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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-25290
TWIN CITY BANCORP, INC.
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(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C>
Tennessee 62-1582947
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
310 State at Edgemont, Bristol, Tennessee 37620
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
ssuer's Telephone Number, Including Area Code: (423) 989-4400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.00 per share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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. [ ]
The issuer's revenues for its most recent fiscal year were $9,380,000.
As of March 17, 2000, the aggregate market value of the 806,921 shares of Common
Stock of the registrant issued and outstanding held by non-affiliates on such
date was approximately $9.9 million based on the closing sales price of $12.25
per share of the registrant's Common Stock on March 17, 2000 as reported on the
Nasdaq SmallCap Market SM. For purposes of this calculation, the registrant's
employee stock ownership plan, management recognition plan and directors and
executive officers are deemed affiliates.
The total number of outstanding shares of the registrant's common stock at March
17, 2000 was 1,121,388
Transitional small business disclosure format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the registrant's 2000 Annual Meeting
of Stockholders (the "Proxy Statement"). (Part III)
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PART I
Item 1. Description of Business
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General
Twin City Bancorp, Inc. Twin City Bancorp, Inc. (the "Company") became
the holding company of Twin City Federal Savings Bank (the "Bank") upon the
Bank's conversion from mutual to stock form (the "Conversion") on December 29,
1994. On that date, the Company issued 898,404 shares of its common stock in an
initial public offering. Prior to the Conversion, the Company did not engage in
any material operations. Since the Conversion, the Company has not had any
significant assets other than the outstanding capital stock of the Bank, a
portion of the net proceeds of its stock offering and a note receivable from the
Company's employee stock ownership plan, and the Company's principal business
has been the business of the Bank and its subsidiaries.
The Company's executive offices are located at 310 State Street,
Bristol, Tennessee 37620, and its telephone number is (423) 989-4400.
Twin City Federal Savings Bank. The Bank was organized in 1958 as a
federally chartered mutual savings and loan association, at which time it also
became a member of the Federal Home Loan Bank ("FHLB") System and obtained
federal deposit insurance. In 1988, the Bank converted to a federal mutual
savings bank and assumed its current name. The Bank currently operates through
three banking offices located in Bristol, Tennessee and is in the process of
constructing a branch in Bristol, Virginia.
The Bank's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Bank has sought to implement this
strategy by using retail deposits supplemented by FHLB advances as its sources
of funds and maintaining substantially all of its assets in loans secured by
owner-occupied one- to four-family residential real estate located in the Bank's
market area, U.S. government and agency securities, mortgage-backed securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"), interest-earning deposits and cash and
equivalents and investing limited amounts in commercial real estate,
construction, commercial business and nonmortgage consumer loans. The Bank also
services a substantial portfolio of loans previously sold to investors.
As a federal savings bank, the Bank is subject to extensive regulation
by the Office of Thrift Supervision ("OTS"). The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements, and the OTS periodically examines the Bank for compliance with
various regulatory requirements. The Bank's deposits are insured to applicable
limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve Board").
Financial Modernization Legislation
On November 12, 1999, President Clinton signed legislation which could
have a far-reaching impact on the financial services industry. The
Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities that will be permitted to bank holding companies are securities and
insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Secretary
of the Treasury, may approve additional financial activities. The G-L-B Act,
however, prohibits future acquisitions of existing unitary savings and loan
holding companies, like the Company, by firms which are engaged in commercial
activities and limits the permissible activities of unitary holding companies
formed after May 4, 1999.
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The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the FHLB System. The
G-L-B Act imposes new capital requirements on the FHLBs and authorizes them to
issue two classes of stock with differing dividend rates and redemption
requirements. The G-L-B Act deletes the current requirement that the FHLBs
annually contribute $300 million to pay interest on certain government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible uses of FHLB advances by community financial institutions (under
$500 million in assets) to include funding loans to small businesses, small
farms and small agri-businesses. The G-L-B Act makes membership in the FHLB
voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which may acquire control of the Company, it may facilitate affiliations
with companies in the financial services industry.
Market Area
Carter, Hawkins, Johnson, Sullivan, Unicoi and Washington Counties and
the City of Bristol in Tennessee and Buchanan, Dickenson, Lee, Russell, Scott,
Smyth, Tazewell, Washington and Wise Counties and the City of Bristol in
Virginia constitute the Bank's market area for deposit activities, while the
Bank's primary market area for lending activities is concentrated in Sullivan
County, including the City of Bristol, in Tennessee and Washington County and
the City of Bristol, in Virginia. To a lesser extent, the Bank accepts deposits
and makes loans throughout northeastern Tennessee and southwestern Virginia.
The Bank's market area is primarily rural, with population centers in
Bristol and Kingsport, Tennessee and Bristol and Abingdon, Virginia. The area's
economy is based on a mixture of agriculture (primarily tobacco, small grains
and cattle) and manufacturing (primarily textiles and metal products), as well
as a variety of service, wholesale and retail businesses and government
agencies. The area's population, employment and income levels have not
experienced significant growth in recent years (growth rates have been below
national as well as Tennessee and Virginia averages) and are not projected to
increase significantly over the next five years. Although there can be no
assurance, consistent with the area's rural location and stable demographics,
management does not expect the Bank's market area to experience substantial
instability or growth in future.
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Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings
institutions, credit unions, regional bank holding companies and commercial
banks located in its primary market area. Significant competition for the Bank's
other deposit products and services comes from money market mutual funds and
brokerage firms. The primary factors in competing for loans are interest rates
and loan origination fees and the range of services offered by various financial
institutions. Competition for origination or real estate loans normally comes
from other savings institutions, commercial banks, mortgage bankers, and
mortgage brokers.
Bristol is centrally located between the financial centers of
Charlotte, North Carolina, Atlanta, Georgia, Washington, D.C. and Nashville,
Tennessee. The financial institutions of these areas, as well as those locally,
constitute a highly competitive market. In Bristol, Tennessee, where the Bank's
main office and branches are located, primary competition consists of
approximately thirty banks, thrifts and credit unions.
The Bank is able to compete effectively in its primary market area by
offering a wide variety of loan and deposit products and competitive interest
rates and fees and by emphasizing personal customer service. Management believes
that, as a result of the Bank's commitment to competitive pricing, varied
products and personal service, the Bank has developed a solid base of core
deposits and a lending volume and quality that ranks among the leaders in the
Bank's market area.
Business Strategy
The Bank's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Bank has sought to implement this
strategy by using retail deposits supplemented by FHLB advances as its sources
of funds and maintaining most of its assets in loans secured by owner-occupied
one- to four-family residential real estate located in the Bank's market area,
U.S. government and agency securities, mortgage-backed securities issued by the
FHLMC and the FNMA, interest-earning deposits and cash and equivalents and
investing limited amounts in commercial real estate, construction, commercial
business and nonmortgage consumer loans. The Bank's business strategy
incorporates the following key elements: (1) operating as a community-oriented
financial institution, maintaining a strong core customer base by providing
quality service and offering customers the access to senior management and
services that a community-based institution can offer; (2) maintaining asset
quality by emphasizing investment in residential mortgage loans, mortgage-backed
securities and other securities issued or guaranteed by the U.S. government or
agencies thereof; (3) attracting a relatively strong retail deposit base from
the communities served by the Bank's three banking offices; (4) managing
interest rate risk exposure while achieving desirable levels of profitability;
and (5) maintaining capital in excess of regulatory requirements.
Lending Activities
General. The Bank's principal lending activity consists of the
origination of loans secured by mortgages on existing one- to four-family
residences in the Bank's market area. The Bank also makes a variety of consumer
loans as well as commercial real estate loans, construction loans and commercial
business loans.
Historically, savings institutions' residential lending activities
primarily consisted of originating fixed-rate mortgage loans with maturities of
up to 30 years for retention in the loan portfolio. Since the early 1980s,
however, management has sought to increase the interest rate sensitivity of the
Bank's loan portfolio by emphasizing the origination of adjustable-rate
mortgages and by originating adjustable-rate mortgage loans for portfolio and
fixed-rate mortgage loans principally for sale to the FHLMC. During recent
periods of declining market interest rates, many
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borrowers sought to refinance existing mortgages, and most borrowers preferred
longer term, fixed-rate mortgage loans rather than shorter term or adjustable-
rate mortgage loans. As a result, the Bank's loan originations and sales during
these periods reflected a general increase in lending activity, particularly
with respect to the origination of fixed-rate loans for sale. During 1999,
however, market rates have risen somewhat, and the Bank's refinance loan
originations and loan sales activities have been more consistent with lower
historical levels.
Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
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1998 1999
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Amount % Amount %
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(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans --
Construction loans...................................... $ 10,427 11.76% $ 8,267 9.28%
One- to four-family residential......................... 40,303 45.48 40,695 45.67
Multi-family residential................................ 1,460 1.65 361 0.41
Non-residential......................................... 8,267 9.33 10,114 11.35
---------- ------- --------- -------
Total real estate loans............................. 60,457 68.22 59,437 66.71
---------- ------ --------- ------
Consumer loans --
Automobiles............................................. 3,877 4.38 3,592 4.03
Savings accounts........................................ 172 0.19 137 0.15
Home equity............................................. 22,315 25.18 22,691 25.47
Other................................................... 1,794 2.03 3,243 3.64
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Total consumer loans................................ 28,158 31.78 29,663 33.29
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Total loans (1)..................................... 88,615 100.00% 89,100 100.00%
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Less:
Loans in process........................................ 5,462 1,830
Discounts and other..................................... (256) (319)
Loan loss reserve....................................... 194 215
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Total............................................... $ 83,215 $ 87,374
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(1) Does not include $75 million of loans the Bank previously sold to the
FHLMC and others and serviced at December 31, 1999.
The following table sets forth information at December 31, 1999
regarding the dollar amount of loans maturing in the Bank's portfolio, including
scheduled repayments of principal based on contractual terms to maturity. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less.
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<CAPTION>
Due within 1 Due 1 through Due after 5
year after 5 years after years after
December 31, December 31, December 31,
1999 1999 1999
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(In thousands)
<S> <C> <C> <C>
Real Estate:
Permanent................................. $ 11,179 $ 19,744 $ 20,247
Construction.............................. 8,267 -- --
Installment.................................. 6,127 16,135 4,158
Other........................................ 871 1,886 486
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$ 26,444 $ 37,765 $ 24,891
========= ========= =========
</TABLE>
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The following table sets forth the dollar amount of all loans at
December 31, 1999 due on or after December 31, 2000 which have predetermined
interest rates and have floating or adjustable interest rates.
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<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
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(In thousands)
<S> <C> <C>
Real Estate:
Permanent................. $ 18,104 $ 21,887
Construction.............. -- --
Installment................. 20,293 --
Other....................... 2,372 --
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$ 40,769 $ 21,887
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</TABLE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are higher than rates on existing mortgage loans and tends to decrease when
current mortgage loan market rates are lower than rates on existing mortgage
loans.
For additional information, see "Management's Discussion and Analysis
or Plan of Operation -- Asset/Liability Management" at Item 6 and Note 4 of the
Notes to Consolidated Financial Statements at Item 7 of this report.
Originations, Purchases and Sales of Loans. The following table sets
forth information with respect to the Bank's originations, purchases and sales
of loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
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1998 1999
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(In thousands)
<S> <C> <C>
Loans originated:
Real estate loans:
Construction loans................. $ 9,478 $ 5,784
One- to four-family................ 33,047 29,080
Consumer loans....................... 14,683 17,623
Commercial loans..................... 2,530 1,974
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Total loans originated........... $ 59,738 $ 54,461
========= =========
Real estate loans purchased............ $ 6,932 $ 4,370
========= =========
Loans sold:
Whole loans.......................... $ 22,479 $ 12,506
Participation loans.................. -- 2,920
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Total loans sold................. $ 22,479 $ 15,426
========= =========
</TABLE>
Management attributes the decrease in loan originations and sales in
fiscal 1999 to the rising interest rate environment which has resulted in a slow
down in refinancing activity. In particular higher market rates have reduced
demand for fixed-rate mortgages which the Bank originates for resale in the
secondary market. In periods of insufficient local loan demand the Bank has
purchased (and may in the future purchase) participations and whole loans on a
selective basis in market areas and from lenders with which management has
developed correspondent relationships and extensive
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experience and a history of success. These purchased loans typically have
adjustable-rates and are secured by primary and, to a lesser extent, secondary
residences (but not predominantly rental properties) located in selected
developments within the resort area of Hilton Head Island, South Carolina or in
economically diverse metropolitan areas, such as the Nashville, Tennessee,
Raleigh, North Carolina, Atlanta, Georgia and Washington, D.C. areas. The Bank
also has a limited number of purchased lot loans and development loans.
Management underwrites the Bank's purchased loans under substantially the same
guidelines as the Bank's originated loans, including viewing and photographing
the exterior of each property, prior to purchase. The Bank's resulting
experience with purchased loans has been favorable, and at that date none of
these loans was delinquent or adversely classified or designated by management.
One- to Four-Family Residential Lending. Historically, the Bank's
principal lending activity has been the origination of loans secured by first
mortgages on existing one- to four-family residences in the Bank's market area.
The Bank also originates significant amounts of loans for the construction of
such residences. The purchase price or appraised value of most of such
residences generally has been between $75,000 and $175,000, with the Bank's loan
amounts averaging approximately $92,600. At December 31, 1999, $40.7 million, or
45.7%, of the Bank's total loans were secured by one- to four-family residences,
over 84% of which were existing, owner-occupied, single-family residences in the
Bank's market area. At December 31, 1999, $31.2 million, or 76.6%, of the Bank's
one- to four-family residential loans had adjustable interest rates, and $9.5
million, or 23.4%, had fixed rates. During the year ended December 31, 1999, the
Bank originated $11.8 million of adjustable-rate loans, which was approximately
40.6% of total mortgage loan originations for that period, and at that date the
Bank had $417,000 of loan commitments, of which $90,000 was for adjustable-rate
loans.
