<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO.1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-25290
TWIN CITY BANCORP, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Tennessee 62-1582947
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 State at Edgemont, Bristol, Tennessee 37620
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
The registrant's telephone number, including area code: (423) 989-4400
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.00 per share
The registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the past 12 months and (2) has
been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained in this form, and disclosure will not be contained, to the best of the
registrant's knowledge, in the definitive proxy statement incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
Yes No X
--- ---
The registrant's revenues for its most recent fiscal year were $9,003,000.
The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant at March 6, 1998 was approximately $13,256,976
(based on 898,778 shares at the most recent trading price of which management
was aware ($14.75 on March 6, 1998)) (the registrant's employee stock ownership
plan, management recognition plan and directors and executive officers have not
been deemed to be non-affiliates).
The total number of outstanding shares of the registrant's common stock at March
6, 1998 was 1,261,027.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Annual Report to Stockholders (the
"Annual Report"). (Part II)
Portions of the Proxy Statement for the registrant's 1998 Annual Meeting of
Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the date as
forth below.
TWIN CITY BANCORP, INC.
Date: July 6, 1998 By: /s/ Thad R. Bowers
----------------------------------
Thad R. Bowers
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated below as of the date set forth above.
By: /s/ Thad R. Bowers
----------------------------------------------------------
Thad R. Bowers
President and Chief Executive Officer
(Director and Principal Executive and Financial Officer)
By: /s/ Albert Joseph Vance, II
----------------------------------------------------------
Albert Joseph Vance, II
Assistant Treasurer
(Principal Accounting Officer)
By: /s/ William C. Burriss, Jr.
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William C. Burriss, Jr.
Director
By: /s/ Sid Oakley
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Sid Oakley
Director
By: /s/ Louis H. Phetteplace
----------------------------------------------------------
Louis H. Phetteplace
Director
By: /s/ Paul R. Wohlford
----------------------------------------------------------
Paul R. Wohlford
Director
34
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EXHIBIT 13
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock was first quoted and began trading on the NASDAQ
Small Cap Market System on January 4, 1995, under the symbol "TWIN." As of
March 6, 1998, there were 1,261,027 shares of the common stock outstanding. The
approximate number of record holders of the Company's common stock as of that
date was 480.
Quarterly stock prices and dividends declared and paid are shown in the
table below. These quotations reflect inter-dealer prices without retail
markup, markdown, or commission and a three-for-two stock split in the form of a
50% stock dividend paid on September 8, 1997.
<TABLE>
<CAPTION>
1997 First Second Third Fourth Year
- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
High $12.67 $13.18 $13.88 $15.50 $15.50
Low $11.67 $12.00 $12.83 $13.50 $11.67
Dividend Declared
& Paid per Share $ 0.11 $ 0.11 $ 0.11 $ 0.10 $ 0.43
1996
- ----
High $12.17 $11.50 $11.67 $12.00 $12.19
Low $11.17 $10.67 $10.83 $11.25 $10.67
Dividend Declared
& Paid per Share $ 0.10 $ 0.21 $ 0.11 $ 0.11 $ 0.52
</TABLE>
The payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors of the Company. The Board of
Directors has adopted a policy of paying quarterly cash dividends on the Common
Stock, which commenced following the first full fiscal quarter following the
Conversion. The payment of future dividends will be subject to the requirements
of applicable law and the determination by the Board of Directors of the Company
that the net income, capital and financial condition of the Company and the
Bank, thrift industry trends and general economic conditions justify the payment
of dividends, and there can be no assurance that dividends will be paid or, if
paid, will continue to be paid in the future. Under Tennessee law, dividends may
be paid upon determination that following payment of the dividend the Company
would be able to pay its debts in the ordinary course of business and the
Company's assets would exceed its liabilities. For additional information, see
Note 21 of the Notes to Consolidated Financial Statements herein.
1
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary of selected consolidated financial information and
other data does not purport to be complete and is qualified in its entirety by
reference to the detailed information and consolidated financial statements and
accompanying notes appearing elsewhere in this annual report. For additional
information, see the consolidated financial statements and related notes
appearing elsewhere herein.
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets.......................... $93,111 $99,851 $102,551 $105,041 $108,687
Loans receivable, net........... 67,350 72,734 73,010 78,207 77,680
Cash and investment securities.. 14,948 15,991 14,501 11,277 10,604
Mortgage-backed securities...... 6,822 7,547 11,464 11,649 15,248
Savings accounts................ 81,470 79,700 83,211 85,689 92,320
FHLB advances................... 5,600 5,600 4,000 5,100 1,000
Total equity - substantially
restricted.................... 5,054 13,489 14,258 13,385 14,011
Number of:
Real estate loans outstanding... 2,671 2,296 2,329 2,314 2,282
Deposit accounts................ 8,141 8,390 8,716 8,939 9,482
Offices open.................... 3 3 3 3 3
</TABLE>
SELECTED OPERATIONS DATA
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1993 1994 1995 1996 1997
-------- -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income.......................... $6,172 $6,266 $7,677 $8,084 $8,264
Interest expense......................... 3,422 3,414 3,905 4,063 4,261
Net interest income...................... 2,750 2,852 3,772 4,021 4,003
Provision for loan losses................ 99 10 16 422 165
Non-interest income...................... 641 842 864 740 739
Non-interest expense..................... 2,057 2,473 2,906 3,303 2,794
Income before taxes and cumulative
effect adjustment...................... 1,235 1,211 1,714 1,036 1,783
Income tax expense....................... 494 422 651 390 705
Cumulative effect of accounting change.. (18) -- -- -- --
------ ------ ------ ------ ------
Net income............................... $ 723 $ 789 $1,063 $ 646 $1,078
====== ====== ====== ====== ======
</TABLE>
2
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SELECTED RATIOS
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets).................. 1.06% 0.62% 1.01%
Return on equity (ratio of net
income to average equity)........................ 7.67% 4.69% 7.85%
Ratio of noninterest equity to
average total assets............................. 13.77% 13.25% 12.85%
Ratio of noninterest expense to average
total assets..................................... 2.89% 3.18% 2.61%
Interest rate spread (average yield on interest-
earning assets less average cost of interest-
bearing liabilities)............................. 3.39% 3.53% 3.48%
Net interest margin (ratio of net interest income
to average interest earning assets).............. 3.93% 4.05% 3.95%
Asset Quality Ratios:
Ratio of nonperforming loans
to total loans (1)................................ 0.07% 0.16% 0.02%
Ratio of allowance for loan losses
to nonperforming loans (1)....................... 348.08% 261.60% 961.54%
Ratio of nonperforming assets
to total assets (2).............................. 0.41% 0.43% 0.09%
Ratio of allowances for losses
to nonperforming assets (2)...................... 48.92% 100.62% 121.36%
Ratio of net charge-offs
to average loans outstanding..................... 0.09% 0.36% 0.48%
</TABLE>
- ---------------------
(1) Nonperforming loans represents accruing loans which are contractually past
due 90 days or more.
(2) Nonperforming assets represents property acquired by the Bank through
foreclosure or repossession or accounted for as an in-substance foreclosure
at its net realizable value plus nonperforming loans.
3
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REGULATORY CAPITAL COMPLIANCE
At December 31, 1997, the Bank substantially exceeded all regulatory
minimum capital requirements. The table below presents certain information
relating to the Company's stockholders' equity and the Bank's regulatory capital
at that date.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Company:
Stockholders' Equity, as reported in
Consolidated Financial Statements..... $14,011 12.89%
======= =====
Bank:
Tangible Capital...................... $12,325 11.33%
Tangible Capital Requirement.......... 1,631 1.50
------- -----
Excess............................. $10,694 9.83%
======= =====
Core Capital.......................... $12,325 11.33%
Core Capital Requirement.............. 3,262 3.00
------- -----
Excess............................. $ 9,063 8.33%
======= =====
Total Capital......................... $12,450 20.61%
Risk-Based Capital Requirement........ 4,833 8.00
------- -----
Excess............................. $ 7,617 12.61%
======= =====
</TABLE>
- ---------------------------
(1) Based on total assets for purpose of stockholders' equity, adjusted total
assets for purposes of the tangible capital and core capital requirements,
and risk-weighted assets for purpose of the risk-based capital requirement.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The earnings of the Company and the Bank depend primarily on the Bank's
level of net interest income, which is the difference between interest earned on
the Bank's interest earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-bearing deposits at other institutions,
investment securities and other investments, and the interest paid on interest
bearing liabilities which have consisted primarily of savings deposits and FHLB
advances. Net interest income is a function of the Bank's interest rate spread,
which is the difference between the average yield on interest earning assets and
the average rate paid on interest bearing liabilities, as well as a function of
the average balance of interest earning assets as compared to interest bearing
liabilities. During 1997, the Company's net interest income decreased as a
result of an increase in the average cost of interest bearing liabilities due to
an increase in the average rates paid on deposits and borrowings. The Bank's
earnings are also affected by its level of noninterest income including
primarily service fees and charges, and noninterest expense, including primarily
compensation and employee benefits, occupancy and equipment expenses and federal
deposit insurance premiums. Earnings of the Bank also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Bank.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND 1996
The Company's total consolidated assets grew by $3.7 million or 3.5% to
$108.7 million at December 31, 1997 from $105.0 million at December 31, 1996.
The Company has carefully monitored its growth through recent years and
continues to subscribe to a controlled growth philosophy. The composition of
the Company's balance sheet has been affected by market conditions during 1997.
Net loans receivable decreased $473,000, or 0.6%, in 1997 due to a general
increase in the prevailing interest rates in the first two quarters of the year
while the last two quarters saw a general decrease in the prevailing interest
rates the Company could offer.
