/s/ John D. Lyon December 27, 2000
------------------------------------------------ -----------------
John D. Lyon - Director Date
/s/ R.W. Wilkinson, III December 27, 2000
------------------------------------------------ -----------------
R.W. Wilkinson, III - Vice-Chairman and Director Date
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/s/ Howard L. Brown December 27, 2000
------------------------------------------------ -----------------
Howard L. Brown -Chairman of the Board Date
and Director
/s/ Leelan A. Woodlief December 27, 2000
------------------------------------------------ -----------------
Leelan A. Woodlief - Director Date
/s/ William S. Wooten December 27, 2000
------------------------------------------------ -----------------
William S. Wooten - Director Date
/s/ Rodney M. Privette December 27, 2000
------------------------------------------------ -----------------
Rodney M. Privette - Director Date
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