The Bank's one- to four-family residential mortgage loans generally are
for terms of up to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option without penalty. These loans
customarily contain "due-on-sale" clauses which permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on one- to four-family residential mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price, with private mortgage insurance or other enhancement required on
loans with loan-to-value ratios in excess of 90%. The maximum loan-to-value
ratio on mortgage loans secured by non-owner-occupied properties generally is
limited to 80%.
The Bank offers adjustable-rate, one- to four-family residential
mortgage loans. These loans generally are indexed to the weekly average rate on
U.S. Treasury securities adjusted to a constant maturity of one year. The rates
at which interest accrues on these loans are adjustable annually, generally with
limitations on adjustments of two percentage points per adjustment period and
six percentage points over the life of the loan. While the Bank's adjustable-
rate loans frequently are originated with initially discounted interest rates,
such loans are underwritten and borrowers are qualified based on the fully
indexed interest rate. The Bank's adjustable-rate loans do not permit negative
amortization.
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, adjustable-rate loans which
provide for initial rates of interest below the fully indexed rates may be
subject to increased risk of delinquency or default as the higher, fully indexed
rate of interest subsequently replaces the lower initial rate. Further, although
adjustable-rate loans allow the Bank to increase the sensitivity of its
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed-rate period before the
first adjustment and the periodic and lifetime interest rate adjustment
limitations and the ability of borrowers to convert the loans to fixed rates.
Accordingly, there can be no assurance that yields on the Bank's adjustable-rate
loans will fully adjust to
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compensate for increases in the Bank's cost of funds. Finally, adjustable-rate
loans increase the Bank's exposure to decreases in prevailing market interest
rates, although decreases in the Bank's cost of funds tend to offset this
effect.
The Bank's fixed-rate, one- to four-family residential mortgage loans
generally are underwritten in accordance with applicable guidelines and
requirements for sale to the FHLMC in the secondary market, and it is the Bank's
current policy to originate substantially all such loans for prompt sale to the
FHLMC, servicing retained and without recourse. The Bank occasionally makes
fixed-rate loans for portfolio which may or may not conform with applicable
requirements for sale to the FHLMC.
Construction Lending. The Bank offers single-family residential
construction loans to qualified borrowers for construction of one- to
four-family residences in the Bank's market area. At December 31, 1999, one- to
four-family residential construction loans, constituted $5.1 million, or 5.7%,
of the Bank's total loans. Typically, the Bank limits its construction lending
to construction-permanent loans to individuals building their primary residences
and, to a lesser extent, interim construction loans to selected local builders
to build single-family dwellings. These loans may have fixed or adjustable
interest rates and are underwritten in accordance with the same standards as the
Bank's mortgages on existing properties, except the loans generally provide for
disbursement in stages during a construction period of up to 12 months, during
which period the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. Construction loans generally have a
maximum loan-to-value ratio of 80%. Borrowers must satisfy all credit
requirements which would apply to the Bank's permanent mortgage loan financing
for the subject property. While the Bank's construction-permanent construction
loans convert to permanent loans following construction, the Bank's interim
construction loans generally require repayment in full upon the completion of
construction.
Included in construction loans at December 31, 1999 were some loans
that were not one-to-four family residential construction. The loans were for
projects in the Bristol area. The most significant of these loans were a $1.6
million non-residential real estate loan for the renovation of a golf course and
a residential development loan. The total amount disbursed on the golf course
loan at December 31, 1999 was $1.5 million. This represents the Bank's portion
of this loan that was not participated to another local bank. The residential
development loan has a commitment of $1.75 million and had $1.6 million
disbursed. The Bank holds a deed of trust on the development and personal
guarantees of the developers on the development loan.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a property having a value which is insufficient to assure full repayment.
The ability of a builder to sell completed residences will depend on, among
other things, demand, pricing, availability of comparable properties and
economic conditions. The Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers in the Bank's market area and by
limiting the aggregate amount of outstanding construction loans.
Consumer Lending. The Bank's consumer loans consist of home equity
loans secured by second mortgages on single-family residences in the Bank's
market area, automobile loans, demand loans secured by savings accounts at the
Bank and other loans. These loans totaled approximately $18.5 million, $3.6
million, $137,000 and $2.8 million, respectively, at December 31, 1999. At
December 31, 1999, the Bank had 1,906 consumer loans, with a median loan balance
of $13,700, none of which had a balance exceeding $237,000, and none of the
Bank's ten largest consumer loans was adversely classified or designated by
management.
7
<PAGE>
The Bank makes second mortgage loans secured by the borrower's
residence. These loans, combined with the first mortgage loan, which usually is
from the Bank, generally are limited to 85% of the appraised value of the
residence. The Bank has emphasized this form of lending in recent years because
of its shorter term and higher yield.
The Bank's automobile loans are generally made directly rather than
through dealers. The Bank faces substantial competition for automobile loans,
particularly from manufacturers who offer low rate financing as a sales
incentive. The Bank has de-emphasized automobile lending over the past several
years.
The Bank generally makes savings account loans for up to 90% of the
balance of the account. The interest rate on these loans generally is indexed to
the rate paid on the account, and interest is billed on a monthly basis. These
loans are payable on demand, and the account must be pledged as collateral to
secure the loan.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank, and a borrower may be able to assert against the
Bank claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral.
Federally chartered thrift institutions are authorized to make secured
and unsecured consumer loans up to 35% of the institution's assets. In addition,
a federal thrift institution has lending authority above the 35% category for
certain consumer loans, such as home equity loans, property improvement loans,
mobile home loans and loans secured by savings accounts.
Non-Residential Real Estate Lending. The Bank originates a variety of
non-residential real estate loans in order to benefit from the higher
origination fees and interest rates, as well as shorter terms to maturity, than
could be obtained from single-family mortgage loans. The Bank's non-residential
real estate lending includes commercial real estate loans secured by churches,
office and apartment buildings and other income-producing commercial properties
as well as loans for the development of land. These loans generally have
annually adjustable interest rates, with limitations on adjustments of two
percentage points per year, and maximum loan-to-value ratios of 75%. At December
31, 1999, the Bank had $7.2 million in non-residential real estate loans. The
Bank's largest non-residential real estate loan at December 31, 1999 was a $1.8
million residential development loan on which $1.6 million had been disbursed.
Its next largest non-residential real estate loan was a $1.6 million loan for
golf course renovation on which $1.5 million had been disbursed at December 31,
1999. The Bank's third largest non-residential loan was a $1.4 million loan
secured by a manufacturing plant. The properties securing each of the foregoing
loans are located in Bristol, Tennessee. None of these loans were classified by
management as substandard, doubtful or loss or designated by management as
special mention at that date. For information regarding the Bank's asset
classification policies and nonperforming assets, see "Asset Classification,
Allowances for Losses and Nonperforming Assets."
Non-residential real estate lending entails significant additional
risks compared with one- to four-family residential lending. For example,
commercial real estate loans typically involve large loan balances to single
borrowers or groups of related borrowers, the payment experience on such loans
typically is dependent on the successful operation of the real estate project,
and these risks can be significantly impacted by supply and demand conditions in
the market for multi-family residential units and commercial office space, and,
as such, may be subject to a greater extent to adverse conditions in the economy
generally. In addition, church loans may be dependent on the congregation's
voluntary contributions, which may be affected by local employment levels and
other factors. Land development loans involve higher risks than other loans
since the value of the property securing the loan depends on the successful
completion of
8
<PAGE>
the project, which can be affected by the changes in the national or local
economy and other factors that might influence the demand for housing. To
minimize the effects of these risks, the Bank generally limits commercial real
estate and development lending to its market area and to borrowers with which
management has substantial experience or who are otherwise well known to
management. It is the Bank's policy to obtain personal guarantees from all
principals obtaining commercial real estate and development loans. In assessing
the value of such guarantees, the Bank reviews the individual's personal
financial statements, credit reports, tax returns and other financial
information.
The aggregate amount of loans which federally chartered savings
institutions may make on the security of liens on commercial real estate may not
exceed 400% of the institution's capital; however, the limits on commercial real
estate lending do not require divestiture of any loan or investment that was
lawful when made.
Commercial Lending. The Bank offers commercial loans for various
business purposes on a selected basis and in limited amounts in its market area.
At December 31, 1999, the Bank's commercial loans totaled $4.6 million and
primarily consisted of small business loans unsecured or secured by equipment or
other collateral. At December 31, 1999, the Bank had 41 commercial loans, with a
median loan balance of approximately $112,000, none of which had an outstanding
balance exceeding $700,000. At that date, none of these loans were adversely
classified or designated by management.
Commercial business loans generally involve more risk than first
mortgage loans. Repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding credit obligation as a result of
damage, loss or depreciation, and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Further, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered. These financings may also
give rise to claims and defenses by a borrower against the Bank, and a borrower
may be able to assert against the Bank claims and defenses which it has against
the seller of the underlying collateral. In underwriting commercial loans, the
Bank considers the borrower's credit history, an analysis of the borrower's
income, expenses and ability to repay the obligation and the value of the
collateral. The Bank's risks associated with commercial loans have been
minimized by the modest amount of such loans made by the Bank.
The Bank generally would be permitted to make secured and unsecured
loans for commercial, corporate, business and agricultural purposes, including
issuing letters of credit and engaging in inventory financing and commercial
leasing activities, in an aggregate outstanding amount of up to 10% of the
Bank's assets.
Loan Solicitation and Processing. The Bank's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers and mortgage brokers, as well as walk-in customers. The
Bank's solicitation programs consist of calls by the Bank's branch managers and
loan officers to local realtors and builders and advertisements in local
newspapers and billboards and radio broadcasts. Real estate loans are originated
by the Bank's staff loan officers as well as the Bank's branch managers and
executive officers, none of whom receives commissions for loan originations.
Loan applications are accepted at each of the Bank's offices for processing and
approval, except the West State Street office which forwards real estate loan
applications to the main office.
Upon receipt of a loan application from a prospective borrower, the
Bank's staff preliminarily reviews the information provided and makes an initial
determination regarding the qualification of the borrower. If not disapproved,
the application then is placed in processing, and a credit report and
verifications are ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. It is the Bank's policy to
obtain an appraisal of the real estate intended to secure a proposed mortgage
loan from salaried staff appraisers. It is the Bank's policy to obtain personal
guarantees from the principals on all loans. Except when the Bank becomes aware
of a particular risk of environmental contamination, the Bank generally does not
obtain a formal environmental report on the real estate at the time a loan is
made.
9
<PAGE>
It is the Bank's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy which insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a designated flood plain,
paid flood insurance policies. Most borrowers are also required to advance funds
on a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes.
The Board of Directors has the overall responsibility and authority for
general supervision of the Bank's loan policies. The Board has established
written lending policies for the Bank. The Bank's officers and loan committee
approve loans up to specified limits above which the approval of the Board may
be required. Loan applicants are promptly notified of the decision of the Bank.
It has been management's experience that substantially all approved loans are
funded, particularly during the recent periods of active refinancing activity.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and the Bank's minimum yield requirements. Mortgage loan rates
reflect factors such as prevailing market interest rate levels, the supply of
money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic conditions, the monetary
policies of the federal government, including the Federal Reserve Board, the
general supply of money in the economy, tax policies and governmental budget
matters.
The Bank receives fees in connection with loan commitments and
originations, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Loan origination
fees are calculated as a percentage of the loan principal. The Bank typically
receives fees of up to two points (one point being equivalent to 1% of the
principal amount of the loan) in connection with the origination of fixed-rate
and adjustable-rate residential mortgage loans. The excess, if any, of loan
origination fees over direct loan origination expenses is deferred and accreted
into income over the contractual life of the loan using the interest method. If
a loan is prepaid, refinanced or sold, all remaining deferred fees with respect
to such loan are taken into income at such time.
Collection Policies. When a borrower fails to make a payment on a loan,
the Bank generally takes prompt steps to have the delinquency cured and the loan
restored to current status. Once the payment grace period has expired (in most
instances 15 days after the due date), a late notice is mailed to the borrower,
and a late charge is imposed, if applicable. If payment is not promptly
received, a second notice is sent ten days after the expiration of the grace
period. If the loan becomes 45 days delinquent, the borrower is contacted, and
efforts are made to formulate an affirmative plan to cure the delinquency. If a
loan becomes 60 days delinquent, the loan is reviewed by the Bank's loan
committee, and if payment is not made, management may pursue foreclosure or
other appropriate action. If a loan remains delinquent 90 days or more, the Bank
generally initiates foreclosure proceedings.
Asset Classification, Allowances for Losses and Nonperforming Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose an institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require an institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, an institution must either
establish a specific allowance for loss in the amount of the portion of the
asset classified loss, or charge-off such amount. Federal examiners may disagree
with an institution's classifications. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS Regional Director. The Bank regularly reviews its assets to determine
whether any assets require classification or re-classification. The Board of
Directors reviews and approves all classifications. At December 31, 1999, the
Bank had no assets classified as loss, no assets classified as doubtful,
$277,000 of assets classified as substandard and no assets designated as special
mention. The Bank's total
10
<PAGE>
adversely classified assets represented 0.24% of the Bank's total assets and
2.1% of the Bank's Tier 1 capital at December 31, 1999.
In extending credit, the Bank recognizes that losses will occur and
that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the term of the
obligation, general economic conditions and, in the case of a secured
obligation, the quality of the security. It is management's policy to maintain
allowances for losses based on, among other things, regular reviews of
delinquencies and credit portfolio quality, character and size, the Bank's and
the industry's historical and projected loss experience and current and
forecasted economic conditions. The Bank increases its allowance for loan losses
by charging provisions for losses against the Bank's income. Federal examiners
may disagree with an institution's allowance for loan losses.