5
<PAGE>
The Company, in recent years, has promoted home equity consumer lending,
being primarily competitive in real estate equity lending. At December 31,
1997, the Company had consumer loans, consisting primarily of home equity loans,
of $27.2 million, a $1.1 million increase from the balance of $26.1 million at
December 31, 1996. The Company's nonresidential real estate lending increased
during 1997, and at December 31, 1997, $5.9 million, or 7.4%, of the total
portfolio was represented by these type loans. Nonresidential real estate loans
amounted to 7.4%, and 5.5% at December 31, 1997 and 1996, respectively. The
Company and Bank do not solicit nonresidential real estate lending. In recent
years, the Company has also increased its emphasis on automobile lending in
order to benefit from the relatively higher yields and shorter maturities of
these loans as compared to long term fixed rate mortgage loans. At December 31,
1997 and 1996, the Company had automobile loans totaling $4.7 million and $6.7
million, respectively. Because of the increased activity in automobile loans,
which bear greater risk than single family mortgage lending, the Company has
experienced proportionate increases in loan losses, and during 1997 the Company
recognized provisions for loan losses of $165,000 to replenish the loan loss
reserve levels from charge-offs during 1997, and to reflect the increased risk
in the loan portfolio taken as a whole. At December 31, 1997, loan loss reserves
amounted to $125,000, or 9.62% of nonperforming loans. For discussion of
provisions for loan losses, see "Comparison of Results of Operations for the
Years Ended December 31, 1997, 1996 and 1995 -- Provisions for Loan Losses"
included herein.
Funds not invested in loans were invested in other interest earning assets
to create the Company's investment portfolio. The most liquid assets are the
funds invested in FHLB overnight, federal funds and short term certificates of
deposit. These liquid assets increased $3.3 million during the year ended
December 31, 1997. Investment securities as of December 31, 1997, totaled $4.0
million compared with $8.4 million at December 31, 1996. The decrease at
December 31, 1997 was a result of the Company moving investments into higher
yielding mortgage-backed securities. Mortgage-backed securities as of December
31, 1997 totaled $15.2 million compared with $11.6 million at December 31, 1996.
At December 31, 1997, unrealized gains on securities available-for-sale,
amounted to $103,000.
6
<PAGE>
Real estate acquired in settlement of loans (net of allowance for losses
and accumulated depreciation) decreased by approximately $144,000 at December
31, 1997 from December 31, 1996 as a result of the sale of the Company's
commercial office building in Knoxville, Tennessee for a gross sales price of
$250,000, and accordingly, the Company recognized a gain on the sale of the
building of approximately $17,000.
Deposit comparisons show a $6.6 million, or 7.7%, increase in deposits in
the year ended December 31, 1997, as the Company more actively solicited new
deposit accounts during 1997. From time to time supplemental cash in addition
to regular cash flows has been obtained from the FHLB of Cincinnati in the form
of cash management advances, and at December 31, 1997, the Company owed $1.0
million to the FHLB of Cincinnati.
Stockholders' equity increased $626,000 during fiscal 1997. In 1997, the
Company earned $1.1 million of net income while paying cash dividends of
$501,000. As a component of stockholders' equity, the Company recorded, net of
income taxes, $103,000 of unrealized gains on securities classified as
available-for-sale, bringing the balance of unrealized gains on securities
available-for-sale to $63,000. The Company recognized an expense of
approximately $72,000 for cost of shares allocated to employees under the
Company's ESOP, leaving unearned compensation of $503,000. Purchases for the MRP
amounted to $159,000 while an expense of approximately $123,000 was recognized
for 1997 leaving unearned compensation of $307,000. The Company also purchased
and retired 11,670 shares of stock costing approximately $158,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996
AND 1995
Interest Income. The dollar amount of interest income from all sources
totaled $8.3 million, $8.1 million and $7.7 million for years 1997, 1996, and
1995, respectively. The average yield on interest earning assets increased to
8.15% for 1997, compared with 8.14% for 1996 and 7.99% for 1995. The Company
attributes the increase in 1997 to the increases experienced in the average
yields on the Company's investment and mortgage-backed security portfolio. With
the rising interest rate market condition that took place in 1995, the Company's
adjustable rate mortgage portfolio and other investments enhanced interest
income, as evidenced by the increase in 1995, coupled with an increase in the
average volume of mortgage-backed securities and the average yield on mortgage-
backed securities. In 1996, the Company continued to experience an increase in
its average yield on loans receivable as the Company's portfolio of adjustable
rate loans continued to adjust toward prevailing market interest rates while
there was an increase in the
7
<PAGE>
average volume of mortgage-backed securities. The average volume of interest
earning assets increased to $101.4 million in 1997, compared with $99.3 million
in 1996 and $96.0 million in 1995.
Interest Expense. Interest expense totaled $4.3 million, $4.1 million and
$3.9 million for the years 1997, 1996 and 1995, respectively. The Company
attributes the increase in interest expense to an increase in the average volume
of interest bearing liabilities coupled with an increase in the average cost of
interest bearing liabilities. An increase in the average balance of interest
bearing liabilities increased interest expense in 1996, and rising interest
rates attributed to the increased interest expense in 1995. The average
interest rate paid increased to 4.67% in 1997, compared with 4.61% in 1996 and
4.60% in 1995 . The average volume of interest bearing liabilities increased to
$91.2 million in 1997, compared with $88.1 million in 1996 and $84.8 million in
1995.
Net Interest Income. Net interest income amounted to $4.0 million, $4.0
million and $3.8 million in 1997, 1996 and 1995, respectively. The Company's
interest rate spread decreased to 3.48% in 1997, compared with 3.53% in 1996 and
3.39% in 1995. The Company attributes the decrease in the interest rate spread
in 1997 to the increase experienced in the average cost of interest bearing
liabilities over the increased experience in the average yield of interest
earning assets. The increase in 1996 was a result of the Company's high
concentration of adjustable rate loans and adjustable rate mortgage-backed
securities which are adjusted annually according to prevailing market interest
rates. The Bank also originated approximately $6.8 million of adjustable rate
loans in 1995 at initially discounted interest rates which adjusted toward
prevailing market interest rates in 1996.
Provisions for Loan Losses. Provisions for loan losses are charged to
income to bring the total allowance to a level considered adequate by management
to provide for losses based on prior loss experience, volume and type of lending
conducted by the Company, industry standards and past due loans in the Company's
portfolio. Management
8
<PAGE>
also considers general economic conditions and other factors relating to the
collectibility of the Company's loan portfolio. These provisions were made based
on management's analysis of the various factors which affect the loan portfolio
and management's desire to hold the allowance at a level considered adequate to
provide for losses. Management performed a detailed analysis of the Company's
loan portfolio, including reviews of the Company's write off history and an
analysis of the Company's allowance for losses as compared with industry and
peer averages. The provision for loan losses amounted to $165,000, $422,000 and
$16,000 for the years 1997, 1996 and 1995, respectively. The provision for
loan losses during 1997 was determined to be necessary by management to
replenish the allowance for loan losses from charge-offs in 1997 and to bring
the allowance to a level considered appropriate by management. The provision for
losses during 1996 was determined to be necessary by management to replenish the
allowance for loan losses from charge-offs during 1996, to reflect the increase
in nonperforming loans, and to reflect the increased risk in the loan portfolio
taken as a whole. For discussion of loans and loan loss reserves, see
"Comparison of Financial Condition at December 31, 1997 and 1996," included
herein. At December 31, 1997, the allowance for possible loan losses represented
962% of total loans past due more than 90 days. While management believes the
allowance for possible losses at December 31, 1997 was adequate to cover all
losses inherent in the Bank's portfolio, there can be no assurance that in the
future further increases in the allowance will not be necessary.
Non-interest Income. Noninterest income amounted to $739,000 for 1997,
compared with $740,000 for 1996 and $864,000 for 1995. The largest component of
other income is loan fees and service charges, which totaled $323,000, $326,000
and $374,000 for 1997, 1996 and 1995, respectively, including fees for servicing
the Company's substantial portfolio of loans previously sold to investors. The
other major component of other income is gains recognized on the sale of loans
and securities. The Company regularly sells the majority of its fixed rate
mortgage loans to the FHLMC. The Company realized gains on loan sales of
$233,000, $151,000 and $165,000 in 1997, 1996 and 1995, respectively. The
Company's adoption of SFAS No. 122 "Accounting for Mortgage Servicing Rights" in
1995 resulted in additional gains on the sale of mortgage loans of approximately
$252,000 in 1997, $192,000 in 1996 and $153,000 in 1995. In
9
<PAGE>
1997, 1996 and 1995 the Company had gains on sale of securities (principally
mortgage-backed securities) of $53,000, $2,000 and $30,000, respectively. These
gains were achieved principally due to the favorable interest rate environment
and reflect sales undertaken in an effort to restructure the maturity and
interest rates (adjustable versus fixed) of the portfolio. Income from the
rental of real estate amounted to $39,000, $137,000 and $170,000 for 1997, 1996
and 1995, respectively. The decrease from 1995 to 1996 was the result of the
loss of a major tenant at the Company's commercial office building held as
rental real estate located in Knoxville, Tennessee. The Company managed the
building until it was sold on February 28, 1997.
Non-interest Expense. Non-interest expense was 2.61% of average assets in
1997, compared with 3.18% in 1996 and 2.89% in 1995. It amounted to $2.8
million, $3.3 million and $2.9 million for 1997, 1996 and 1995, respectively.
Compensation and employee benefits increased to $1.7 million in 1997, compared
with $1.4 million in 1996 and $1.5 million in 1995. Provision for real estate
losses decreased to $10,000 in 1997, compared with $77,000 in 1996 and $110,000
in 1997. The provisions were considered necessary by management due to the loss
of a tenant and available market resale value at the Company's commercial office
building then held as rental real estate located in Knoxville, Tennessee. Other
expenses were $546,000 in 1997, $630,000 in 1996 and $742,000 million in 1995.
The primary decrease in non-interest expense for the year ended December 31,
1997 compared with the year ended December 31, 1996 was in deposit insurance
premiums. Deposit insurance premiums amounted to $57,000, $716,000 and $189,000
for 1997, 1996 and 1995, respectively. During 1996, the Company recorded a
liability and paid for the one-time special assessment levied by the omnibus
appropriation bill to recapitalize the Savings Association Insurance Fund (SAIF)
and resolve the Bank Insurance Fund (BIF) / SAIF disparity in the amount of
$534,000 with an after tax impact on net income of approximately $332,000.
Effective January 1, 1997, the Company began paying reduced premium assessments
in accordance with the BIF / SAIF legislation.