Management actively monitors the Bank's asset quality and charges off
loans and properties acquired in settlement of loans against the allowances for
losses on such loans and such properties when appropriate and provides specific
loss allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
The Bank's methodology for establishing the allowance for losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a regular basis based on
an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, the state of the real estate market, regulatory reviews
conducted in the regulatory examination process and economic conditions
generally. Allowances are provided for individual assets, or portions of assets,
when ultimate collection is considered improbable by management based on the
current payment status of the assets and the fair value or net realizable value
of the security. At the date of foreclosure or other repossession or at the date
the Bank determines a property is an "in-substance foreclosed" property, the
Bank transfers the property to real estate acquired in settlement of loans at
the lower of cost or fair value. Fair value is defined as the amount in cash or
cash-equivalent value of other consideration that a property would yield in a
current sale between a willing buyer and a willing seller. Fair value is
measured by market transactions. If a market does not exist, fair value of the
property is estimated based on selling prices of similar properties in active
markets or, if there are no active markets for similar properties, by
discounting a forecast of expected cash flows at a rate commensurate with the
risk involved. Fair value generally is determined through an appraisal at the
time of foreclosure. At December 31, 1999, the Bank held no properties acquired
in settlement of loans for which market values were unavailable. Any amount of
cost in excess of fair value is charged-off against the allowance for loan
losses. The Bank records an allowance for estimated selling costs of the
property immediately after foreclosure. Subsequent to acquisition, the property
is periodically evaluated by management and an allowance is established if the
estimated fair value of the property, less estimated costs to sell, declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded.
11
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1999
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period.............. $ 125 $ 194
--------- ---------
Loans charged-off:
Real estate -- mortgage:
Residential............................. -- 28
Commercial.............................. -- --
Consumer.................................. 204 75
--------- ---------
Total charge-offs........................... 204 103
--------- ---------
Recoveries:
Real estate -- mortgage:
Residential............................ -- --
Commercial............................. -- --
Consumer.................................. 41 39
--------- ---------
Total recoveries............................ 41 39
--------- ---------
Net loans charged-off....................... 163 64
--------- ---------
Provision for loan losses................... 232 85
--------- ---------
Balance at end of period.................... $ 194 $ 215
========= =========
Ratio of net charge-offs to average
loans outstanding during the period....... 0.20% 0.07%
========= =========
</TABLE>
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1998 1999
-------------------- ---------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans(1) Amount Loans(1)
------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential (2).................................. $ 31 45.48% $ 35 45.67%
Construction..................................... 31 11.76 30 9.28
Commercial (3)................................... 31 10.98 40 11.76
Consumer........................................... 101 31.78 110 33.29
------- ------ ------- ------
Total allowance for loan losses.............. $ 194 100.00% $ 215 100.00%
======= ====== ======= ======
</TABLE>
- ----------------
(1) Before deductions for loans in process, net deferred loans, fees and
allowance for loan losses.
(2) Includes loans held for sale.
(3) Includes multi-family residential and non-residential real estate
loans.
12
<PAGE>
Numerous financial institutions throughout the United States have
incurred losses in recent years due to significant increases in loss provisions
and charge-offs resulting largely from higher levels of loan delinquencies and
foreclosures. Depressed real estate market conditions have adversely affected
the economies of various regions and have had a severe impact on the financial
condition and businesses of many of the financial institutions doing business in
these areas. Considerable uncertainty exists as to the future improvement or
deterioration of the real estate markets in these regions, or of its ultimate
impact on these financial institutions. As a result of declines in real estate
market values and significant losses experienced by many financial institutions,
there has been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of examinations of such
institutions by the FDIC, OTS or other federal or state regulators. Results of
recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for losses on loans and real estate acquired
in settlement of such loans. While management believes the Bank has established
its existing loss allowances in accordance with generally accepted accounting
principles, there can be no assurance that regulators, in reviewing the Bank's
assets, will not make the Bank increase its loss allowance, thereby negatively
affecting the Bank's reported financial condition and results of operations.
The Bank ceases accruing interest on a loan when the loan becomes 90
days delinquent, unless, in the opinion of management, full collection of
principal or interest is likely. Interest accrued prior to a loan becoming 90
days past due is retained in income. Such interest is considered as part of the
total investment in determining the need for an allowance for losses. Any
interest received in excess of the amount previously accrued on such a loan is
recorded in income in the period of recovery.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At each of these dates, the Bank
did not have any nonaccrual or restructured loans.
<TABLE>
<CAPTION>
At December 31,
------------------------
1998 1999
------ -----
(Dollars in thousands)
<S> <C> <C>
Accruing loans which are contractually
past due 90 days or more:
Residential real estate.................................... $ -- $ 160
Consumer................................................... 84 49
--------- ---------
Total................................................... $ 84 $ 209
========= =========
Percentage of total loans, net................................. 0.10% 0.23%
========= =========
Other nonperforming assets (1)................................. $ 149 $ --
========= =========
Percentage of all nonperforming
assets to total assets....................................... 0.21% 0.18%
========= =========
</TABLE>
- -------------------------
(1) Other nonperforming assets represents property acquired by the Bank
through foreclosure or repossession or accounted for as an in-substance
foreclosure. This property is carried at its net realizable value.
At December 31, 1999, management had identified no loans which were not
reflected in the preceding table, but as to which known information about
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms.
13
<PAGE>
Mortgage-Backed Securities
The Bank maintains a portfolio of mortgage-backed securities in the
form of FHLMC and FNMA participation certificates. FNMA and FHLMC certificates
are each guaranteed by their respective agencies as to principal and interest.
Mortgage-backed securities generally entitle the Bank to receive a pro rata
portion of the cash flows from an identified pool of mortgages. Although
mortgage-backed securities generally yield less than the loans which are
exchanged for such securities, they present substantially lower credit risk,
they are more liquid than individual mortgage loans, and they may be used to
collateralize obligations of the Bank.
The following table sets forth information regarding the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------
1998 1999
------ -----
(In thousands)
<S> <C> <C>
FHLMC............... $ 10,805 $ 14,076
FNMA................ 1,624 2,999
-------- --------
Total.......... $ 12,429 $ 17,075
======== ========
</TABLE>
The following table sets forth information regarding the scheduled
maturities, amortized costs, market value and weighted average yields for the
Bank's mortgage-backed securities at December 31, 1999. Expected maturities will
differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
One to Five Years Five to Ten Years More Than Ten Years Total Mortgage-Backed Securities
------------------- --------------------- -------------------- --------------------------------
Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Value Yield
-------- --------- ---------- --------- ---------- --------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC....................... $ 756 7.00% $ 883 6.00% $ 12,437 6.23% $14,076 $14,076 6.26%
FNMA........................ -- -- 928 5.50 2,071 5.72 2,999 2,999 5.65
-------- -------- -------- ------- -------
Total.................. $ 756 7.00 $ 1,811 5.74 $ 14,508 6.16 $17,075 $17,075 6.15
======== ======== ======== ======= =======
</TABLE>
For additional information, see Note 5 to the Notes to Consolidated
Financial Statements.
Investment Activities
The Bank is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Cincinnati, certificates of
deposits in federally insured institutions, certain bankers' acceptances and
federal funds. The Bank may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require the Bank to
maintain an investment in FHLB of Cincinnati stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets which savings
institutions are required to maintain. For additional information, see
"Regulation of the Bank -- Liquidity Requirements."
14
<PAGE>
The general objectives of the Bank's investment policy are (i) to
provide liquidity to meet day to day, cyclical and long-term changes in the
composition of assets and to increase the interest rate sensitivity of the
Bank's assets, (ii) to make a strong and stable contribution to earnings, (iii)
to provide a suitable balance of quality and diversification to the Bank's
assets, and (iv) to absorb funds when loan demand is weak and to provide
lendable funds when demand is strong. Currently, the Bank's investment portfolio
consists of cash, FHLB stock, overnight deposits and deposits in the FHLB of
Cincinnati.
The Bank's investment policy expressly prohibits the Bank from
investing in any futures, options or high risk mortgage derivatives, including
residual interests in collateralized mortgage obligations and other real estate
mortgage investment conduits, stripped mortgage-backed securities and other
investments that exhibit a high degree of price volatility. In accordance with
this policy, management historically has avoided investments involving a high
degree of market, interest rate, credit or other risk.
The following table sets forth information regarding the Company's
investment securities and other investments at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------
1998 1999
------ -----
(In thousands)
<S> <C> <C>
Investment securities:
U.S. government and agency securities..... $ 1,508 $ --
Equity securities......................... 4 4
--------- ---------
Total investment securities............ 1,512 4
Interest-earning deposits................... 8,081 2,277
FHLB stock.................................. 773 829
--------- ---------
Total investments ..................... $ 10,366 $ 3,110
========= =========
</TABLE>
The following table sets forth information regarding the scheduled
maturities and weighted average yields for each range of maturities of the
Bank's investment securities and certain other investments at December 31, 1999.
<TABLE>
<CAPTION>
Total
Less than One Year One to Five Years Five to Ten Years More than Ten Years Investment Portfolio
------------------ ------------------ ------------------ ------------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
--------- ------- -------- ------- ------- ------- ------ ------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities (1)..... $ -- $ -- $ -- $ 4 133% $ 4 4 133%
------- -------- ------- ------- -------- -------
Total................ $ -- $ -- $ -- $ 4 $ 4 $ 4
======= ======== ======= ======= ======== =======
</TABLE>
- ---------
(1) Consists of common stock issued by Tennessee Life Insurance Company,
carried at cost.
For additional information, see Note 3 to the Notes to Consolidated
Financial Statements.
15
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions. Borrowings may
be used to supplement the Bank's available funds, and from time to time the Bank
has borrowed funds from the FHLB of Cincinnati.
Deposits. The Bank attracts deposits principally from within its market
area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit which range in term from seven
days to ten years. Deposit terms vary, principally on the basis of the minimum
balance required, the length of time the funds must remain on deposit and the
interest rate. The Bank also offers Individual Retirement Accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents through the Bank's branch network rather than from outside the
Bank's market area. The Bank competes for deposits with other institutions in
its market area by offering deposit instruments that are competitively priced
and by providing personal customer service through a knowledgeable and efficient
staff. The Bank's interest rates, maturities, service fees and withdrawal
penalties on deposits are established by management on a periodic basis.
Management determines deposit interest rates and maturities based on the Bank's
funds acquisition and liquidity requirements, the rates paid by the Bank's
competitors, the Bank's growth goals and applicable regulatory restrictions and
requirements. The Bank does not solicit deposits from brokers and currently does
not bid for governmental deposits.
The Bank attracts and maintains IRAs by offering competitive rates and
terms, providing personal customer service in management of the accounts, and by
servicing the accounts without administrative fees. Management believes that IRA
deposits provide a valuable source of relatively stable long-term funds which
are beneficial in the Bank's asset/liability management.
The Bank plans to remain competitive in its primary market area by
introducing new products and services which include various checking account
products, enhancements to the savings portfolio, offering competitive interest
rates and fees, and to attract new customers by providing full service banking.
16
<PAGE>
The following table sets forth the average balances and interest rates
based on month-end balances for certificates of deposit and non-certificate
accounts as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1999
------------------------- ----------------------
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance........................ $25,756 $56,071 $25,231 $54,448
Average rate........................... 3.64% 5.04% 3.97% 5.12%
</TABLE>
The following table sets forth the time deposits in the Bank classified
by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------
1998 1999
------ -----
(In thousands)
<S> <C> <C>
2 - 3.99%............... $ 255 $ 173
4 - 5.99%............... 46,026 46,765
6 - 7.99%............... 7,644 11,413
8 - 9.99%............... 18 --
-------- --------
$ 53,943 $ 58,351
======== ========
</TABLE>
The following table sets forth the amount and maturities of time
deposits in the Bank at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99%..................... $ 162 $ 11 $ -- $ -- $ 173
4 - 5.99%..................... 37,642 6,586 1,318 1,219 46,765
6 - 7.99%..................... 7,061 2,947 988 417 11,413
--------- ---------- ---------- ---------- ----------
$ 44,865 $ 9,544 $ 2,306 $ 1,636 $ 58,351
========= ========== ========== ========== ==========
</TABLE>
The following table indicates the amount of the certificates of deposit
of $100,000 or more in the Bank by time remaining until maturity at December 31,
1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ---------------
(In thousands)
<S> <C>
Three months or less....................... $ 1,043
Over three through six months 1,771
Over six through 12 months................. 5,148
Over 12 months............................. 6,524
----------
Total.................................. $ 14,486
==========
</TABLE>
17
<PAGE>
For additional information, see Note 10 to the Notes to Consolidated
Financial Statements.
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending, investment and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Cincinnati functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB system, the Bank is required to own stock
in the FHLB of Cincinnati and is authorized to apply for advances.
Advances are made pursuant to several different programs, each of which
has its own interest rate and range of maturities. Advances from the FHLB of
Cincinnati are secured by the Bank's stock in the FHLB and a portion of the
Bank's mortgage loan portfolio. At December 31, 1999, the Bank had $8.9 million
of advances outstanding from the FHLB of Cincinnati, with rates of 4.53% to
6.00% and terms of up to nine years. For additional information, see Note 11 to
the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
At or For the Year
Ended December 31,
----------------------
1998 1999
------ -----
(In thousands)
<S> <C> <C>
FHLB Advances:
Amount outstanding at end of period........... $ 8,500 $ 8,850
Weighted average rate paid.................... 4.95% 5.24%
Maximum amount outstanding at any month end... $ 8,500 $ 12,600
Approximate average amount outstanding........ $ 4,333 $ 9,571
Approximate weighted average rate paid........ 4.82% 5.04%
</TABLE>
Subsidiary Activities
Federally chartered savings institutions are permitted to invest up to
2% of their assets in subsidiary service corporations, plus an additional 1% in
subsidiaries engaged in specific community purposes. Federal associations are
also authorized to make investments without limit in "operating subsidiaries"
that engage solely in activities that federal associations may conduct directly.