Income Taxes. Income tax expense amounted to $705,000, $390,000 and
$651,000 for 1997, 1996 and 1995, respectively. Income tax for the periods is
affected by the amount of pre-tax income at the then effective tax rates.
10
<PAGE>
ASSET / LIABILITY MANAGEMENT
Net interest income, the primary component of the Company's net income, is
derived from the difference, or "spread," between the yield on interest earning
assets and the cost of interest bearing liabilities. The Company has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest earning assets
and interest bearing liabilities. The matching of the Company's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on an institution's net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Company's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates.
The Company's policy has been to mitigate the interest rate risk inherent in the
historical savings institution business of originating long term loans funded by
short term deposits by pursuing the following strategies: (i) emphasizing the
origination of adjustable rate and short term loans, such as adjustable rate
mortgage loans and various consumer loans, for portfolio (ii) originating long
term, fixed rate loans principally for sale to the FHLMC, (iii) maintaining a
substantial portfolio of shorter term investments, such as U.S. government and
agency securities with terms of 1 to 7 years, and (iv) obtaining a portion of
the Bank's funds from long term advances from the FHLB of Cincinnati, with terms
of up to 4 years.
The OTS requires the Bank to measure its interest rate risk by computing
estimated changes in the net present value of its cash flows from assets,
liabilities and off-balance sheet items (NPV) in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on the
Bank's NPV of sudden and sustained 1% to 4% increases and decreases in market
interest rates. The Board of Directors has adopted an interest rate risk policy
which establishes maximum decreases in the Bank's estimated NPV of 20%, 40%, 60%
and 80% in the event of
11
<PAGE>
1%, 2%, 3% and 4% increases and decreases in market interest rates,
respectively. At December 31, 1997, based on information provided by the OTS, it
was estimated that the Bank's NPV would decrease 4%, 11%, 19% and 29% in the
event of 1%, 2%, 3% and 4% increases in market interest rates, respectively and
possibly increase in the event of decreases in market interest rates. These
calculations indicate that the Bank's net portfolio value could be adversely
affected by increases in interest rates but could be favorably affected by
decreases in interest rates. These calculations indicate that the Bank would not
be deemed to have more than a normal level of interest rate risk under
applicable regulatory capital requirements. Changes in interest rates also may
affect the Bank's net interest income, with increases in rates expected to
decrease income and decreases in rates expected to increase income, as the
Bank's interest bearing liabilities would be expected to mature or reprice more
quickly than the Bank's interest earning assets.
While management cannot predict future interest rates or their effects on
the Bank's NPV or net interest income, management does not expect current
interest rates to have a material adverse effect on the Bank's NPV or net
interest income in the future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments and deposit run-offs and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in such computations. Although certain assets and liabilities may
have similar maturity or periods of repricing they may react at different times
and in different degrees to changes in the market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable rate mortgages, generally have features which restrict
changes in interest rates on a short term basis and over the life of the asset.
In the event of a change in interest rates, prepayments and early withdrawal
levels could deviate significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result as the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase. Finally, virtually all of the adjustable rate loans in the
Bank's portfolio contain conditions which restrict the periodic change in
interest rate.
12
<PAGE>
The Company's Board of Directors is responsible for reviewing the Company's
asset and liability policies. The Board meets monthly to review interest rate
risk and trends, as well as liquidity and capital ratios and requirements. The
Company's management is responsible for administering the policies and
determinations of the Board of Directors with respect to the Company's and
Bank's asset and liability goals and strategies. Management expects that the
Company's and Bank's asset and liability policies and strategies will continue
as described above so long as competitive and regulatory conditions in the
financial institution industry and market interest rates continue as they have
in recent years.
13
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Company's average interest earning assets and interest bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods indicated.
The table also presents information for the periods indicated and at
December 31, 1997 with respect to the difference between the weighted average
yield earned on interest earning assets and the weighted average rate paid on
interest bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net yield on interest
earning assets," which is its net interest income divided by the average balance
of interest earning assets. Net interest income is affected by the interest
rate spread and by the relative amounts of interest earning assets and interest
bearing liabilities. When interest earning assets approximate or exceed
interest bearing liabilities, any positive interest rate spread will generate
net interest income.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1995 1996 1997
---------------------------- ---------------------------- ---------------------------------
Average Average Average
Average Yield / Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable......... $ 73,505 $6,257 8.51% $ 75,663 $6,631 8.76% $ 77,175 $6,731 8.72%
Investment securities.... 9,494 558 5.88 9,414 567 6.02 7,295 461 6.32
Mortgage-backed
securities.............. 9,925 668 6.74 11,677 760 6.51 13,251 895 6.75
Short-term investments
and other
interest earning assets 3,117 194 6.22 2,546 126 4.95 3,711 177 4.77
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest
earning assets....... 96,041 7,677 7.99 99,300 8,084 8.14 101,432 8,264 8.15
------ ---- ------ ---- ------ ----
Non-interest earning assets 4,606 4,583 5,479
-------- -------- --------
Total assets........... $100,647 $103,883 $106,911
======== ======== ========
Interest-bearing
liabilities:
Deposits................. $ 80,441 $3,677 4.57 $ 83,817 $3,846 4.59 $ 89,170 $4,158 4.66%
Borrowings............... 4,383 228 5.22 4,325 217 5.02 2,017 103 5.11
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest bearing
liabilities............. 84,824 3,905 4.60 88,142 4,063 4.61 91,187 4,261 4.67
------ ---- ------ ---- ------ ----
Non-interest bearing
liabilities............... 1,962 1,975 1,989
-------- -------- --------
Total liabilities...... 86,786 90,117 93,176
Total equity............... 13,861 13,766 13,735
-------- -------- --------
Total liabilities and
equity................ $100,647 $103,883 $106,911
======== ======== ========
Net interest income........ $3,772 $4,021 $4,003
====== ====== ======
Interest rate spread....... 3.39% 3.53% 3.48%
==== ==== ====
Net interest margin 3.93% 4.05%
==== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1997
----------------------
Average
Yield /
Balance Cost
------------ --------
<S> <C> <C>
Interest earning assets:
Loans receivable......... $ 77,680 8.67%
Investment securities.... 4,004 5.65
Mortgage-backed
securities.............. 15,248 7.07
Short-term investments
and other
interest earning assets 6,037 5.25
-------- -----
Total interest
earning assets....... 102,969 8.12
-----
Non-interest earning assets 5,718
--------
Total assets........... $108,687
========
Interest-bearing
liabilities:
Deposits................. $ 92,320 4.71%
Borrowings............... 1,000 5.25
-------- -----
Total interest bearing
liabilities............. 93,320 4.72
-----
Non-interest bearing
liabilities............... 1,356
--------
Total liabilities...... 94,676
Total equity............... 14,011
--------
Total liabilities and
equity................ $108,687
========
Net interest income........
Interest rate spread....... 3.40%
=====
Net interest margin 3.95%
=====
</TABLE>
14
<PAGE>
RATE / VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate), (ii) changes in rate (changes in
rate multiplied by old volume) and (iii) changes in rate-volume (changes in rate
multiplied by the changes in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 vs. 1996 1996 vs. 1997
---------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- ----------------------------------------
Rate / Rate /
Volume Rate Volume Total Volume Rate Volume Total
--------- --------- ---------- ------ --------- --------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans portfolio.................. $ 453 $(204) $ 125 $ 374 $ 132 $ (30) $ (2) $ 100
Mortgage-backed securities....... 13 (5) 84 92 102 28 5 135
Investment securities............ (60) 9 60 9 (128) 28 (6) (106)
Other interest earning assets.... (103) 3 32 (68) 58 (5) (2) 51
----- ----- ----- ----- ----- ----- ---- -----
Total interest earning assets.. 303 (197) 301 407 164 21 (5) 180
----- ----- ----- ----- ----- ----- ---- -----
Interest expense:
Savings deposits................. 116 (67) 120 169 246 59 7 312
FHLB advances.................... 56 22 (89) (11) (116) 4 (2) (114)
----- ----- ----- ----- ----- ----- ---- -----
Total interest bearing
liabilities.................. 172 (45) 31 158 130 63 5 198
----- ----- ----- ----- ----- ----- ---- -----
Change in net interest income...... $ 131 $(152) $ 270 $ 249 $ 34 $ (42) $(10) $ (18)
===== ===== ===== ===== ===== ===== ==== =====
</TABLE>
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of the Bank. The
Bank is required to maintain minimum levels of liquid assets as defined by OTS
regulations. This requirement, which varies from time to time (between 4% and
10%) depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short term borrowings. At December 31, 1997, the
required ratio was 4.0%. The Bank's liquidity ratio averaged 19.5% during the
month of December 1997. Management of the Bank seeks to maintain a relatively
high level of liquidity in order to retain flexibility in terms of investment
opportunities and deposit pricing. The Bank adjusts its liquidity levels in
order to meet funding needs of deposit outflows, payment of real estate taxes on
mortgage loans, repayment of borrowings and loan commitments. The Bank also
adjusts liquidity as appropriate to meet its asset and liability management
objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, earnings and funds provided from operations
and advances from the FHLB of Cincinnati. While scheduled principal repayments
on loans and mortgage-backed securities are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, competition and other factors. The Bank
manages the pricing of its deposits to maintain a desired deposit balance. In
addition, the Bank invests in short term interest earning assets, which provide
liquidity to meet lending requirements.
The primary investing activity of the Bank is the origination and purchase
of mortgage loans. During the years ended December 31, 1997, 1996 and 1995, the
Bank originated and purchased loans in the amounts of $47.7 million, $44.8
million and $31.0 million, respectively. Other investing activities include the
purchase of securities, which totaled $9.2 million, $5.5 million and $9.0
million during the years ended December 31, 1997, 1996 and 1995, respectively.
These activities were funded primarily by principal repayments on loans,
mortgage-backed securities and other investment securities and the sale of loans
to FHLMC.
16
<PAGE>
At December 31, 1997, savings certificates amounted to $60.3 million, or
65%, of the Bank's total deposits, including $43.6 million which were scheduled
to mature in one year or less. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature. Management of the Bank
believes it has adequate resources to fund all loan commitments by savings
deposits and FHLB of Cincinnati advances and sale of mortgage loans and that it
can adjust the offering rates of savings certificates to retain deposits in
changing interest rate environments.
For additional information about cash flows from the Bank's operating,
financing and investing activities, see the Consolidated Financial Statements
elsewhere herein.
At December 31, 1997, the Bank exceeded all regulatory minimum capital
requirements. The proceeds from the Conversion substantially increased the
Bank's capitalization. For additional information, see "Selected Consolidated
Financial and Other Data -- Regulatory Capital Compliance" and Note 16 of the
Notes to Consolidated Financial Statements herein.
The Bank had $455,000 in outstanding loan commitments at December 31, 1997.
The Bank expects to fund its loan originations through principal and interest
payments on loans and mortgage-backed securities, proceeds from investment and
other securities as maturities occur, and to the extent necessary, borrowed
funds. Management expects that funds provided from these sources will be
adequate to meet the Bank's needs.
POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Bank. Data
processing is also essential to most other financial institutions and other
companies.
All of the significant data processing of the Bank that could be affected
by this problem is provided by a third party service bureau. The service bureau
of the Bank has advised the Bank that it expects to resolve this potential
problem before the year 2000. However, if the service bureau is unable to
resolve this potential problem in time, the Bank would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a material adverse impact on the financial condition and
results of operation of the Bank.
The Bank is actively monitoring the Year 2000 issues to ensure that all
data processing applications are promptly converted to allow for Year 2000
processing.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and Notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are
17
<PAGE>
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
For discussion of accounting pronouncements which impact the Company and
Bank, see Note 1 of the Notes to Consolidated Financial Statements included
herein.
18
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report 20
Consolidated Balance Sheets as of December 31, 1996 and 1997 21
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997 22
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 25
Notes to Consolidated Financial Statements 27
19
<PAGE>
[LETTERHEAD OF CRISP HUGHES EVANS LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Twin City Bancorp, Inc. and Subsidiaries
Bristol, Tennessee
We have audited the accompanying consolidated balance sheets of Twin City
Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and 1997
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the years in the three year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Crisp Hughes Evans LLP
Asheville, North Carolina
February 4, 1998
20
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1996 1997
- ---------------------------------------- ---------- ----------
<S> <C> <C>
Cash and due from banks $ 920 $ 1,283
Interest-earning deposits 2,003 5,317
Investment securities:
Available for sale (amortized cost of
$8,351 in 1996 and
$4,000 in 1997) 8,354 4,004
Loans receivable, net 78,177 77,171
Loans held for sale 30 509
Mortgage-backed securities:
Available for sale (amortized cost of
$11,716 in 1996 and
$15,149 in 1997) 11,649 15,248
Premises and equipment, net 1,767 3,049
Real estate 233 89
Federal Home Loan Bank stock 671 720
Interest receivable 378 288
Other 859 1,009
-------- --------
Total assets $105,041 $108,687
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
Deposits $ 85,689 $ 92,320
Federal Home Loan Bank advances 5,100 1,000
Advance payments by borrowers for taxes
and insurance 282 187
Accrued expenses and other liabilities 313 288
Current income taxes - 256
Deferred income taxes 272 625
-------- --------
Total liabilities 91,656 94,676
-------- --------
Stockholders' equity:
Common stock ($1 par value, 8,000,000
shares authorized; 853,484 and
1,268,527 shares issued and outstanding
at December 31,1996 and 1997,
respectively) 854 1,269
Paid-in capital 7,134 7,133
Retained earnings, substantially
restricted 6,283 6,356
Unearned compensation:
Employee stock ownership plan (575) (503)
Management recognition plan (271) (307)
Net unrealized gains (losses) on
securities available for sale,
net of income tax (40) 63
-------- --------
Total stockholders' equity 13,385 14,011
-------- --------
Total liabilities and stockholders'
equity $105,041 $108,687
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Loans $6,257 $6,631 $6,731
Mortgage-backed securities 668 760 895
Investment securities 558 567 461
Interest-earning deposits 194 126 177
------ ------ ------
Total interest income 7,677 8,084 8,264
------ ------ ------
Interest expense:
Deposits 3,677 3,846 4,158
Federal Home Loan Bank advances 228 217 103
------ ------ ------
Total interest expense 3,905 4,063 4,261
------ ------ ------
Net interest income 3,772 4,021 4,003
Provision for loan losses 16 422 165
------ ------ ------
Net interest income after
provision for loan losses 3,756 3,599 3,838
------ ------ ------
Non-interest income:
Loan fees and service charges 374 326 323
Insurance commissions and fees 67 86 60
Gain on sale of securities 30 2 53
Gain on sale of loans 165 151 233
Income from rental of real estate 170 137 39
Other 58 38 31
------ ------ ------
Total non-interest income 864 740 739
------ ------ ------
Non-interest expenses:
Compensation and employee benefits 1,454 1,446 1,690
Net occupancy expense 232 234 269
Deposit insurance premiums 189 716 57
Data processing 179 200 222
Provision for real estate losses 110 77 10
Other 742 630 546
------ ------ ------
Total non-interest expenses 2,906 3,303 2,794
------ ------ ------
Income before income taxes 1,714 1,036 1,783
Income tax expense 651 390 705
------ ------ ------
Net income $1,063 $ 646 $1,078
====== ====== ======
Basic net income per share $ .85 $ .53 $ .90
====== ====== ======
Diluted net income per share $ .84 $ .52 $ .86
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
UNEARNED COMPENSATION
--------------------- UNREALIZED
COMMON PAID-IN RETAINED FOR FOR GAINS
STOCK CAPITAL EARNINGS ESOP MRP (LOSSES) TOTAL
------ ------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $899 $7,466 $5,843 $(719) $ - $ - $13,489
Net income - - 1,063 - - - 1,063
Cash dividends ($.40 per share) - - (331) - - - (331)
Capitalized stock issuance cost - (8) - - - - (8)
Unrealized gains on securities,
net of income taxes of $20 - - - - - 28 28
Purchase of MRP shares - - - - (151) - (151)
ESOP and MRP compensation
earned - 30 - 72 66 - 168
----- ------- ------ ------ ------ ------ -------
Balance at December 31, 1995 899 7,488 6,575 (647) (85) 28 14,258
Net income - - 646 - - - 646
Cash dividends ($.78 per share) - - (643) - - - (643)
Unrealized loss on securities,
net of income tax benefit
of $42 - - - - - (68) (68)
Purchase of MRP shares - - - - (288) - (288)
Purchase of treasury stock
(44,920 shares) (45) (404) (295) - - - (744)
ESOP and MRP compensation
earned - 50 - 72 102 - 224
----- ------- ------ ------ ------ ------ -------
</TABLE>
(continued)
23
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
UNEARNED COMPENSATION
--------------------- UNREALIZED
COMMON PAID-IN RETAINED FOR FOR GAINS
STOCK CAPITAL EARNINGS ESOP MRP (LOSSES) TOTAL
------ ------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 854 7,134 6,283 $(575) $(271) $(40) $13,385
Net income - - 1,078 - - - 1,078
Cash dividends ($.42 per share) - - (501) - - - (501)
Unrealized gains on securities,
net of income tax expense
of $62 - - - - - 103 103
Purchase of MRP shares - - - - (159) - (159)
Purchase of treasury stock
(11,670 shares) (12) (69) (77) - - - (158)
3 for 2 stock split 427 - (427) - - - -
ESOP and MRP compensation
earned - 68 - 72 123 - 263
------ ------- ------ ------ ------ ------ -------
Balance at December 31, 1997 $1,269 $7,133 $6,356 $(503) $(307) $ 63 $14,011
====== ======= ====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,063 $ 646 $ 1,078
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation 149 151 170
Provision for losses on loans 16 422 165
Provision for real estate losses 110 77 10
Deferred income taxes (benefit) 75 (58) 296
FHLB dividends received in stock (41) (45) (49)
Amortization of deferred loan
origination fees, net (97) (76) (7)
Amortization of excess servicing
fees and mortgage service rights 38 71 91
Amortization of premiums on
mortgage-backed securities 21 35 27
Amortization of premiums and
discounts on securities 12 (4) (4)
Gain on sale of securities and
mortgage-backed securities (30) (2) (53)
Loans originated for sale (7,926) (9,871) (12,646)
Proceeds from sale of loans 7,558 9,743 9,443
Gain on sale of loans (165) (151) (233)
Gain on sale of real estate (7) -- (1)
Loss on sale of premises and
equipment -- 2 --
Amortization of unearned
compensation 168 224 263
Purchase of MRP shares (151) (288) (159)
Decrease (increase) in interest
receivable (116) 36 89
Decrease (increase) in other
assets (25) (29) (91)
Increase (decrease) in accrued
expenses and other liabilities 219 41 (38)
Increase (decrease) in current
income tax payable 160 15 256
------- ------- --------
Net cash provided (used) by
operating activities 1,031 939 (1,393)
------- ------- --------
Investing activities:
Purchase of investment securities
classified as held to maturity (3,027) -- --
Purchase of investment securities
classified as available for sale (2,309) (2,976) (3,993)
Maturities of investment securities 2,500 3,000 3,855
Proceeds from sales of investment
securities classified as available
for sale 2,492 998 4,517
Purchase of certificates of deposit (500) -- --
Proceeds from maturities of
certificates of deposits 696 196 --
Proceeds from sale of FHLB stock 21 -- --
Purchase of mortgage-backed
securities classified as held to
maturity (1,063) -- --
Purchase of mortgage-backed
securities classified as available
for sale (2,575) (2,536) (5,168)
Proceeds from sale of
mortgage-backed securities
classified as available for sale 1,020 -- 1,993
Principal payments on
mortgage-backed securities 1,436 2,820 2,448
Increase in cash surrender value of
life insurance (20) (21) (22)
</TABLE>
(continued on next page)
25
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Investing activities, continued:
Proceeds from sale of real estate $ 45 $ - $ 230
Net decrease (increase) in loans
originated or acquired (1,591) (4,585) 6,706
Purchase of loans (1,010) (1,532) (5,826)
Proceeds from sale of premises and
equipment - 20 -
Purchase of premises and equipment (96) (422) (1,447)
------- -------- --------
Net cash provided (used) by
investing activities (3,981) (5,038) 3,293
------- -------- --------
Financing activities:
Net (decrease) increase in deposits 3,511 2,478 6,631
Decrease in advance payments by
borrowers for taxes and insurance (210) (76) (95)
Proceeds from FHLB advances 2,800 13,000 11,100
Repayment of FHLB advances (4,400) (11,900) (15,200)
Capitalized stock issuance cost (92) - -
Purchase of treasury stock - (744) (158)
Dividends paid (331) (643) (501)
------- -------- --------
Net cash provided by financing
activities 1,278 2,113 1,777
------- -------- --------
Increase (decrease) in cash and
cash equivalents (1,672) (1,986) 3,677
Cash and cash equivalents at
beginning of period 6,581 4,909 2,923
------- -------- --------
Cash and cash equivalents at end of
period $ 4,909 $ 2,923 $ 6,600
======= ======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest on deposits and other
borrowings $ 3,921 $ 4,050 $ 4,266
Income taxes (net of refunds) 436 467 178
======= ======== ========
Noncash investing and financing
activities:
Real estate acquired in
satisfaction of mortgage loans $ - $ - $ 331
======= ======== ========
Sale of mortgage loans in
exchange for mortgage-backed
security $ 2,723 $ 589 $ 2,704
======= ======== ========
Loans to facilitate real estate
sales $ - $ - $ 231
======= ======== ========
Net unrealized gains (losses) on
available for sale securities $ 28 $ (68) $ 103
======= ======== ========
Capitalized mortgage servicing
rights $ 155 $ 197 $ 252
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1996 and 1997
(Tabular amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A. Twin City Bancorp, Inc. (the "Holding Company") was formed on
September 20, 1994, as the holding company for Twin City Federal
Savings Bank (the "Bank") in connection with the Bank's conversion from
a federally chartered mutual savings bank to a federally chartered
stock savings bank ("Conversion"). On December 29, 1994, the Holding
Company completed its initial public offering ("Offering") and with a
portion of the net proceeds acquired all the issued and outstanding
stock of the Bank.