The Bank's principal wholly owned subsidiary, TCF Investors, Inc. ("TCFI"),
sells credit and mortgage life insurance and title insurance, and provides land
surveying for the Bank. The Bank's other subsidiary, Magnolia Investment, Inc.,
holds real estate acquired by the Bank through foreclosure. At December 31,
1999, Magnolia Investment, Inc. held one property with a net book value of
$78,000, which is held as rental property.
Savings institutions whose deposits are insured by the SAIF are
required to give the FDIC and the OTS 30 days' prior notice before establishing
or acquiring a new subsidiary, or commencing any new activity through an
existing subsidiary. Both the FDIC and the Director of the OTS have authority to
order termination of subsidiary activities determined to pose a risk to the
safety or soundness of the institution.
Regulation of the Bank
General. As a federal savings bank, the Bank is subject to extensive
regulation by the OTS. The lending activities and other investments of the Bank
must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations.
The Bank must file reports with OTS describing its activities and financial
condition
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and is also subject to certain reserve requirements promulgated by the Federal
Reserve Board. This supervision and regulation is intended primarily for the
protection of depositors.
FHLB System. The Bank is a member of the FHLB System, which consists of
12 district FHLBs subject to supervision and regulation by the Federal Housing
Finance Board ("FHFB"). The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Cincinnati, the Bank is
required to acquire and hold shares of capital stock in the FHLB of Cincinnati
in an amount at least equal to 1% of the aggregate unpaid prin cipal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB of
Cincinnati, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB of Cincinnati stock at December 31, 1999
of $829,000.
The FHLB of Cincinnati serves as a reserve or central bank for its
member institutions within its assigned district. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Cincinnati.
Long-term advances may only be made for the purpose of providing funds for
residential housing finance. At December 31, 1999, the Bank had $8.9 million in
advances outstanding with the FHLB of Cincinnati. See "Deposit Activity and
Other Sources of Funds -- Borrowings."
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, deposits maintained pursuant to Federal Reserve
Board requirements, time and savings deposits in certain institutions,
obligations of state and political subdivisions thereof, shares in mutual funds
with certain restricted investment policies, highly rated corporate debt, and
mortgage-backed securities) equal to the monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable savings deposits
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet liquidity requirements. The average daily liquidity ratio of the Bank for
the month of December 1999 was 4.85%.
Qualified Thrift Lender Test. The Bank is subject to OTS regulations
which use the concept of a Qualified Thrift Lender to determine eligibility for
FHLB advances and for certain other purposes. To qualify as a Qualified Thrift
Lender, a savings institution must either qualify as a "domestic building and
loan association" under the Internal Revenue Code or maintain at least 65% of
its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified Thrift Investments consist of (i) loans, equity positions or
securities related to domestic, residential real estate or manufactured housing
and educational, small business and credit card loans, (ii) 50% of the dollar
amount of residential mortgage loans subject to sale under certain conditions
and (iii) stock in a FHLB or the FHLMC. Subject to a 20% of portfolio assets
limit, however, savings institutions are able to treat as Qualified Thrift
Investments 200% of their investments in loans to finance "starter homes" and
loans for construction, development or improvement of housing and community
service facilities or for financing small businesses in "credit-needy" areas. To
be qualified as a Qualified Thrift Lender, a savings institution must maintain
its status as a Qualified Thrift Lender for nine out of every 12 months. Failure
to qualify as a Qualified Thrift Lender results in a number of sanctions,
including the imposition of certain operating restrictions imposed on national
banks.
At December 31, 1999, approximately 92% of the Bank's assets were
invested in Qualified Thrift Investments as currently defined.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "Tier 1" or "core" capital equal to at least 4% of adjusted total
assets (3% if the institution is rated CAMELS 1 under the OTS examination rating
system) and "total" capital (a combination of core and "supplementary" capital)
equal to at least 8% of "risk-weighted" assets. In addition, the OTS has adopted
regulations which impose certain restrictions on institutions that have a total
risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted
total assets of less than 4.0% (or 3.0% if the institution has a CAMELS 1
rating). For purposes of these regulations, Tier
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<PAGE>
1 capital has the same definition as core capital. See "Prompt Corrective
Regulatory Action." Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Core capital is generally reduced by the
amount of a savings institution's intangible assets for which no market exists.
Limited exceptions to the deduction of intangible assets are provided for
mortgage and mortgage servicing rights and qualifying supervisory goodwill.
Tangible capital is given the same definition as core capital, but does not
include an exception for qualifying supervisory goodwill and is reduced by the
amount of all the savings institution's intangible assets with only a limited
exception for mortgage servicing rights and purchased credit card relationships.
Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts, and increased by a pro rated portion of the assets of
subsidiaries in which the institution holds a minority interest and which are
not engaged in activities for which the capital rules require deduction of its
debt and equity investments. Adjusted total assets are reduced by the amount of
assets that have been deducted from capital, the portion of the institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill. At December 31, 1999, the Bank's adjusted total assets for
purposes of the Tier 1 capital requirements were $117 million and the Bank was
in compliance with both its tangible and Tier 1 capital requirements.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
institution's core capital. Supplementary capital is defined to include certain
preferred stock issues, nonwithdrawable accounts and pledged deposits that do
not qualify as core capital, certain approved subordinated debt, certain other
capital instruments, a portion of the institution's general loss allowances and
up to 45% of unrealized gains on equity securities. Total core and supplementary
capital are reduced by the amount of capital instruments held by other
depository institutions pursuant to reciprocal arrangements, the portion of the
savings institution's land loans and non- residential construction loans in
excess of an 80% loan-to-value ratio and equity investments other than those
deducted from core and tangible capital. As of December 31, 1999, the Bank had
no land or non-residential construction loans in excess of an 80% loan-to-value
ratio and no equity investments for which OTS regulations require a deduction
from total capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on- balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to- value
ratios not exceeding 80%, multi-family first mortgages not more than 90 days
past due with loan-to-value ratios not exceeding 80% (75% if rate is
adjustable), annual net operating income equal to not less than 120% of debt
service (115% if loan is adjustable), and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer loans, non-qualifying residential
construction loans and commercial real estate loans, repossessed assets and
assets more than 90 days past due, as well as all other assets not specifically
categorized, are assigned a risk weight of 100%. The portion of equity
investments not deducted from core or supplementary capital is assigned a 100%
risk-weight. As of December 31, 1999, the Bank's risk-weighted assets were
approximately $93 million and the Bank was in compliance with its total capital
requirement.
OTS risk-based capital requirements require that savings institutions
with more than a "normal" level of interest rate risk maintain additional total
capital. An institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. An institution will
be considered to have a "normal" level of interest rate risk exposure
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<PAGE>
if the decline in its net portfolio value after an immediate 200 basis point
increase or decrease in market interest rates (whichever results in the greater
decline) is less than two percent of the current estimated economic value of its
assets. An institution with a greater than normal interest rate risk will be
required to deduct from total capital, for purposes of calculating its
risk-based capital requirement, an amount (the "interest rate risk component")
equal to one-half the difference between the institution's measured interest
rate risk and the normal level of interest rate risk, multiplied by the economic
value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%
are generally exempt from filing the interest rate risk schedule with their
Thrift Financial Reports. However, the OTS will require any exempt institution
that it determines may have a high level of interest rate risk exposure to file
such schedule on a quarterly basis. Based on information provided by the OTS,
management does not believe that the Bank would be deemed to have more than
normal level of interest rate risk under the rule as of December 31, 1999.
In addition to requiring generally applicable capital standards for
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for a savings institution at such amount or at such ratio of
capital-to- assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of the OTS may treat the failure of any institution to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an order
issued by the FDIC.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions at a level necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of estimated insured deposits that the FDIC
determines to be justified by circumstances indicating a significant risk of
substantial future losses to the SAIF.
The FDIC has established a risk-based assessment system for insured
depository institutions. Under the system, the assessment rate for an insured
depository institution depends on the assessment risk classification assigned to
the institution by the FDIC which will be determined by the institution's
capital level and supervisory evaluations. Based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period, institutions are assigned to one of three
capital groups -- well capitalized, adequately capitalized or undercapitalized
- -- using the same percentage criteria as under the prompt corrective action
regulations. See "Prompt Corrective Regulatory Action." Within each capital
group, institutions are assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund.
The FDIC's current assessment schedule for SAIF deposit insurance sets
the assessment rate for well-capitalized institutions with the highest
supervisory ratings at zero and institutions in the lowest risk assessment
classification are assessed at the rate of 0.27% of insured deposits. In
addition, FDIC-insured institutions are required to pay assessments to the FDIC
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. Until December 31, 1999, SAIF-insured
institutions were required to pay FICO assessment at the rate of 6.5 basis
points while Bank Insurance Fund ("BIF") members were assessed at the rate of
1.3 basis points. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments.
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Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
net transaction accounts on the first $44.3 million, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1999, the Bank met its reserve
requirements.
Dividend Restrictions. Under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distributions
if, after making the distribution, it would have: (i) a total risk-based capital
ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a Tier 1 leverage ratio of less than 4.0% (or 3% if the
institution is rated CAMELS 1). See "Prompt Corrective Regulatory Action." The
OTS, after consultation with the FDIC, however, may permit an otherwise
prohibited stock repurchase if made in connection with the issuance of
additional shares in an equivalent amount and the repurchase will reduce the
institution's financial obligations or otherwise improve the institution's
financial condition. Under OTS regulations, the Bank is not permitted to pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form.
Savings institutions must submit notice to the OTS prior to making a
capital distribution if (a) they would not be well-capitalized after the
distribution, (b) the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its regulatory
capital, or (c) the institution is a subsidiary of a holding company. A savings
institution must make application to the OTS to pay a capital distribution if
(x) the institution would not be adequately capitalized following the
distribution, (y) the institution's total distributions for the calendar year
exceeds the institution's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or (z) the distribution
would otherwise violate applicable law or regulation or an agreement with or
condition imposed by the OTS.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Limits on Loans to One Borrower. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain limited
exceptions, a savings institution's loans and extensions of credit outstanding
to a person at one time shall not exceed 15% of the unimpaired capital and
surplus of the institution. An institution may lend an additional amount equal
to 10% of unimpaired capital and surplus, if such loan is fully secured by
readily marketable collateral. Savings institutions are additionally authorized
to make loans to one borrower, for any purpose, in an amount not to exceed
$500,000. The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by the institution in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the institution is not placed in a more detrimental position as a
result of the sale. Certain types of loans are excepted from the lending limits,
including loans secured by savings deposits.
At December 31, 1999, the maximum amount that the Bank could have lent
to any one borrower under the 15% limit was approximately $2 million. At such
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower or group of affiliated borrowers was approximately $1.8 million.
Transactions with Affiliates. A savings institution or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such institution's capital stock and surplus, and for all
such transactions with all affiliates the savings institution is limited to an
amount equal to 20% of such capital stock and surplus. All such transactions
must also be on terms substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase
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<PAGE>
of assets, issuance of a guarantee and similar other types of transactions. An
affiliate of a savings institution is any company or entity which controls or is
under common control with the savings institution or any subsidiary of the
savings institution that would be deemed a financial subsidiary of a national
bank. In a holding company context, the parent holding company of a savings
institution (such as the Company) and any companies which are controlled by such
parent holding company are affiliates of the savings institution. In addition to
the foregoing restrictions, no savings institution may (i) loan or otherwise
extend credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
institution. The Bank is also subject to the anti-tying provisions of the Home
Owners' Loan Act which prohibit a savings institution from extending credit to
or offering any other services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions.
Loans to Executive Officers and Principal Stockholders. Loans to
directors, executive officers and principal stockholders, and their related
interests, must be made on terms substantially the same as offered in comparable
transactions to other persons unless the loan is made pursuant to a benefit or
compensation program that is widely available to employees and does not give
preference to insiders. Loans to any executive officer, director or greater than
10% stockholder of a savings institution, and their related interests, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the institution's loan to one borrower limit (generally equal to 15%
of the institution's unimpaired capital and surplus) and all loans to all
executive officers, directors and greater than 10% stockholders, and all their
related interests, may not, in the aggregate, exceed the institution's capital
and surplus. Loans to directors, executive officers and greater than 10%
stockholders of a savings institution, and their respective related interests,
in excess of the greater of $25,000 or 5% of capital and surplus (up to
$500,000) must be approved in advance by a majority of the board of directors of
the institution with any "interested" director not participating in the voting.
Loans to executive officers of depository institutions must be made on terms not
more favorable than those afforded to other borrowers, approved by the board of
directors of the institution, and are subject to reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. The Bank is also subject to certain provisions of Section 106(b) of
the Bank Holding Company Act which prohibit extensions of credit to executive
officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling
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the institution. Any company controlling the institution may also be required to
divest the institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions. If an institution's ratio
of tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
</TABLE>
- -----------
* 3.0% if institution has a composite 1 CAMELS rating.
A "critically undercapitalized" savings institution is defined as an institution
that has a ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative perpetual preferred
stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
Standards for Safety and Soundness. Under FDICIA, as amended by the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDRI
Act"), each federal bank regulatory agency is required to establish safety and
soundness standards for institutions under its authority. In 1995, these
agencies, including the OTS, released interagency guidelines establishing such
standards and adopted rules with respect to safety and soundness compliance
plans. The OTS guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Management believes that the
Bank meets substantially all the standards adopted in the interagency guidelines
and, therefore, does not believe that the implementation of these regulatory
standards will materially affect its operations.
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Additionally, under FDICIA, as amended by the CDRI Act, each federal
banking agency is required to establish standards relating to the adequacy of
asset and earnings quality. In 1995, these agencies, including the OTS, issued
proposed guidelines relating to asset and earnings quality. Under the proposed
guidelines, a savings institution should maintain systems, commensurate with its
size and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management does not believe that the asset and earnings standards,
in the form proposed by the OTS, would have a material effect on the Bank.
Regulation of the Company
The Company is a savings and loan holding company and, as such, is
subject to OTS registration, regulation, examination, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank is
subject to certain restrictions in its dealings with the Company and affiliates
thereof. The Company also is required to file certain reports with, and
otherwise comply with the rules and regulations of, the Securities and Exchange
Commission under the federal securities laws.
Activities Restrictions. Because the Company became a unitary savings
and loan holding company prior to May 4, 1999, there are generally no
restrictions on its activities as long as the Bank continues to satisfy the
Qualified Thrift Lender test. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. If the savings institution
subsidiary of a unitary holding company fails to meet the QTL test, then such
unitary savings and loan holding company shall also presently become subject to
the activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, register as, and become subject to, the restrictions applicable
to a bank holding company. See "Regulation of the Bank -- Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings institution,
other than through a merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by, the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. A multiple savings and loan holding company must obtain the
approval of the OTS prior to engaging in the activities described in (vii)
above.
Restrictions on Acquisitions. Unless the acquiror was a unitary savings
and loan holding company on May 4, 1999 (or became a unitary savings and loan
holding company pursuant to an application pending as of that date), no company
may acquire control of the Company unless the company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under Bank Holding Company Act of 1956 as
amended by the G-L-B Act. Financial holding companies may engage in activities
that the Federal Reserve
25
<PAGE>
Board, in consultation with the Secretary of the Treasury, has determined to be
financial in nature or incidental to a financial activity or complementary to a
financial activity provided that the complementary activity does not pose a risk
to safety and soundness. Financial holding companies that were not previously
bank holding companies may continue to engage in limited non-financial
activities for up to ten years after the effective date of the G-L-B Act (with
provision for extension for up to five additional years by the Federal Reserve
Board) provided that the financial holding company is predominantly engaged in
financial activities.
Savings and loan holding companies may not acquire, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof, or (ii) more than 5% of the voting shares of a savings institution or
savings and loan holding company thereof which is not a subsidiary. Except with
the prior approval of the Director of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may also acquire control of any
savings institution, other than a subsidiary savings institution, or of any
other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
OTS regulations permit federal savings institutions to branch in any
state or states of the United States and its territories. Except in supervisory
cases or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal savings institution may not establish an
out-of-state branch unless (i) the federal savings institution qualifies as a
QTL or as a "domestic building and loan association" under ss.7701(a)(19) of the
Internal Revenue Code and the total assets attributable to all branches of the
institution in the state would qualify such branches taken as a whole for
treatment as a QTL or treatment as a domestic building and loan association and
(ii) such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company, or (b) a violation of certain
statutory restrictions on branching by savings institution subsidiaries of
banking holding companies. Federal savings institutions generally may not
establish new branches unless the institution meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the institution's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings institution. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible activity for bank holding companies, if the savings institution
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The resulting bank will be
required to continue to pay assessments to the SAIF at the rates prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.
Taxation
General. The Company files consolidated federal and state income tax
returns on a calendar year basis. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
26
<PAGE>
Federal Income Taxation. Thrift institutions are subject to the
provisions of the Internal Revenue Code of 1986 (the "Code") in the same general
manner as other corporations. However, institutions such as the Bank which meet
certain definitional tests and other conditions prescribed by the Code may
benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. For tax years beginning before January 1, 1996, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
may be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method").
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank will no longer be allowed to use the
percentage of taxable income method for tax loan loss provisions, but would be
allowed to use the experience method of accounting for bad debts. There will be
no future effect on net income from the recapture because the taxes on these bad
debts reserves has already been accrued as a deferred tax liability.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
The Bank's federal corporate income tax returns for 1997 were audited
in 1999. No changes resulted from this audit.
State Income Taxation. In addition to the Company's federal income tax
liability, the State of Tennessee imposes an excise tax on savings institutions
at the rate of 6% of net taxable income, which is computed based on federal
taxable income subject to certain adjustments. The State of Tennessee also
imposes franchise and privilege taxes on savings institutions which, in the case
of the Company, have not constituted significant expense items.
The Company's state income tax returns were have not been examined by
the regulatory authorities since 1992. For additional information, see Note 12
to the Notes to Consolidated Financial Statements.
Executive Officers Who Are Not Directors
The following table sets forth information regarding the executive
officers of the Bank who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
December 31,
Name 1999 Title
- ---- ------------ -----
<S> <C> <C>
Robert C. Glover 42 Executive Vice President/Manager, Mortgage Loan Administration,
Mortgage Banking and Compliance Officer
Judith O. Bowers 50 Senior Vice President and Manager of the Volunteer Parkway
Branch, Investor Relations Officer
Michael H. Phipps 55 Senior Vice President Consumer/Commercial Loans
Joyce S. Rouse 56 Senior Vice President - Operations
John M. Wolford 54 Senior Vice President - Mortgage Production
</TABLE>
27
<PAGE>
Judith O. Bowers has served as Manager of the Bank's Volunteer Parkway
Branch since 1990 after serving as Branch Manager of the Bank's West Office
since 1981. She joined the Bank in 1980. Ms. Bowers became Senior Vice President
of the Bank in 1995. Ms. Bowers is married to Thad R. Bowers.
Robert C. Glover joined the Bank in 1984 and has served as Vice
President of the Bank since 1993. He became Senior Vice President in 1994 and
Executive Vice President in December 1998. His various community involvements
include service on the board of directors of Avoca Youth Baseball and is active
as an Elder of Central Christian Church.
Michael H. Phipps joined the Bank in 1980 as Chief Appraiser and
Mortgage Loan Officer. He became Vice President of Consumer Lending in 1985 and
has served as Senior Vice President in the same capacity since 1994. He is
President-elect of the Board of Directors of the Country Club of Bristol, a
licensed Real Estate Appraiser, a past Director of the Bristol Credit Bureau,
former President of Western Little League. He is an active member of Redeemer
Lutheran Church and serves on the church council.
Joyce S. Rouse assumed the position of Senior Vice President -
Operations in 1994. Prior to that time, Ms. Rouse served as Vice President -
Operations since 1982. She joined the Bank in 1961. Ms. Rouse is active in
Volunteer Baptist Church.
John M. Wolford joined the Bank in 1965 and assumed the position of
Senior Vice President - Mortgage Production in 1994. Prior to that time, he
served as Vice President of the Bank since 1978. Mr. Wolford is a Board Member
and Executive Committee Member of the Bristol Family YMCA and serves as a
Trustee of the Bristol Family YMCA Endowment Fund. He is an active member of
Pleasant View United Methodist Church and also serves on the Board of Governors
of Beaver Creek Walk, Inc. and the Bristol Junior Steer Show.
Employees
As of December 31, 1999, the Bank had 53 full-time and five part-time
employees, none of whom was represented by a collective bargaining agreement.
Item 2. Description of Property
- --------------------------------
The following table sets forth information regarding the Bank's offices
at December 31, 1999. All offices are owned by the Bank and are located in
Bristol, Tennessee.
<TABLE>
<CAPTION>
Book Value at
Year December 31, Approximate
Opened 1999 Square Footage
------ ------------- ---------------
<S> <C> <C> <C>
Main Office:
310 State Street 1958 $ 1,366,000 13,600
Branch Offices:
844 Volunteer Parkway 1974 822,000 2,700
2708 West State Street 1978 284,000 1,900
</TABLE>
The book value of the Bank's investment in furnishings and equipment
totaled $623,000 at December 31, 1999.
The Bank has begun construction of a new branch office in Bristol,
Virginia. The cost of the land for this branch was $251,000 and as of December
31, 1999, $114,000 in construction costs had been incurred.
28
<PAGE>
Item 3. Legal Proceedings
- --------------------------
From time to time, the Bank is a party to various legal proceedings
incident to its business. At December 31, 1999, there were no legal proceedings
to which the Company, the Bank or its subsidiary was a party, or to which any of
their property was subject, which were expected by management to result in a
material loss.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The Company's common stock trades on the Nasdaq SmallCap Market SM
under the symbol "TWIN." As of March 17, 2000, there were 1,121,388 shares of
the common stock outstanding and 417 stockholders of record. The quarterly high
and low closing prices for the common stock as reported on the Nasdaq SmallCap
Market SM and dividends declared and paid are shown in the table below.
<TABLE>
<CAPTION>
1999 First Second Third Fourth Year
---- ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
High $14 11/16 $13 15/16 $15 11/16 $17 5/16 $17 5/16
Low $13 9/16 $11 7/8 $13 3/16 $15 5/8 $11 7/8
Dividends Declared
& Paid Per Share $ 0.15 $ 0.10 $ 0.10 $ 0.10 $ 0.45
1998 First Second Third Fourth Year
---- ----- ------ ----- ------ ----
High $ 15 1/2 $ 14 3/4 $ 13 3/4 $ 15 $ 15 1/2
Low $ 14 3/8 $ 13 1/4 $ 12 3/4 $ 12 7/8 $ 12 3/4
Dividends Declared
& Paid Per Share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.40
</TABLE>
The information set forth (i) under "Item 1. Business -- Regulation of
the Bank -- Dividend Restrictions," and (ii) in Note 21 of the Notes to
Consolidated Financial Statements under "Item 7. Financial Statements," are
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
Forward Looking Statements
When used in this discussion and elsewhere in this Annual Report, the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, unfavorable judicial decisions, substantial
changes in levels of market interest rates, credit and other risks of lending
and investment activities and competitive and regulatory factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.
29
<PAGE>
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
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 1999, the Company's net interest income
decreased as a result of a decreasing net interest margin of 22 basis points.
The Bank's earnings are also affected by its level of noninterest income
including primarily service fees and charges and gains on sales of loans, and
noninterest expense, including primarily compensation and employee benefits,
occupancy and equipment and data processing expenses. 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, 1999 and 1998
The Company's total consolidated assets increased $2.8 million, or
2.4%, to $116.0 million at December 31, 1999 from $113.2 million at December 31,
1998. Substantially all of the Company's asset growth can be traced to a $3.0
million increase in deposits that was used to fund new loans. The loan portfolio
showed an increase of $4.2 million, or 5.0% from $83.2 million at December 31,
1998 to $87.4 million at December 31, 1999. The Company originated 314 mortgage
loans during the year ended December 31, 1999, as compared to 471 for the year
ended December 31, 1998 and 269 in 1997. The Company's one- to four-family
mortgage loan portfolio primarily consists of adjustable-rate loans. The Company
continues to package and sell most of its new fixed-rate loans in the secondary
market, servicing retained without recourse. In 1999, the refinancing market
that the Company experienced in 1998 began to slow as is evident in the number
of loans originated.
Loan portfolio growth was led by a $748,000, or 7.7%, increase in
non-residential real estate loans that totaled $10.5 million at year-end. The
Company attributes the increase in non-residential real estate lending to a
concentration on this area of the portfolio. The Company also showed growth in
other installment consumer loans that include commercial lines of credit and
commercial lending. The Company continues to emphasize home equity lending to
provide a higher yield, shorter-term investment than permanent mortgage lending.
Total real estate loans amounted to $59.4 million at December 31, 1999
as compared to $60.5 million at December 31, 1998. Consumer/commercial lending
increased by $1.5 million or 5.3%, from $28.2 million at December 31, 1998 to
$29.7 million at December 31, 1999. The automobile loan portfolio showed a
$285,000 decrease as the Company continues to focus on other consumer/commercial
lending.
Funds not invested in loans were invested in other interest-earning
assets to create the Company's investment portfolio. The Company's portfolio of
mortgage-backed securities increased $4.6 million or 37.4% from $12.4 million at
December 31, 1998 to $17.1 million at December 31, 1999. A part of this increase
of mortgage-backed securities was $5.4 million of mortgage loans that were
packaged and swapped for mortgage-backed securities. At December 31, 1999,
unrealized losses on mortgage-backed securities amount to $423,000, net of
applicable income taxes. The Company as of December 31, 1999 had no investment
positions in U.S. government and agency bonds. The proceeds from these maturing
investment securities during 1999 were invested into loans and mortgaged-backed
securities that currently produce a greater yield. Cash and due from banks and
interest-earning deposits decreased $5.0 million from $10.3 million at December
31, 1998 to $5.3 million at December 31, 1999. These liquid assets were diverted
to higher yielding loans and mortgage-backed securities. Most of the
interest-earning deposits are invested in FHLB overnight deposits.
30
<PAGE>
Deposit comparisons show a $3.0 million, or 3.4%, increase in the year
ended December 31, 1999. Of the deposit growth, $4.4 million resulted from an
increase in time deposits offset by decreases in passbook and money market
savings accounts. The growth in time deposits was the result of the Company's
marketing efforts and ability to offer new deposits products. 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. At December 31,
1999, the Company had $8.9 million in advances from the FHLB of Cincinnati. The
Company uses FHLB advances to fund loan demand and meet short-term cash flow
needs.
Stockholders' equity decreased $625,000, or 4.4%, during fiscal 1999.
In 1999, the Company earned $1.2 million of net income while paying cash
dividends of $495,000. Other comprehensive income that represents unrealized
losses on securities classified as available for sale net of income taxes, was a
$448,000 loss for 1999. The Company recognized compensation expense of $158,000
based on the fair market value of shares allocated to employees under the
Company's employee stock ownership plan. The cost of these shares was $72,000,
leaving unearned compensation of $359,000 in stockholders' equity at year-end.
Compensation expense of approximately $123,000 was recognized in 1999 for the
Company's management recognition plan leaving a balance of unearned compensation
of $42,000. This remaining balance will be recognized in 2000 as the shares
granted under the plan become fully vested in May 2000. The Company also
repurchased 80,303 shares of its outstanding common stock (all of which were
held in treasury) at an average purchase price of $14.28 per share or
approximately $1.1 million.