The accounting and reporting policies of the Holding Company and the
Bank and subsidiaries (the "Company") conform, in all material
respects, to generally accepted accounting principles and to general
practices with the savings and loan industry. The following summarize
the more significant of these policies and practices.
B. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
---------------------------
include the accounts of the Holding Company and its subsidiary, the
Bank, and the Bank's wholly-owned subsidiaries, TCF Investors, Inc. and
Magnolia Investment, Inc., herein collectively referred to as the
"Company". Intercompany balances and transactions have been eliminated.
C. LOANS RECEIVABLE - Loans receivable are carried at their unpaid
----------------
principal balance less, where applicable, unearned income, net deferred
loan fees, and allowances for losses. Unearned discounts on mortgage
loans purchased are amortized to interest income using the level yield
interest method over the contractual lives of the loans. Additions to
these allowances for losses are based on management's evaluation of the
loan portfolio under current economic conditions and such other factors
which, in management's judgment, deserve recognition in estimating
losses. Interest accrual is discontinued when a loan becomes 90 days
delinquent or impaired unless, in management's opinion, the loan is
well secured and in process of collection.
D. LOAN FEES - Loan fees result from the Company originating loans. Such
---------
fees and certain direct incremental costs related to origination of
such loans are deferred ("net deferred loan fees") and reflected as a
reduction of the carrying value of loans. The net deferred fees (or
costs) are amortized using the interest method over the contractual
lives of the loans. Unamortized net deferred loan fees on loans sold
prior to maturity are credited to income at the time of sale.
E. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - The Company
----------------------------------------------------
utilizes SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). SFAS 115 requires that all investments
in debt securities and all investments in equity securities that have
readily determinable fair values be classified into three categories.
Securities that management has the positive intent and ability to hold
until maturity are classified as held to maturity. Securities that are
bought and held specifically for the purposes of selling them in the
near term are classified as trading securities. All other securities
are classified as available for sale. The Company has identified all
securities as available for sale and they are carried at fair value.
The unrealized holding gains or losses on securities available for sale
are excluded from income and reported, net of related income tax
effects, as a separate component of stockholders' equity until
realized. Gains and losses on the sale of these securities are
calculated based on the specific identification method.
27
<PAGE>
F. REAL ESTATE HELD AND FORECLOSED REAL ESTATE - Real estate properties
-------------------------------------------
acquired through, or in lieu of, loan foreclosure are initially
recorded at fair value at the date of foreclosure. Real estate
properties held for rental and resale are carried at the lower of cost,
including cost of improvements incurred subsequent to acquisition, or
net realizable value. Costs relating to development and improvement of
properties are capitalized, whereas costs relating to the holding of
property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to income if the carrying value
of a property exceeds its estimated net realizable value.
G. PREMISES AND EQUIPMENT - Land is carried at cost. Premises and
----------------------
equipment are carried at cost less accumulated depreciation.
Depreciation is provided for using straight-line rates over the
following useful lives of the respective assets:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements 25 to 40 years
Office furniture and equipment 5 to 10 years
Vehicles 5 years
</TABLE>
The cost of maintenance and repairs is charged to expense as incurred
while expenditures which materially increase property lives are
capitalized.
H. FEDERAL HOME LOAN BANK STOCK - Investment in stock of a Federal Home
----------------------------
Loan Bank is required by law of every federally insured savings and
loan or savings bank. The investment is carried at cost. No ready
market exists for the stock, and it has no quoted market value.
I. INCOME TAXES - The Company files a consolidated income tax return
------------
with its wholly owned subsidiary. The income tax effect of temporary
differences in reporting transactions for financial reporting and
income tax purposes is reflected in the consolidated financial
statements as deferred income taxes.
The Company provides for income taxes using the liability method. Under
this method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax basis of
assets and liabilities. Current tax expense is provided based upon the
actual tax liability incurred for tax return purposes.
J. LOAN SALES - The Company periodically sells whole and/or participating
----------
interests in real estate loans. Mortgage loans originated and intended
for sale are carried at the lower of aggregate cost or market value.
Gains or losses on such sales are recognized at the time of sale and
determined by the difference between the net sales proceeds and the
unpaid principal balance of the loans sold less capitalized mortgage
servicing rights. Net unrealized losses are recognized in a valuation
allowance by charges to income.
The Company often retains the loan servicing rights in connection with
the sale of real estate loans. When interests in loans sold have an
average contractual interest rate, adjusted for normal servicing costs,
which differs from the agreed yield to the purchaser, gains or losses
are recognized equal to the present value of such differential over the
estimated remaining life of such loans. The resulting "excess servicing
fees receivable" is amortized over the same estimated life using the
interest method.
The excess servicing fees receivable, and the amortization thereon is
periodically evaluated in relation to the present value of the
estimated future net servicing revenues. The Company evaluates the
carrying value of the servicing portfolio by estimating the future net
servicing income of the portfolio based on management's best estimate
of remaining lives of the loans.
28
<PAGE>
K. MORTGAGE SERVICING RIGHTS - The Company capitalizes as an asset the
-------------------------
right to service mortgage loans for others when those rights were
acquired either through loan purchases or loan origination activities.
The capitalized mortgage servicing rights are amortized in proportion
to and over the period of estimated net service income and are
evaluated for impairment based upon fair value.
L. CASH FLOW INFORMATION - As presented in the consolidated statements
---------------------
of cash flows, cash and cash equivalents include cash on hand,
interest-earning deposits in other banks, federal funds sold and FHLB
overnight deposits. The Company considers all highly liquid instruments
with original maturities of three months or less to be cash
equivalents.
M. USE OF ESTIMATES - The preparation of financial statements in
----------------
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
N. LONG-LIVED ASSETS - Long-lived assets to be held and used are
-----------------
reviewed for impairment whenever events or circumstances indicate that
the related carrying amount may not be recoverable. When required,
impairment losses on assets to be held and used are recognized based on
the excess of the asset's carrying amount over the fair value of the
asset. Impairment on long-lived assets to be disposed of is recognized
based on the excess of the asset's carrying amount over the fair value
less cost to sell.
O. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT - During 1997, the Financial
--------------------------------------
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 provides accounting and reporting standards for displaying
comprehensive income and components of comprehensive income in a
complete set of financial statements. SFAS 130 addresses reporting and
display only and is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS 130 is not expected to have a material
impact on the Company's financial statements.
2. EARNINGS PER SHARE
------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) in 1997. SFAS 128 establishes standard for
computing earnings per share and requires the presentation of basic and
diluted earnings per share amounts. Net income per share amounts for all
periods presented have been restated to conform with SFAS 128.
For the years ended December 31, 1995, 1996 and 1997, net income available
to the common stockholders in both the basic and diluted computations was
equal to net income. The weighted average common shares outstanding used in
the basic computation were 1,244,779, 1,229,005, and 1,195,650 for the
years ended December 31, 1995, 1996 and 1997, respectively. For purposes of
the diluted earnings per share calculation, additional common stock
equivalents for the stock option plan of 22,000, 22,539 and 51,776 were
included as weighted average common shares outstanding for the years ended
December 31, 1995, 1996 and 1997, respectively.
3. SECURITIES AVAILABLE FOR SALE
-----------------------------
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
U.S. government and
agency bonds $8,347 $21 $(18) $8,350
Equity securities 4 - - 4
------ --- ---- ------
$8,351 $21 $(18) $8,354
====== === ==== ======
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
U.S. government and
agency bonds $3,996 $ 5 $ 1 $4,000
Equity securities 4 - - 4
------ --- ---- ------
$4,000 $ 5 $ 1 $4,004
====== === ==== ======
</TABLE>
The amortized cost and estimated fair values of debt securities at
December 31, 1996 and 1997, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED COST ESTIMATED FAIR VALUE
------------------ --------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Due in one year $3,860 $2,495 $3,866 $2,497
Due after one year through
five years 4,487 1,501 4,484 1,503
------ ------ ------ ------
$8,347 $3,996 $8,350 $4,000
====== ====== ====== ======
</TABLE>
Investment securities sold during the years ended December 31, 1995, 1996
and 1997, resulted in realized gains of approximately$19,000, $2,000 and
$23,000 in 1995, 1996 and 1997, respectively, and realized losses of $4,000
in 1995. The proceeds from the sale of securities during the years ended
December 31, 1995, 1996 and 1997, were approximately $2,492,000, $997,500
and $4,517,000, respectively. The net unrealized gains at are reported as a
separate component of stockholders' equity. All securities are identified
as available for sale.