Comparison of Results of Operations for the Years Ended December 31, 1999, 1998
and 1997
Net Income. Net income decreased $80,000 to $1.2 million ($1.08 basic
and $1.04 diluted earnings per share) for the year ended December 31, 1999
compared to $1.3 million ($1.08 basic and $1.04 diluted earnings per share) for
the year ended December 31, 1998 and $1.1 million ($0.90 basic and $0.86 diluted
earnings per share) for the year ended December 31, 1997. Weighted average
shares outstanding for 1999, 1998 and 1997 were 1,095,530, 1,167,943, and
1,195,650, respectively. The decreases in outstanding shares reflect the
Company's open-market stock repurchases. Net income for fiscal year 1999
decreased primarily as a result of an increase in non-interest expense. Net
income for the 1998 fiscal year benefited from improvements in net interest
income and non-interest income which were partially offset by increases in
non-interest expenses and the provision for loan losses.
Interest Income. Total interest income decreased to $8.5 million in
1999 compared to $8.6 million in 1998 and $8.3 million in 1997. The decrease in
interest income was the result of a 42 basis point decline in the average yield
on interest-earning assets offset by an increase of $4.4 million in average
interest-earning assets outstanding for 1999. Interest on loans showed a slight
increase of $24,000 in 1999. The average volume of loans outstanding increased
$6.0 million, or 7.4%, to $87.3 million in 1999 compared to $81.3 million in
1998. Total interest income earned on loans was affected by a decrease in the
average yield on the portfolio to 8.32% for 1999 compared to 8.90% for 1998 and
8.72% for 1997. The Company attributes the decrease in the loan portfolio's
yield to its increased originations of adjustable-rate residential mortgages
which the Company retains in portfolio and which generally had lower initial
interest rates than loans in the portfolio. Interest on investment securities
continued to decline as the portfolio matured and was invested in loans and
mortgage-backed securities and used to fund the repurchase shares of common
stock.
Interest Expense. Interest expense totaled approximately $4.3 million
for 1999, 1998, and 1997. The Company attributes the stability of total interest
expense to a combination of offsetting changes in the average volume of
interest-bearing liabilities, the average cost on those liabilities, and amount
of advances outstanding. The average cost of interest-bearing liabilities was
4.25%, 4.57% and 4.67% for 1999, 1998 and 1997, respectively. The average volume
of interest-bearing liabilities increased to $100.4 million for 1999, as
compared to $94.2 million for 1998 and $91.2 million for 1997. The Company also
relied to a greater extent on additional FHLB borrowings during 1999 which
resulted in an increase of interest expense of $273,000 over 1998.
Net Interest Income. Net interest income decreased to $4.2 million in
1999 compared to $4.3 million in 1998 and $4.0 million in 1997. The Company's
interest rate spread decreased 10 basis points to 3.49% in 1999 compared to
3.59% in 1998 and was 3.48% in 1997. The 1999 decrease was a combination of a 42
basis point decrease in the average yield on interest-earning assets partially
offset by a 32 basis point decrease in the average cost of interest-bearing
liabilities. The net interest margin decreased to 3.86% for 1999, compared to
4.08% for 1998 and 3.95% for 1997.
31
<PAGE>
Provision 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 on the Company's
portfolio. The provision for loan losses amounted to $85,000, $232,000 and
$165,000 for the fiscal years 1999, 1998 and 1997, respectively. Net charge-offs
declined to $64,000 in 1999 compared to $163,000 for 1998 and $367,000 for 1997.
At December 31, 1999, the allowance for loan losses represented 103% of total
loans past due more than ninety days. The provisions for loan losses for 1999,
1998 and 1997 were determined by management to be necessary to replenish the
allowance for loan losses from net charge-offs and to bring the allowance to a
level considered appropriate by management based on the composition of the loan
portfolio and other factors such as general economic climate and loan loss
expectations. While management believes the allowance for possible losses at
December 31, 1999 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.
Noninterest Income. Noninterest income amounted to $870,000 for 1999
compared with $906,000 for 1998 and $739,000 for 1997. The largest component of
noninterest income was gains recognized on the sale of loans. The Company
continues to sell a majority of its fixed-rate loan production in the secondary
market. The Company recognized gains on loan sales of $468,000, $337,000 and
$233,000 in 1999, 1998 and 1997. The other major component of noninterest income
is loan fees and service charges, which totaled $277,000, $232,000 and $323,000
for 1999, 1998, and 1997, respectively. During 1998, the Company also recorded a
$200,000 gain on sale of land. This property had originally been purchased for a
new branch. When the decision was made not to build a branch at the location,
the property was sold at a profit. The Company did not recognize any gains on
the sale of securities in 1999. In 1998 and 1997, the Company had gains on sale
of securities (principally mortgage-backed securities) of $15,000 and $53,000,
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 amount to $10,000, $10,000 and
$39,000 for 1999, 1998 and 1997, respectively.
Noninterest Expense. Non-interest expense was 2.62% of average assets
in 1999, compared with 2.61% in 1998 and 1997. Total expense was $3.1 million,
$2.9 million and $2.8 million for 1999, 1998, and 1997, respectively.
Compensation and employee benefit expense has remained relatively constant at
approximately $1.7 million for all three years. During 1999, the Company
experienced a $39,000 or 11.6% increase in net occupancy expense, which totaled
$375,000 for the year compared to $336,000 for 1998 and $269,000 for 1997. The
increase in net occupancy expense was attributable to additional depreciation
expenses. Deposit insurance premiums remained constant for 1999, 1998, and 1997.
During 1999, the Company also experienced a $42,000 or 15.7% increase in data
processing expense due to higher transaction volumes and the additional cost for
preparing for the Year 2000. There were no provisions for real estate losses in
1999 or 1998 and $10,000 in 1997. Other expenses were $572,000 in 1999, $502,000
in 1998, and $546,000 in 1997. These expenses include advertising, professional
services and other general operating expenses.
Income Taxes. Income tax expense amounted to $790,000, $833,000 and
$705,000 for 1999, 1998 and 1997, respectively. Income tax for the periods is
affected by the amount of pre-tax income at the then-effective tax rates. The
Company's effective tax rate for the past three years has been approximately
40%.
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
32
<PAGE>
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 3% 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% and 60% in the event of 1%, 2% and 3% increases and decreases in market
interest rates, respectively. At December 31, 1999, based on information
provided by the OTS, it was estimated that the Bank's NPV would decrease 1.5%,
3.2% and 5.1% in the event of 1%, 2% and 3% 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.
Set forth below is a tabular presentation of the interest rate
sensitivity of the Bank's NPV to changes in market interest rates at December
31, 1999, which is based upon information provided to the Bank by the OTS.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of Portfolio Value of Assets
---------------------------------------- -------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- -------- -------- --------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 5,919 $(6,218) (51)% 5.50% (510)
+200 bp 8,094 (4,043) (33) 7.36 (324)
+100 bp 10,220 (1,917) (16) 9.10 (150)
0 bp 12,137 -- -- 10.60 --
-100 bp 13,655 1,518 13 11.74 114
-200 bp 15,069 2,933 24 12.75 215
-300 bp 16,471 4,334 36 13.71 311
</TABLE>
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.
33
<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.
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 indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of the related assets or liabilities,
respectively, for the periods indicated.
The table also presents information for the periods indicated 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 interest margin," which is its net
interest income divided by the average balance of interest-earning assets.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------- ----------------------------
Average Average Average
Average Yield / Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---------- ------- -------- ----------- ------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.......................... $ 77,175 $ 6,731 8.72% $ 81,295 $ 7,236 8.90% $ 87,289 $ 7,260 8.32%
Mortgage-backed securities..... 13,251 895 6.75 14,854 933 6.28 16,298 1,001 6.14
Investment securities.......... 7,295 461 6.32 2,387 164 6.87 1,355 98 7.23
Interest-earning deposits...... 3,711 177 4.77 7,030 278 3.95 5,007 151 3.02
-------- ------- ---- -------- ------- ----- --------- ------- ------
Total interest-earning assets 101,432 8,264 8.15 105,566 8,611 8.16 109,949 8,510 7.74
------- ---- ------- ---- ------- ------
Noninterest-earning assets 5,479 5,001 6,664
-------- -------- ---------
Total assets................. $106,911 $110,567 $ 116,613
======== ======== =========
Interest-bearing liabilities:
Deposits....................... $ 89,170 $ 4,158 4.66 $ 89,895 $ 4,094 4.55% $ 90,883 $ 3,787 4.17%
FHLB advances.................. 2,017 103 5.11 4,333 209 4.82 9,571 482 5.04
-------- -------- ---- -------- -------- ------ --------- --------- ------
Total interest-bearing
liabilities................ 91,187 4,261 4.67 94,228 4,303 4.57 100,454 4,269 4.25
-------- ---- ------- ------ --------- ------
Noninterest-bearing liabilities 1,989 2,302 2,407
-------- -------- ---------
Total liabilities.......... 93,176 96,530 102,861
Total stockholders' equity 13,735 14,037 13,752
-------- --------- --------
Total liabilities and
stockholders' equity $106,911 $110,567 $ 116,613
======== ======== =========
Net interest income.............. $ 4,003 $ 4,308 $ 4,241
======== ======== =========
Interest rate spread............. 3.48% 3.59% 3.49%
==== ====== ======
Net interest margin.............. 3.95% 4.08% 3.86%
==== ====== ======
</TABLE>
34
<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). Changes in rate-volume (changes in rate
multiplied by changes in volume) have been allocated proportionately between
changes in rate and changes in volume.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1997 vs. 1998 1998 vs. 1999
--------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------- -------------------------------
Volume Rate Total Volume Rate Total
------ -------- ------ -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans........................... $ 364 $ 141 $ 505 $ 534 $ (510) $ 24
Mortgage-backed securities...... 103 (65) 38 91 (23) 68
Investment securities........... (334) 37 (297) (71) 5 (66)
Interest-earning deposits....... 135 (34) 101 (80) (47) (127)
------ ------ ------ -------- --------- -------
Total interest-earning
assets..................... 268 79 347 474 (575) (101)
------ ------ ------ -------- --------- -------
Interest expense:
Deposits........................ 34 (98) (64) 45 (352) (307)
FHLB advances................... 112 (6) 106 252 21 273
------ ------ ------ -------- --------- -------
Total interest-bearing
liabilities................. 146 (104) 42 297 (331) (34)
------ ------ ------ -------- --------- -------
Change in net interest
income.......................... $ 122 $ 183 $ 305 $ 177 $ (244) $ (67)
====== ====== ====== ======== ========= =======
</TABLE>
Liquidity and Capital Resources
The Company currently has no business other than that of the Bank. The
Company's primary funding needs are for stock repurchases and the payment of
dividends to stockholders. To fund these activities, the Company relies on
dividends on its stock in the Bank which is its principal asset. The Bank is
subject to various regulatory restrictions on the payment of dividends. At
December 31, 1999, the Bank had approximately $8 million available for the
payment of additional dividends to the Company under these regulations.
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,
1999, the required ratio was 4%. The Bank's liquidity ratio averaged 4.9% during
the month of December 1999. 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.
35
<PAGE>
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, 1999, 1998 and
1997, the Bank originated and purchased loans in the amounts of $41.2 million,
$47.8 million and $47.7 million, respectively. Other investing activities
include the purchase of securities, which totaled $4.2 million, $5.1 million and
$9.2 million during the years ended December 31, 1999, 1998 and 1997,
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.
At December 31, 1999, savings certificates amounted to $58.4 million,
or 63.3%, of the Bank's total deposits, including $44.9 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 in
this report.
At December 31, 1999, the Bank exceeded all regulatory minimum capital
requirements. For additional information, see Note 16 of the Notes to
Consolidated Financial Statements herein.
The Bank had $417,000 in outstanding loan commitments at December 31,
1999. 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.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Company and related Notes
theretohave 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 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
in this report.
36
<PAGE>
Item 7. Financial Statements
- -----------------------------
The Independent Auditor's Report, Consolidated Financial Statements and
related Notes are included in this Annual Report on Form 10-KSB immediately
following Item 13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Information concerning the directors and executive officers of the
Company is incorporated herein by reference to the sections titled "Item 1.
Business -- Executive Officers Who Are Not Directors" herein and "Election of
Directors" and "Voting Securities and Beneficial Ownership" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement.
Item 10. Executive Compensation
- --------------------------------
The information required by this item is incorporated herein by
reference to the section titled "Election of Directors -- Executive
Compensation" in the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Beneficial Ownership" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Beneficial Ownership" and "Election of Directors" in the Proxy
Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section titled "Election of Directors -- Transactions with
Management" in the Proxy Statement.
37
<PAGE>
PART IV
Item 13. Exhibits List and Reports on Form 8-K
- -----------------------------------------------
(a) The following exhibits either are filed or otherwise furnished as
part of this report or are incorporated herein by reference:
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C>
3.1/1/ Charter of Twin City Bancorp, Inc.
3.2/1/ Bylaws of Twin City Bancorp, Inc.
4/1/ Form of Common Stock Certificate
10.1/1//2/ Twin City Bancorp, Inc. Incentive Compensation Plan, as
amended+
10.2/1/ Twin City Bancorp, Inc. Deferred Compensation Plan +
10.3/3/ Employment Agreements between Twin City Bancorp, Inc. and Twin
City Federal Savings Bank and Thad R. Bowers +
10.4/3/ Severance Agreements between Twin City Bancorp, Inc. and Twin
City Federal Savings Bank and Judith O. Bowers, Robert C.
Glover, Michael H. Phipps, Joyce C. Rouse and John M. Wolford+
10.5/1/ Twin City Federal Savings Bank Supplemental Executive
Retirement Agreement +
10.6/3/ Twin City Bancorp, Inc. 1995 Stock Option and Incentive Plan +
10.7/3/ Twin City Bancorp, Inc. Management Recognition Plan +
21 Subsidiaries
23 Consent of Independent Auditor
27 Financial Data Schedule
</TABLE>
- ------------------
/1/ All or a portion incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-84196).
/2/ All or a portion incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 1995.
/3/ Incorporated by reference to the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended March 31, 1995.
/4/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994.
+ Management contract or compensatory plan or arrangement.
(b) No reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this report.
38
<PAGE>
[CRISP HUGHES EVANS, LLP LETTERHEAD]
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, 1998 and 1999
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1999. 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, 1998 and 1999, and the results of their operations and their cash
flows for each of the years in the three year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ CRISP HUGHES EVANS LLP
Asheville, North Carolina
February 4, 2000
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------
Assets 1998 1999
- ------ ---------------- ---------------
<S> <C> <C>
Cash and due from banks $ 2,260 $ 2,998
Interest-earning deposits 8,081 2,277
Investment securities:
Available for sale (amortized cost of $1,505 in 1998 and
$4 in 1999) 1,512 4
Loans receivable, net 81,428 87,202
Loans held for sale 1,787 172
Mortgage-backed securities:
Available for sale (amortized cost of $12,395 in 1998 and
$17,759 in 1999) 12,429 17,075
Premises and equipment, net 3,241 3,487
Real estate 237 85
Federal Home Loan Bank stock 773 829
Interest receivable 224 244
Other 1,273 1,638
-------- --------
Total assets $113,245 $116,011
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 89,112 $ 92,165
Federal Home Loan Bank advances 8,500 8,850
Advance payments by borrowers for taxes and insurance 243 274
Accrued expenses and other liabilities 330 436
Current income taxes 97 69
Deferred income taxes 811 690
-------- --------
Total liabilities 99,093 102,484
-------- --------
Stockholders' equity:
Common stock ($1 par value, 8,000,000 shares authorized;
1,219,430 issued; 1,201,691 outstanding at December 31, 1998,
and 1,121,388 outstanding at December 31, 1999) 1,220 1,220
Paid-in capital 6,917 7,003
Retained earnings, substantially restricted 6,824 7,513
Accumulated other comprehensive income 25 (423)
Treasury stock at cost (17,739 shares at December 31, 1998
and 98,042 shares at December 31, 1999) (238) (1,385)
Unearned compensation:
Employee stock ownership plan (431) (359)
Management recognition plan (165) (42)
-------- --------
Total stockholders' equity 14,152 13,527
-------- --------
Total liabilities and stockholders' equity $113,245 $116,011
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ending December 31,
-----------------------------------------------------
1997 1998 1999
--------------- ----------------- -----------------
<S> <C> <C> <C>
Interest income:
Loans $6,731 $7,236 $7,260
Mortgage-backed securities 895 933 1,001
Investment securities 461 164 98
Interest-earning deposits 177 278 151
------ ------ ------
Total interest income 8,264 8,611 8,510
------ ------ ------
Interest expense:
Deposits 4,158 4,094 3,787
Federal Home Loan Bank advances 103 209 482
------ ------ ------
Total interest expense 4,261 4,303 4,269
------ ------ ------
Net interest income 4,003 4,308 4,241
Provision for loan losses 165 232 85
------ ------ ------
Net interest income after provision for loan losses 3,838 4,076 4,156
------ ------ ------
Non-interest income:
Loan fees and service charges 323 232 277
Insurance commissions and fees 60 82 79
Gain on sale of securities 53 15 -
Gain on sale of loans 233 337 468
Income from rental of real estate 39 10 10
Gain on sale of land - 200 -
Other 31 30 36
------ ------ ------
Total non-interest income 739 906 870
------ ------ ------
Non-interest expenses:
Compensation and employee benefits 1,690 1,724 1,743
Net occupancy expense 269 336 375
Deposit insurance premiums 57 56 53
Data processing 222 267 309
Provision for real estate losses 10 - -
Other 546 502 572
------ ------ ------
Total non-interest expenses 2,794 2,885 3,052
------ ------ ------
Income before income taxes 1,783 2,097 1,974
Income tax expense 705 833 790
------ ------ ------
Net income $1,078 $1,264 $1,184
====== ====== ======
Basic net income per share $ .90 $ 1.08 $ 1.08
====== ====== ======
Diluted net income per share $ .86 $ 1.04 $ 1.04
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Years Ending December 31,
--------------------------------------------------------
1997 1998 1999
---------------- ------------------ ------------------
<S> <C> <C> <C>
Net income $1,078 $1,264 $1,184
Other comprehensive income:
Net unrealized gains (losses) on securities available
for sale, net of income tax (benefit) expense of
$82, $(18) and $(275), respectively 136 (29) (448)
Less: Reclassification adjustment for gains included in
net income, net of income tax expense of $20, $6 and
$-0-, respectively (33) (9) -
------ ------ ------
Other comprehensive income 103 (38) (448)
------ ------ ------
Comprehensive income $1,181 $1,226 $ 736
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION> Unearned
Accumulated Compensation
Other ---------------
Common Paid-In Retained Comprehensive Treasury for for
Stock Capital Earnings Income Stock ESOP MRP Total
------- -------- --------- -------------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 854 $7,134 $6,283 $ (40) $ - $(575) $(271) $13,385
Comprehensive income:
Net income - - 1,078 - - - - 1,078
Other comprehensive income - - - 103 - - - 103
-------
1,181
Cash dividends ($.42 per share) - - (501) - - - - (501)
Purchase of MRP shares - - - - - - (159) (159)
Repurchase of 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 63 - (503) (307) 14,011
Comprehensive income:
Net income - - 1,264 - - - - 1,264
Other comprehensive income - - - (38) - - - (38)
-------
1,226
Cash dividends ($.40 per share) - - (465) - - - - (465)
</TABLE>
(continued)
F-5
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION> Unearned
Accumulated Compensation
Other ---------------
Common Paid-In Retained Comprehensive Treasury for for
Stock Capital Earnings Income Stock ESOP MRP Total
-------- -------- --------- -------------- --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options
(900 shares) $ - $ (2) $ - $ - $ 12 $ - $ - $ 10
Repurchase of stock (66,836
shares) (49) (294) (331) - (250) - 31 (893)
ESOP and MRP compensation
earned - 80 - - - 72 111 263
------- ------ -------- ------------- -------- ------ ----- -------
Balance at December 31, 1998 1,220 6,917 6,824 25 (238) (431) (165) 14,152
Comprehensive income:
Net income - - 1,184 - - - - 1,184
Other comprehensive income - - - (448) - - - (448)
-------
736
Cash dividends ($.45 per share) - - (495) - - - - (495)
Repurchase of stock (80,303
shares) - - - - (1,147) - - (1,147)
ESOP and MRP compensation
earned - 86 - - - 72 123 281
------- ------ -------- ------------- -------- ------ ----- -------
Balance at December 31, 1999 $ 1,220 $7,003 $ 7,513 $ (423) $(1,385) $(359) $ (42) $13,527
======= ====== ======== ============= ======== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,078 $ 1,264 $ 1,184
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 170 217 243
Provision for losses on loans 165 232 85
Provision for real estate losses 10 - -
Deferred income taxes (benefit) 296 210 154
FHLB dividends received in stock (49) (53) (56)
Amortization of deferred loan origination fees, net (7) 14 (64)
Amortization of excess servicing fees and mortgage servicing rights 91 205 184
Amortization of premiums and discounts on mortgage-backed securities, net 27 54 32
Amortization of premiums and discounts on securities (4) (5) 1
Gain on sale of securities and mortgage-backed securities (53) (15) -
Loans originated for sale (12,646) (23,635) (10,891)
Proceeds from sale of loans 9,443 22,202 7,064
Gain on sale of loans (233) (337) (468)
Gain on sale of real estate (1) - -
(Gain) loss on sale of land - (200) 7
Amortization of unearned compensation 263 263 281
Purchase of MRP shares (159) - -
Decrease (increase) in interest receivable 89 64 (20)
Decrease (increase) in other assets (91) 42 15
Increase (decrease) in accrued expenses and other liabilities (38) 42 110
Increase (decrease) in current income tax payable 256 (159) (29)
-------- -------- --------
Net cash provided (used) by operating activities (1,393) 405 (2,168)
-------- -------- --------
Investing activities:
Purchase of investment securities classified as available for sale (3,993) - -
Maturities of investment securities 3,855 2,500 1,500
Proceeds from sales of investment securities classified as available for sale 4,517 - -
Purchase of mortgage-backed securities classified as available for sale (5,168) (5,089) (4,221)
Proceeds from sale of mortgage-backed securities classified as available for sale 1,993 2,752 -
Principal payments on mortgage-backed securities 2,448 5,051 4,196
Increase in cash surrender value of life insurance (22) (24) (24)
Proceeds from sale of real estate 230 - -
Net decrease (increase) in loans originated 6,706 2,285 (1,276)
Purchase of loans (5,826) (6,932) (4,370)
Proceeds from sale of land - 371 -
Purchase of premises and equipment (1,447) (578) (495)
-------- -------- --------
Net cash provided (used) by investing activities 3,293 336 (4,690)
-------- -------- --------
</TABLE>
(continued on next page)
F-7
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ending December 31,
--------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Financing activities:
Net (decrease) increase in deposits $ 6,631 $(3,208) $ 3,053
Increase (decrease) in advance payments by borrowers
for taxes and insurance (95) 56 31
Proceeds from FHLB advances 11,100 8,500 22,795
Repayment of FHLB advances (15,200) (1,000) (22,445)
Proceeds from stock option exercises - 10 -
Purchase of treasury stock (158) (893) (1,147)
Dividends paid (501) (465) (495)
-------- ------- --------
Net cash provided by financing activities 1,777 3,000 1,792
-------- ------- --------
Increase (decrease) in cash and cash equivalents 3,677 3,741 (5,066)
Cash and cash equivalents at beginning of year 2,923 6,600 10,341
-------- ------- --------
Cash and cash equivalents at end of year $ 6,600 $10,341 $ 5,275
======== ======= ========
Supplemental disclosures:
Cash paid during the year for:
Interest on deposits and other borrowings $ 4,266 $ 4,287 $ 4,230
Income taxes (net of refunds) 178 787 621
======== ======= ========
Non-cash investing and financing activities:
Real estate acquired in satisfaction of mortgage loans $ 331 $ 150 $ -
======== ======= ========
Sale of mortgage loans in exchange for mortgage-backed security $ 2,704 $ - $ 5,371
======== ======= ========
Loans to facilitate real estate sales $ 231 $ - $ 121
======== ======= ========
Net unrealized gains (losses) on available for sale securities $ 103 $ (38) $ 448
======== ======= ========
Capitalized mortgage servicing rights $ 252 $ 494 $ 539
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
TWIN CITY BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(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 within
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 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 other comprehensive income. Gains and losses on the sale of
these securities are calculated based on the specific identification
method.
F. Real Estate - Real estate properties acquired through, or in lieu of, loan
-----------
foreclosure are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. 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.
F-9
<PAGE>
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:
Buildings and improvements 25 to 40 years
Office furniture and equipment 5 to 10 years
Vehicles 5 years
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. Any
net unrealized losses are recognized by recording a valuation allowance
which is charged 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.
K. Mortgage Servicing Rights - The Company capitalizes as an asset the right
-------------------------
to service mortgage loans for others when those rights are 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, and FHLB overnight deposits.
F-10
<PAGE>
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. New Accounting Pronouncements -
-----------------------------
(1) Derivatives and Hedging Activities. The Company has adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities" (SFAS 133). SFAS No. 133
supersedes SFAS 105 and amends SFAS 107 by adding a disclosure for the
concentration of credit risk. SFAS 133 has no material effect on the
Company at this time.
(2) Mortgage-Backed Securities. The Company has adopted Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-
Backed Securities After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise (SFAS 134). All periods
presented are in accordance with SFAS 134. SFAS 134 amends SFAS 65 and
requires that after the securitization of mortgage loans held for
sale, an entity in mortgage banking activities should classify the
resulting mortgage-backed securities based upon its ability and intent
to sell or hold those investments in accordance with SFAS 115. SFAS
134 has no material effect on the Company for the periods presented.
2. Earnings Per Share
------------------
For the years ended December 31, 1997, 1998 and 1999, 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 earnings per share were 1,195,650, 1,167,943 and 1,095,530 for the
years ended December 31, 1997, 1998 and 1999, respectively. Diluted earnings
per share is calculated by adjusting outstanding shares, assuming conversion
of all potentially dilutive securities, using the treasury stock method. The
weighted average common shares outstanding used for diluted earnings per
share were 1,247,426, 1,211,164 and 1,142,709 for the years ending December
31, 1997, 1998 and 1999.
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, 1998:
U.S. government and
agency bonds $1,501 $ 7 $ - $ 1,508
Equity securities 4 - - 4
------ ------- --------- ---------
$1,505 $ 7 $ - $ 1,512
====== ======= ========= =========
December 31, 1999:
Equity securities $ 4 $ - $ - $ 4
====== ======= ========= =========
</TABLE>
The debt securities at December 31, 1998, were due within one year. There
were no sales of investment securities during 1998 or 1999. Investments sold
during 1997 resulted in realized gains of approximately $23,000, with
proceeds of $4,517,000.
F-11
<PAGE>
4. Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Real estate first mortgage loans:
One-to-four-family dwellings $40,303 $40,695
Construction 10,427 8,267
Commercial real estate 6,397 6,673
Other real estate 3,330 3,802
------- -------
Total real estate loans 60,457 59,437
------- -------
Consumer and other loans:
Equity loans 22,315 22,691
Loans secured by deposit accounts 172 137
Other installment loans 5,671 6,835
------- -------
Total other loans 28,158 29,663
------- -------
Total loans 88,615 89,100
------- -------
Less:
Undisbursed portion of loans in process 5,462 1,830
Net deferred loan origination cost (256) (319)
Allowance for loan losses 194 215
------- -------
5,400 1,726
------- -------
$83,215 $87,374
======= =======
</TABLE>
Loans held for sale were approximately $1,787,000 and $172,000 at December
31, 1998 and 1999, 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.