4. LOANS RECEIVABLE
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
-------- --------
<S> <C> <C>
Real estate first mortgage loans:
One-to-four-family dwellings $45,859 $42,552
Construction 3,360 3,790
Commercial real estate 3,886 3,861
Other real estate 479 1,991
------- -------
Total real estate loans 53,584 52,194
------- -------
Consumer and other loans:
Home equity loans 17,207 19,730
Loans secured by deposit accounts 260 259
Other installment loans 8,636 7,164
------- -------
Total other loans 26,103 27,153
------- -------
Total loans 79,687 79,347
------- -------
Less:
Undisbursed portion of loans in process 1,417 1,812
Net deferred loan origination cost (264) (270)
Allowance for loan losses 327 125
------- -------
1,480 1,667
------- -------
$78,207 $77,680
======= =======
</TABLE>
30
<PAGE>
Loans held for sale were approximately $30,000 and $509,000 at December 31,
1996 and 1997, respectively. The carrying value of these loans approximate
market value. The Company's primary lending area for the origination of
mortgage loans includes northeast Tennessee and southwest Virginia. The
Company limits uninsured loans to 80% of the appraised value of the
property securing the loan. Generally, the Company allows loans covered by
private mortgage insurance up to 95% of the appraised value of the property
securing the loan.
The Company's commercial real estate loans consist of properties located in
its primary lending area. The general policy is to limit loans on multi-
family residential complexes, retail shopping centers and office buildings
to 75% of the lesser of appraised value or construction cost of the
property securing the loan.
The Company's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Company believes that its allowances for losses on its
loan portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Company's
allowance for losses as an integral part of their examination processes.
Such agencies may require the Company to recognize additions to the
allowances based on their judgments of information available to them at the
time of their examinations.
The changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Beginning balance $ 229 $ 181 $ 327
Provision for loan losses 16 422 165
Recoveries 6 19 18
Charge-offs (70) (295) (385)
----- ----- -----
Ending balance $ 181 $ 327 $ 125
===== ===== =====
</TABLE>
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, the Company had loans impaired of approximately $160,000 at
December 31, 1996. There were no impaired loans at December 31, 1997.
Commercial real estate and other loans are included in the non-homogenous
group.
Loans in homogeneous groups contractually past due ninety days or more were
not material at December 31, 1996 and 1997, respectively. The amount the
Company will ultimately realize from these loans could differ from their
carrying value because of unanticipated future developments affecting the
underlying collateral or the borrower's ability to repay the loans. If
collection efforts are unsuccessful, these loans will be subject to
foreclosure proceedings in the ordinary course of business. Management
believes that the Company has adequate collateral on these loans and that
the Company will not incur material losses in the event of foreclosure.
Therefore, these loans are not in nonaccrual status at December 31, 1996
and 1997, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
(in thousands) are $51,428, $54,462 and $59,445 at December 31, 1995, 1996
and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $199,000, $156,000 and $ 181,000 at December
31, 1995, 1996 and 1997, respectively.
31
<PAGE>
The following is an analysis of the changes in excess servicing fees
receivable included in other assets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Balance beginning of period $ 202 $ 163
Amortization (39) (35)
----- -----
Balance end of period $ 163 $ 128
===== =====
</TABLE>
In the ordinary course of business, the Company makes loans to directors
and executive officers and their related interests. Such loans were made
using the same underwriting standards for comparable transactions with
other borrowers and did not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to directors
and executive officers and their related interests are as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ 1,136
Advances 728
Repayments (903)
--------
Balance at December 31, 1996 961
Advances 1,071
Repayments (901)
--------
Balance at December 31, 1997 $ 1,131
========
5. MORTGAGE-BACKED SECURITIES
--------------------------
The amortized cost and estimated fair value of mortgage-backed securities
are summarized as follows:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
NET COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
AVAILABLE FOR SALE:
December 31, 1996:
FHLMC Certificates $10,553 $ 56 $(147) $10,462
FNMA Certificates 1,163 24 - 1,187
------- ---- ----- -------
$11,716 $ 80 $(147) $11,649
======= ==== ===== =======
AVAILABLE FOR SALE:
December 31, 1997:
FHLMC Certificates $11,076 $129 $ 52 $11,153
FNMA Certificates 4,073 22 - 4,095
------- ---- ----- -------
$15,149 $151 $ 52 $15,248
======= ==== ===== =======
</TABLE>
Mortgage-backed securities sold during the year ended December 31, 1995,
resulted in realized gains of approximately $15,000. Proceeds from the
sales were approximately $1,020,000. There were no sales during the year
ended December 31, 1996. Mortgage-backed securities sold during the year
ended December 31, 1997, resulted in realized gains of approximately
$30,000. Proceeds from the sales were approximately $1,993,000. Mortgage-
backed securities of $2,173,000 and $7,614,000 were pledged at December 31,
1996 and 1997, respectively. The net unrealized gains (losses) at December
31,1996 and 1997 of approximately $(42,000) and $61,000 respectively are
reported as a separate component of stockholders' equity.
32
<PAGE>
6. REAL ESTATE
-----------
Real estate is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Real estate acquired for $ 598 $ 91
development, rental and sale
Less:
Accumulated depreciation 33 2
Allowance for loss 332 -
----- -----
$ 233 $ 89
===== =====
</TABLE>
Real estate acquired for development, rental and sale consists of at
December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Commercial buildings $ 591 $ 82
Improved land 7 7
----- -----
$ 598 $ 89
===== =====
</TABLE>
The Bank's subsidiary sold one of the commercial building during the first
quarter of 1997. The subsidiary recognized income from rental properties of
approximately $171,000, $137,000 and $39,000 during the years ended
December 31, 1995, 1996 and 1997, respectively.
The changes in the allowance for losses on real estate is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Beginning balance $ 156 $ 255 $ 332
Provision charged to income 110 77 10
Charge-offs - - (342)
Recoveries (11) - -
----- ----- -----
Ending balance $ 255 $ 332 $ -
===== ===== =====
</TABLE>
7. PREMISES AND EQUIPMENT
----------------------
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Land and improvements $ 494 $ 606
Office buildings and improvements 1,652 2,689
Furniture, fixtures and equipment 1,188 1,473
Automobiles 40 54
------ ------
3,374 4,822
Less accumulated depreciation 1,607 1,773
------ ------
$1,767 $3,049
====== ======
</TABLE>
33
<PAGE>
8. INTEREST RECEIVABLE
-------------------
Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Investment securities $ 173 $ 69
Mortgage-backed securities 128 159
Loans receivable 77 60
------ ------
$ 378 $ 288
====== ======
</TABLE>
9. MORTGAGE SERVICING RIGHTS
-------------------------
At December 31, 1996 and 1997, the fair value of mortgage servicing rights
(MSRS) was approximately $311,000 and $507,000, respectively. Fair value is
determined on an individual loan basis for MSRS, capitalized using a
methodology consistent with loans currently available for sale with similar
interest rates and maturity terms.
The amount of MSRS capitalized for the years ending December 31, 1996 and
1997, was approximately $192,000 and $252,000, respectively. The amount
amortized for 1995, 1996 and 1997, was approximately $3,000, $25,000 and
$45,000, respectively. MSRS are being amortized in proportion to and over
the period of estimated net servicing income. An allowance of approximately
$7,000 and $18,000 for valuation of MSRS has been recorded as of and for
the years ending December 31, 1996 and 1997, respectively.
10. DEPOSITS
--------
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INTEREST RATES
DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
-------- ------------ -------- -----------------
<S> <C> <C> <C> <C>
Noninterest bearing accounts $ 2,719 $ 2,991 - % - %
NOW accounts 6,306 6,783 1.85% 1.25%
Money Market accounts 9,355 8,707 4.05% 4.13%
Passbook accounts 7,844 13,526 2.49% 3.68%
Certificates of deposit 59,465 60,313 5.48% 5.65%
------- ------- ---- ----
$85,689 $92,320 4.61% 4.71%
======= ======= ==== ====
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was (in thousands) approximately $13,530 and
$12,078 at December 31, 1996 and 1997, respectively.
34
<PAGE>
Contractual maturities of certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
12 months or less $41,675 $43,615
1 - 2 years 12,047 8,313
2 - 3 years 2,264 5,284
3 - 5 years 3,479 3,101
------- -------
$59,465 $60,313
======= =======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Demand, NOW accounts and
money market $ 322 $ 313 $ 501
Passbook savings 251 208 370
Certificates of deposit 3,104 3,325 3,287
------ ------ ------
$3,677 $3,846 $4,158
====== ====== ======
</TABLE>
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK
----------------------------------------
Advances from the Federal Home Loan Bank are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
INTEREST RATE MATURITY DATE 1996 1997
------------- ------------- -------- --------
<S> <C> <C> <C>
5.55 February 1997 $1,500 $ -
Variable March 1997 2,600 -
5.25 July 1998 1,000 1,000
------ ------
Total $5,100 $1,000
====== ======
</TABLE>
The stock of the Federal Home Loan Bank and mortgage loans receivable are
pledged as collateral for these advances. Loans receivable aggregating
$7,650 and $1,500 (in thousands) representing 150% of the advanced balance
are pledged under the collateral agreement at December 31, 1996 and 1997,
respectively.
12. INCOME TAXES
------------
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current $ 576 $ 448 $ 409
Deferred 75 (58) 296
----- ----- -----
Total $ 651 $ 390 $ 705
===== ===== =====
</TABLE>
35
<PAGE>
The differences between actual income tax expense and the amount computed
by applying the federal statutory income tax rate of 34% to income before
income taxes are reconciled as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Computed income tax expense $ 583 $ 352 $ 606
Increase (decrease) resulting from:
Nondeductible expenses 13 7 14
State income tax, net of
federal tax benefit 70 42 81
Other (15) (11) 4
----- ----- -----
Actual income tax expense $ 651 $ 390 $ 705
===== ===== =====
</TABLE>
The components of deferred tax liabilities and deferred tax assets are
summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
FHLB stock dividends $ 165 $ 182
Mortgage servicing fees 181 241
Bad debt reserves--loans - 100
Deferred loan origination cost 152 146
Depreciation 63 63
Deferred income 4 1
Unrealized gains on securities - 39
available for sale ----- -----
565 772
----- -----
Deferred tax assets:
Accrued expenses 32 84
Bad debt reserves--real estate 125 -
Bad debt reserves--loans 114 43
Unrealized losses on securities 22 -
available for sale
Valuation reserve - -
Other - 20
----- -----
293 147
----- -----
Net deferred tax liability $ 272 $ 625
===== =====
</TABLE>
The Bank's annual addition to its reserve for bad debts allowed under the
Internal Revenue Code may differ significantly from the bad debt experience
used for financial statement purposes. Such bad debt deductions for income
tax purposes are included in taxable income of later years only if the bad
debt reserves are used for purposes other than to absorb bad debt losses.
Since the Bank does not intend to use the reserve for purposes other than
to absorb losses, no deferred income taxes have been provided on the amount
of bad debt reserves for tax purposes that arose in tax years beginning
before December 31, 1987, in accordance with SFAS No. 109. Therefore,
retained earnings at December 31, 1996 and 1997, includes approximately
$2,400,000, representing such bad debt deductions for which no deferred
income taxes have been provided.
13. PENSION PLAN
------------
The Bank sponsors a noncontributory defined benefit pension plan covering
substantially all employees who meet certain age and length of service
requirements. The plan calls for benefits to be paid to all eligible
employees at retirement based primarily upon years of service with the Bank
and compensation paid in the
36
<PAGE>
five years where earnings were the greatest. The plan meets the criteria of
a multi-employer plan as defined in Statement of Financial Accounting
Standards No. 87, "Employers' Accounting For Pensions" (SFAS No. 87).
Therefore, no separate disclosure is required for the components of pension
cost and the Plan's funding status. The plan is sponsored by the Financial
Institutions Retirement Fund and consists of approximately 400
participating employers.
In accordance with SFAS No. 87, an employer participating in a multi-
employer plan shall recognize as net pension cost the required contribution
for the period and shall recognize as a liability any contribution due and
unpaid. The expense recognized for the plan for the years ended
December 31, 1995, and 1996, and 1997 was approximately $35,000, $60,000
and $54,000, respectively.
14. PROFIT SHARING AND THRIFT PLAN
------------------------------
The Bank has established a thrift plan under Section 401(k) of the Internal
Revenue Code. This plan covers substantially all full-time employees who
have completed one year of service and have attained the age of twenty-one.
Employees may contribute a percentage of their annual gross salary as
limited by the federal tax regulations. The Bank matches employee
contributions based on the plan guidelines. The amount charged against
income was approximately $24,000, $25,000 and $25,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
15. COMPENSATION BENEFIT AGREEMENT
------------------------------
Effective January 1, 1995, the Company established a nonqualifed
compensation agreement with a certain key executive providing for benefits
payable annually over a ten-year period. The current terms provide for the
payment of a certain sum annually for ten years upon his termination of
employment or, in the event of his death, to his designated beneficiary.
The liability for the vested benefits has been accrued at the balance sheet
date at the net present value of the expected benefits. Annual expense is
based on the increase in the net present value of vested future benefits.
The expense associated with this agreement was approximately $78,000,
$7,000 and $12,000 the years ending December 31, 1995, 1996 and 1997,
respectively.
16. REGULATORY MATTERS
------------------
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to adjusted total assets (as defined), and of risk-based capital (as
defined) to risk-weighted assets (as defined). Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total tangible, core, and risk-based ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
37
<PAGE>
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the folling table. No adjustments to capital were required for
interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ----------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Tangible Capital (to
adjusted total assets) $12,726 12.1% $1,582 greater than $5,274 greater than
or equal to 1.5% or equal to 5%
Core Capital (to
adjusted total assets) $12,726 12.1% $3,164 greater than $5,274 greater than
or equal to 3.0% or equal to 5%
Risk-Based (to risk-
weighted assets) $12,877 21.5% $4,789 greater than $5,987 greater than
or equal to 8.0% or equal to 10%
AS OF DECEMBER 31, 1997
Tangible Capital (to
adjusted total assets) $12,325 11.33% $1,631 greater than $5,437 greater than
or equal to 1.5% or equal to 5%
Core Capital (to
adjusted total assets) $12,325 11.33% $3,262 greater than $5,437 greater than
or equal to 3.0% or equal to 5%
Risk-Based (to risk-
weighted assets) $12,450 20.61% $4,833 greater than $6,041 greater than
or equal to 8.0% or equal to 10%
</TABLE>
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, lines of credit, and letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
lines of credit, and letters of credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Financial instruments, the contract amounts of which represent credit risk
for lines of credit and letters of credit, totaled approximately (in
thousands) $3,564 and $3,431 at December 31, 1996 and 1997, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterpart.
Collateral may include accounts receivable; inventory, property, plant, and
equipment; and income-producing commercial properties.
The undisbursed advances on customer lines of credit and letters of credit
were approximately (in thousands) $1,621 and $3,192 at December 31, 1996
and 1997, respectively. The Company does not anticipate any losses as a
result of these transactions.
38
<PAGE>
The Company had outstanding commitments for mortgage loans of approximately
$433,000 and $ 412,700 at December 31, 1996 and 1997, respectively. The
commitments to originate loans at December 31, 1996 and 1997, were all
fixed rate loans having interest rates ranging from 6.875% to 8.75% and
terms ranging from 15 to 30 years.
18. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
------------------------------------
The Bank has established for eligible employees an Employee Stock Ownership
Plan ("ESOP"). The ESOP borrowed money from the Holding Company and
purchased eight percent of the common shares issued in the offering. The
Bank is expected to make scheduled cash contributions to the ESOP
sufficient to service the amount borrowed. In accordance with generally
accepted acounting principles, the unpaid balance of the ESOP loan has been
eliminated in consolidation and the unamortized balance of unearned
compensation is shown as a reduction of stockholders' equity. For the years
ending December 31, 1995 and 1996, the total contributions to the ESOP used
to fund principal and interest payments on the ESOP debt totaled
approximately $141,000 and $83,000 respectively. The scheduled contribution
for 1997 was not made until January 1998.
For the years ending December 31, 1995, 1996 and 1997, compensation from
the ESOP of approximately $102,000, $122,000 and $140,000 was expensed,
respectively. Compensation is recognized at the average fair value of the
ratably released shares during the accounting period as the employees
performed services. At December 31, 1997, the ESOP held approximately
32,300 allocated shares and 75,500 unallocated shares. The fair value of
the unallocated shares at December 31, 1997, was approximately $1,170,000.
The ESOP plan states that dividends on unallocated shares will be used for
debt service and dividends on allocated shares will be distributed to the
Plan participants. In 1996 , ESOP dividends on unallocated shares of
approximately $50,000 were used for debt service. The debt service paid
made in January 1998 used approximately $36,000 of dividends on unallocated
shares. For the purposes of computing earnings per share, all ESOP shares
committed to be released have been considered outstanding.
19. MANAGEMENT RECOGNITION AND RETENTION PLAN
-----------------------------------------
The Company has an established management recognition and retention plan
("MRP") which reserved shares of common stock for issuance. The shares were
granted to certain employees and officers of the Company and began vesting
on May 24, 1996, and will be fully vested by May 24, 2000. The number of
shares granted to certain employees and officers, effected for the stock
split, was 53,904. Compensation expense, in the amount of the fair value of
the common stock at the date plan shares are purchased, will be recognized
during the periods the participants become vested. As of December 31, 1997,
53,904 shares of common stock had been purchased to fund the MRP. The
unamortized balance of unearned compensation is reflected as a reduction of
stockholders' equity. For the years ended December 31, 1995, 1996 and 1997,
compensation expense of approximately $66,000, $102,000 and $123,000 has
been recognized, respectively.
20. STOCK OPTION PLAN
-----------------
The Company has a stock option plan for the benefit of directors, officers,
and other key employees of the Company. The number of shares of common
stock reserved for issuance under the stock option plan was equal to
approximately 10% of the total number of common shares issued pursuant to
the Company's offering. The Plan provides for incentive options for
officers and employees and non-incentive options for directors. The Plan is
administered by a committee of at least three directors of the Company. The
option exercise price cannot be less than the fair value of the underlying
common stock at the date of the option grant, and the maximum option term
cannot exceed ten years. The number of shares of common stock authorized
under the stock option and incentive plan, effected for the stock split,
was 134,760 with an exercise price equal to fair market value on the date
of grant. The following table summarizes the non-incentive stock options
that have been granted to directors and the incentive stock options granted
to officers and other key employees. All information has been restated to
effect the stock split.
39
<PAGE>
<TABLE>
<CAPTION>
NONINCENTIVE INCENTIVE TOTAL OPTION PRICE
------------ --------- -------- ------------
<S> <C> <C> <C> <C>
Shares under options:
Outstanding at January 1, 1995 - - -
Granted - May 24 33,690 94,332 128,022 $ 9.33
Granted - November 30 - 2,250 2,250 11.25
------- ------- --------
Outstanding at December 31, 1995 33,690 96,582 130,272
Granted - December 5 - 900 900 11.67
------- ------- --------
Outstanding at December 31, 1996 33,690 97,482 131,172
Granted - December 1 - 300 300 14.00
------- ------- --------
Outstanding at December 31, 1997 33,690 97,782 131,472
======= ======= ========
Options available to grant
at December 31, 1997 - 3,288 3,288
Options exercisable at
December 31, 1997 13,476 41,183 54,659
Weighted average exercise price:
Outstanding
At December 31. 1997 $ 9.33 $ 9.41 $ 9.39
Exercisable:
At December 31, 1997 $ 9.33 $ 9.52 $ 9.47
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation cost for the
Company's plan been determined based on the fair value at the grant dates
for awards under the Plan consistent with methods under FASB Statement 123
(SFAS 123), the Company's net income and earnings per share would have been
materially reduced and therefore no proforma disclosure was required.
21. STOCKHOLDERS' EQUITY
--------------------
On December 20, 1994, the Holding Company issued and sold 898,404 shares of
common stock at $10 per share in its initial public offering, including
71,872 shares to the Bank's ESOP. The net proceeds to the Holding Company
after recognizing approximately $619,000 of expenses and underwriting costs
and $719,000 of employee compensation plans were approximately $7.7
million. The Holding Company after loaning $719,000 to the Bank's ESOP used
$5.9 million of the net proceeds to purchase all of the capital stock of
the Bank.
At the time of its conversion to a stock bank, the Bank established a
liquidation account in an amount equal to its total retained earnings as of
June 30, 1994. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their accounts at the
Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders reduce their qualifying
deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualified balances for accounts then held.
40
<PAGE>
In connection with the insurance of savings accounts for the Bank, the
Federal Deposit Insurance Corporation (FDIC) requires that certain minimum
amounts be restricted to absorb certain losses as specified in the
insurance of accounts regulations. Because restricted retained earnings is
not related to amounts of losses actually anticipated, the appropriations
thereto have not been charged to income in the accompanying consolidated
financial statements. Furthermore, the use of retained earnings by the Bank
is restricted by certain requirements of the Internal Revenue Code as
disclosed in Note 12. Subsequent to the conversion, the Bank may not
declare or pay cash dividends on or repurchase any of its shares of common
stock, if the effect would cause stockholders' equity to be reduced below
the amount required for the liquidation account, applicable regulatory
capital maintenance requirements, or if such declaration and payment would
otherwise violate regulatory requirements
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on payment of dividends to its stockholders. However, the
source of future dividends may be dependent upon dividends from the Bank.
The Company also has 2,000,000 shares of preferred stock with par value of
$1 per share authorized but none issued or outstanding at December 31, 1996
and 1997.
Effective August 11, 1997, the Holding Company declared a 3 for 2 stock
split effected in the form of a 50% common stock dividend. As a result of
the stock split, 426,713 additional shares were issed and the fractional
shares were paid in cash. All share and per share amounts for all periods
presented have been restated to reflect the effect of the stock split.
22. FINANCIAL INSTRUMENTS
---------------------
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands):
<TABLE>
<CAPTION>
1996 1997
STATED ESTIMATED STATED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents $ 2,923 $ 2,923 $ 6,600 $ 6,600
Loans receivable, net 78,207 89,613 77,680 92,211
Federal Home Loan Bank
Stock 671 671 720 720
Interest receivable 378 378 288 288
------- ------- ------- -------
$82,179 $93,585 $85,288 $99,819
======= ======= ======= =======
Financial liabilities:
Deposits:
Demand accounts $26,223 $26,223 $32,007 $32,007
Certificate accounts 59,465 59,632 60,313 60,414
Advances from Federal
Home Loan Bank 5,100 5,760 1,000 1,215
Other liabilities 597 597 475 475
------- ------- ------- -------
$91,385 $92,212 $93,795 $94,111
======= ======= ======= =======
</TABLE>
The Company had off-balance sheet financial commitments, which include
approximately $2.1 and $3.6 million at December 31, 1996 and 1997,
respectively, of commitments to originate and fund loans and unused
consumer lines of credit. Since these commitments are based on current
market rates, the commitment amount is considered to be a reasonable
estimate of fair value.
41
<PAGE>
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate
that value. The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments:
CASH AND EQUIVALENTS - The carrying amount of such instruments is
--------------------
deemed to be a reasonable estimate of fair value.
LOANS - Fair values for loans held for investment are estimated by
-----
segregating the portfolio by type of loan and discounting scheduled
cash flows using interest rates currently being offered for loans with
similar terms, reduced by an estimate of credit losses inherent in the
portfolio. A prepayment assumption is used as an estimate of the
portion of loans that will be repaid prior to their scheduled maturity.
FEDERAL HOME LOAN BANK STOCK - No ready market exists for this stock
----------------------------
and it has no quoted market value. However, redemption of this stock
has historically been at par value. Accordingly, the carrying amount is
deemed to be a reasonable estimate of fair value.
DEPOSITS - The fair values disclosed for demand deposits are, as
--------
required by SFAS 107, equal to the amounts payable on demand at the
reporting date (i.e., their stated amounts). The fair value of
certificates of deposit are estimated by discounting the amounts
payable at the certificate rates using the rates currently offered for
deposits of similar remaining maturities.
ADVANCES FROM THE FHLB - The estimated fair value of advances from the
----------------------
FHLB is based on discounting amounts payable at contractual rates using
current market rates for advances with similar maturities.
OTHER ASSETS AND OTHER LIABILITIES - Other assets represent accrued
----------------------------------
interest receivable; other liabilities represent advances from
borrowers for taxes and insurance and accrued interest payable. Since
these financial instruments will typically be received or paid within
three months, the carrying amounts of such instruments are deemed to be
a reasonable estimate of fair value.
Fair value estimates are made at a specific point of time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Company's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value also
would affect significantly the estimates. Further, the fair value estimates
were calculated as of December 31, 1996 and 1997. Changes in market
interest rates and prepayment assumptions could change significantly the
estimated fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial assets
or liabilities including deposit franchise value, loan servicing portfolio,
real estate, deferred tax liabilities, and office properties and equipment.
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
42
<PAGE>
23. EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
-------------------------------------------
The Bank and the Holding Company entered into an employment agreement with
a certain key officer. The employment agreements provide for three-year
terms. Commencing on the first anniversary date and continuing each
anniversary date thereafter, the respective boards of directors may extend
the agreements for an additional year so that the remaining terms shall be
three years, unless written notice of termination of the agreement is given
by the executive officer. The agreement provides for severance payments and
other benefits in the event of involuntary termination of employment in
connection with any change in control of the employers. Severance payments
also will be provided on a similar basis in connection with voluntary
termination of employment where, subsequent to a change in control,
officers are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control.
The severance payments will equal 2.99 times the executive officer's
average annual compensation during the preceding five years. Such amount
will be paid within five business days following the termination of
employment, unless the officer elects to receive equal monthly installments
over a three-year period. The employment agreements provide for termination
by the Bank or the Holding Company for just cause at any time. The Company
has not accrued any benefits under these postemployment agreements.
24. DEPOSIT INSURANCE PREMIUMS
--------------------------
The Company recognized an expense for the year ending December 31,1996, for
the one-time special SAIF assessment. The special assessment was
approximately $534,000 and had a after tax impact on net income of
approximately $331,000. The assessment was collected in late November and
effective January 1, 1997, the Company began paying reduced premium
assessments.
25. RELATED PARTY ACTIVITY
----------------------
The Company paid approximately $745,000 to a company owned by one of the
its directors for remodeling and facility improvements at its main offices
and branch locations in 1997.
26. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------
The following condensed balance sheets as of December 31, 1996 and 1997,
and condensed statements of income and cash flows for the years ended
December 31, 1995, 1996 and 1997, for Twin City Bancorp, Inc. should be
read in conjunction with the consolidated financial statements and the
notes thereto.
<TABLE>
<CAPTION>
DECEMBER 31,
PARENT COMPANY ONLY -----------------------
BALANCE SHEETS (IN THOUSANDS) 1996 1997
-------------------------------------------------- ---------- ----------
<S> <C> <C>
Assets:
Cash and due from banks $ 133 $ 827
Securities available for sale 525 -
Loans receivable from ESOP 575 575
Equity in net assets of bank subsidiary 12,686 12,388
Other 18 233
------- -------
Total assets $13,937 $14,023
======= =======
Liabilities 552 12
------- -------
Total stockholders' equity 13,385 14,011
------- -------
Total liabilities and stockholders' equity $13,937 $14,023
======= =======
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
PARENT COMPANY ONLY ------------------------------------
STATEMENTS OF INCOME (IN THOUSANDS) 1995 1996 1997
----------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income $ 108 $ 53 $ 1,621
Expenses (99) (45) (55)
Income tax (expense) benefit (3) (3) 18
------- ------- -------
Income ( loss) before equity earnings
of bank subsidiary 6 5 1,584
Dividends in excess of equity earnings - - (506)
Undistributed equity earnings of bank
subsidiary 1,057 641 -
------- ------- -------
Net income $ 1,063 $ 646 $ 1,078
======= ======= =======
</TABLE>
The bank subsidiary paid cash dividends to the parent company for the year
ending December 31, 1997 of $1,600,000. No dividends had been paid in
either 1995 or 1996.
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
PARENT COMPANY ONLY ------------------------------------
STATEMENTS OF CASH FLOWS (IN THOUSANDS) 1995 1996 1997
----------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,063 $ 646 $ 1,078
Undistributed equity earnings of bank
subsidiary (1,057) (641) -
Dividends in excess of equity earnings - - 506
Net changes in operating assets
and liabilities (3) 15 (64)
------- ------- -------
Net cash provided by operating
activities 3 20 1,520
------- ------- -------
Investing activities:
Maturities (purchases) of investment
securities (1,025) 500 525
Repayments from (advances to)
bank subsidiary (111) 111 (170)
Repayment of ESOP loan 73 71 -
------- ------- -------
Net cash provided (used) by investing
activities (1,063) 682 355
------- ------- -------
Financing activities:
Dividends paid (331) (644) (501)
Payment of stock conversion costs (627) - -
Purchase of treasury stock - (744) (158)
Net advances from (repayments to)
bank subsidiary - 522 (522)
------- ------- -------
Net cash used by financing activities (958) (866) (1,181)
------- ------- -------
Net increase (decrease) in cash (2,018) (164) 694
Cash at beginning of year 2,315 297 133
------- ------- -------
Cash at end of year $ 297 $ 133 $ 827
======= ======= =======
</TABLE>
44
<PAGE>
EXHIBIT 23
[LETTERHEAD OF CRISP HUGHES & CO. L.L.P. APPEARS HERE]
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We have issued our reports dated February 4, 1998, accompanying the
consolidated financial statements of Twin City Bancorp, Inc. and Subsidiary
appearing in the 1997 Annual Report which are incorporated by reference in the
Form 10-KSB/A. We consent to the incorporation by reference to Form 10-KSB/A,
and to the Registration Statement on Form S-8 (No. 33-92848), of the
aforementioned reports.
/s/ Crisp Hughes Evans LLP
CRISP HUGHES EVANS LLP
Asheville, North Carolina
June 30, 1998