F-12
<PAGE>
The changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1998 1999
------------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 327 $ 125 $ 194
Provision for loan losses 165 232 85
Recoveries 18 41 39
Charge-offs (385) (204) (103)
----- ----- -----
Ending balance $ 125 $ 194 $ 215
===== ===== =====
</TABLE>
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," there were no impaired loans at December 31, 1998 and 1999. 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 significant at December 31, 1998 and 1999, 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 non-accrual status at December 31, 1998 and
1999, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans (in
thousands) were $59,445, $65,915 and $75,015 at December 31, 1997, 1998 and
1999, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $181,000, $158,000 and $183,000 at December 31,
1997, 1998 and 1999, respectively.
The following is an analysis of the changes in excess servicing fees
receivable included in other assets:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
Balance beginning of year $ 128 $ 88
Amortization (40) (29)
----- -----
Balance end of year $ 88 $ 59
===== =====
</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 collectability or
present other unfavorable features. Loans to directors and executive officers
and their related interests are as follows:
<TABLE>
<S> <C>
Balance at December 31, 1997 $1,131
Advances 570
Repayments (318)
Officer/director terminations (188)
------
Balance at December 31, 1998 1,195
Advances 220
Repayments (279)
------
Balance at December 31, 1999 $1,136
======
</TABLE>
F-13
<PAGE>
5. Mortgage-Backed Securities Available for Sale
----------------------------------------------
The amortized cost and estimated fair value of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
December 31, 1998:
FHLMC Certificates $10,754 $ 96 $ 45 $10,805
FNMA Certificates 1,641 4 21 1,624
------- ---- ---- -------
$12,395 $100 $ 66 $12,429
======= ==== ==== =======
December 31, 1999:
FHLMC Certificates $14,662 $ 30 $616 $14,076
FNMA Certificates 3,097 4 102 2,999
------- ---- ---- -------
$17,759 $ 34 $718 $17,075
======= ==== ==== =======
</TABLE>
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 sold during the
year ended December 31, 1998, resulted in realized gains of approximately
$15,000. Proceeds from the sales were approximately $2,752,000. Mortgage-
backed securities of $7,614,000, $7,173,000 and $13,767,000 were pledged at
December 31, 1997, 1998 and 1999, respectively.
6. Real Estate
-----------
Real estate is summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
------------------- --------------------
<S> <C> <C>
Real estate acquired for development, rental and sale $ 91 $ 91
Real estate acquired through foreclosures 150 -
Less:
Accumulated depreciation 4 6
----- -----
$ 237 $ 85
===== =====
</TABLE>
Real estate, by type, consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------------------- --------------------
<S> <C> <C>
Commercial buildings $ 80 $ 78
One to four family dwelling 150 -
Improved land 7 7
----- -----
$ 237 $ 85
===== =====
</TABLE>
The Bank's subsidiary sold one of the commercial buildings during the first
quarter of 1997. The subsidiary recognized income from rental properties of
approximately $39,000 for the year ended December 31, 1997, and $10,000 for
the years ended December 31, 1998 and 1999.
F-14
<PAGE>
7. Premises and Equipment
----------------------
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Land and improvements $ 445 $ 700
Office buildings and improvements 3,038 3,038
Furniture, fixtures and equipment 1,692 1,640
Automobiles 54 54
Construction in progress - 114
------ ------
5,229 5,546
Less accumulated depreciation 1,988 2,059
------ ------
$3,241 $3,487
====== ======
</TABLE>
The Bank has entered into a contract with a related party to construct a new
branch location. The total cost is estimated to be approximately $595,000. Of
the total estimated cost, the Bank has spent approximately $114,000 as of
December 31, 1999.
8. Interest Receivable
-------------------
Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1999
------------------- ----------------
<S> <C> <C>
Investment securities $ 21 $ -
Mortgage-backed securities 140 172
Loans receivable 63 72
----- -----
$ 224 $ 244
===== =====
</TABLE>
9. Mortgage Servicing Rights
-------------------------
At December 31, 1998 and 1999, the fair value of mortgage servicing rights
(MSRS) was approximately $837,000 and $1,214,000, 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 ended December 31, 1998 and
1999, was approximately $494,000 and $539,000, respectively. The amount
amortized for 1997, 1998 and 1999, was approximately $56,000, $164,000 and
$184,000, respectively. MSRS are being amortized in proportion to and over
the period of estimated net servicing income. An allowance of approximately
$108,000 and $134,000 for the adjustment of MSRS has been recorded as of
December 31, 1998 and 1999, respectively.
10. Deposits
--------
The aggregate amount of time deposits with a minimum denomination of $100,000
was (in thousands) approximately $10,553 and $14,486 at December 31, 1998 and
1999, respectively.
F-15
<PAGE>
Contractual maturities of certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
12 months or less $38,434 $44,865
1 - 2 years 11,619 9,544
2 - 3 years 1,574 2,306
3 - 5 years 2,316 1,636
------- -------
$53,943 $58,351
======= =======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Demand, NOW accounts and
money market $ 501 $ 513 $ 547
Passbook savings 370 490 454
Certificates of deposit 3,287 3,091 2,786
------ ------ ------
$4,158 $4,094 $3,787
====== ====== ======
</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 1998 1999
------------- ------------- ------------- ---------------
<S> <C> <C> <C>
6.00 March 2000 $ - $ 2,850
5.10 March 2008 1,500 -
5.26 May 2008 1,500 1,500
5.15 June 2008 1,000 -
5.10 September 2008 1,500 1,500
4.53 October 2008 1,500 1,500
4.63 December 2008 1,500 1,500
-------- --------
$ 8,500 $ 8,850
======== ========
</TABLE>
The stock of the Federal Home Loan Bank and mortgage loans receivable are
pledged as collateral for these advances. Loans receivable aggregating
$12,750 and $13,275 (in thousands) representing 150% of the advanced balance
are pledged under the collateral agreement at December 31, 1998 and 1999,
respectively.
F-16
<PAGE>
12. Income Taxes
------------
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
Current $ 409 $ 623 $ 636
Deferred 296 210 154
----- ----- -----
Total $ 705 $ 833 $ 790
===== ===== =====
</TABLE>
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,
------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
Computed income tax expense $ 606 $ 713 $ 671
Increase (decrease) resulting from:
Non-deductible expenses 14 7 12
State income tax, net of federal
tax benefit 81 89 80
Other 4 24 27
----- ------ ------
Actual income tax expense $ 705 $ 833 $ 790
===== ====== ======
</TABLE>
The components of deferred tax liabilities and deferred tax assets are
summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
FHLB stock dividends $ 209 $ 223
Mortgage servicing fees 363 483
Bad debts reserves 11 26
Deferred loan origination cost 174 187
Depreciation 92 104
Deferred income 1 -
Unrealized gains on securities available for sale 16 -
------ ------
866 1,023
------ ------
Deferred tax assets:
Accrued expenses 52 69
Unrealized losses on securities available for sale - 259
Other 3 5
------ ------
55 333
------ ------
Net deferred tax liability $ 811 $ 690
====== ======
</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
F-17
<PAGE>
No. 109. Therefore, retained earnings at December 31, 1998 and 1999,
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 non-contributory 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 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, 1997,
and 1998, and 1999 was approximately $54,000, $42,000 and $53,000,
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
$25,000, $27,000 and $29,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
15. Compensation Benefit Agreement
------------------------------
Effective January 1, 1996, the Company established a non-qualified
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 $12,000, $36,000 and $48,000
the years ending December 31, 1997, 1998 and 1999, 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 Tier I and total capital (as defined in the regulations) to
adjusted total or risk weighted assets (as defined). Management believes, as
of December 31, 1999, that the Bank meets all capital adequacy requirements
to which it is subject.
F-18
<PAGE>
As of December 31, 1999, 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 Tier I and total 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.
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the following table. No adjustments to capital were required
for interest-rate risk.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Tier I Capital (to greater than or greater than or
adjusted total assets) $12,901 11.4% $4,533 equal to 4.0% $5,666 equal to 5.0%
Tier I Capital (to risk- greater than or greater than or
weighted assets) $12,901 17.7% $2,924 equal to 4.0% $4,386 equal to 6.0%
Total Capital (to risk- greater than or greater than or
weighted assets) $13,095 17.9% $5,848 equal to 8.0% $7,310 equal to 10.0%
As of December 31, 1999
Tier I Capital (to greater than or greater than or
adjusted total assets) $13,143 11.3% $4,666 equal to 4.0% $5,833 equal to 5.0%
Tier I Capital (to risk- greater than or greater than or
weighted assets) $13,143 14.1% $3,731 equal to 4.0% $5,596 equal to 6.0%
Total Capital (to risk- greater than or greater than or
weighted assets) $13,358 14.3% $7,461 equal to 8.0% $9,326 equal to 10.0%
</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 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 non-performance 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
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.
At December 31, 1999, the Company had commitments to extend additional credit
of approximately $6.5 million. Included in the Company's commitments are
standby letters of credit. Letters of credit are commitments issued by the
Company to guarantee the performance of a customer to a third party and
totaled approximately $1.3 million at December 31, 1999. The credit risk
involved in the underwriting of letters of credit is essentially the same as
that involved in extending loan facilities to customers.
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
F-19
<PAGE>
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) $3,082 and $6,450 at December 31, 1998 and
1999, respectively. The Company does not anticipate any losses as a result of
these transactions.
The Company had outstanding commitments for mortgage loans of approximately
$3,336,600 and $416,900 at December 31, 1998 and 1999, respectively. At
December 31, 1999, commitments to originate fixed rate loans having interest
rates ranging from 7.375% and 8.125% and terms ranging from 15 to 30 years
totaled $326,900. At December 31, 1999, commitments to originate one year
adjustable rate loans having interest rate of 8.50% and terms of 15 to 30
years totaled $90,000.
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 accounting
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,
1997, 1998 and 1988, the total contributions to the ESOP used to fund
principal and interest payments on the ESOP debt totaled approximately $-0-,
$179,000 and $84,000, respectively. The scheduled contribution of
approximately $72,000 for 1997 was made in January 1998.
For the years ended December 31, 1997, 1998 and 1999, compensation from the
ESOP of approximately $140,000, $152,000 and $158,000 was expensed,
respectively. Compensation is recognized at the average fair value of the
ratably released shares during the period as the employees performed
services. At December 31, 1999, the ESOP held approximately 49,200 allocated
shares and 53,900 unallocated shares. The fair value of the unallocated
shares at December 31, 1999, was approximately $903,000.
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. The 1998 debt service payment used approximately $30,000
of dividends on unallocated shares. In 1999, ESOP dividends on unallocated
shares of approximately $29,000 were used for debt service. 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, 1995, and will be fully vested by May 24, 2000. The number of shares
granted to certain employees and officers was 51,207. Compensation expense,
in the amount of the fair value of the common stock at the date plan shares
were purchased, will be recognized during the periods the participants become
vested. The unamortized balance of unearned compensation is reflected as a
reduction of stockholders' equity. For the years ended December 31, 1997,
1998 and 1999, compensation expense of approximately $123,000, $111,000 and
$123,000 was 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 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
F-20
<PAGE>
authorized under the stock option and incentive plan was 134,760 with an
exercise price equal to fair market value on the date of grant. The following
table summarizes stock options that have been granted.
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Shares under options:
Outstanding, January 1 $122,338 $ 9.43 $131,472 $ 9.39
Granted 4,194 14.29 1,200 14.56
Exercised - - (900) 11.46
Forfeited (450) 11.25 (9,434) 9.33
-------- ------ -------- ------
Outstanding, December 31 $126,082 $ 9.58 $122,338 $ 9.43
======== ====== ======== ======
Exercisable, December 31 $103,847 $ 9.64 $ 77,867 $ 9.49
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Options Contractual Exercise Options Exercise
Outstanding Life Price Exercisable Price
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Range of exercise
prices:
9.33 118,588 5.42 years $ 9.33 96,353 $ 9.33
11.25-13.063 4,494 7.95 years 12.38 4,494 12.38
14.00-16.50 3,000 9.40 years 15.48 3,000 15.48
------- ------------- ------ ------- ------
126,082 5.60 years $ 9.58 103,847 $ 9.64
======= ============= ====== ======= ======
</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 not have been
materially reduced and therefore no proforma disclosure was required.
21. Stockholders' Equity
--------------------
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.
F-21
<PAGE>
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, 1998 and
1999.
22. Financial Instruments
---------------------
The approximate stated and estimated fair value of financial instruments are
summarized below (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------------------------ ------------------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents $10,341 $10,341 $ 5,275 $ 5,275
Loans receivable, net 83,215 80,032 87,374 84,206
Investments 13,941 13,941 17,079 17,079
Federal Home Loan Bank
Stock 773 773 829 829
Interest receivable 224 224 244 244
Financial liabilities:
Deposits:
Demand accounts 35,169 35,169 33,814 33,814
Certificate accounts 53,943 54,407 58,351 58,053
Advances from Federal
Home Loan Bank 8,500 8,270 8,850 8,503
Other liabilities 573 573 710 710
</TABLE>
The Company had off-balance sheet financial commitments, which include
approximately $6.4 and $6.9 million at December 31, 1998 and 1999,
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.
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.
F-22
<PAGE>
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, 1998 and 1999. 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.
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 agreement provides for a one-year term.
Commencing on the first anniversary date and continuing each anniversary date
thereafter, the respective boards of directors may extend the agreement 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 agreement
provides for termination by the Bank or the Holding Company for just cause at
any time. The Company has not accrued any benefits under this post-employment
agreement.
24. Related Party Activity
----------------------
The Company paid approximately $344,000 and $114,000 to a company owned by
one of its directors for remodeling, construction, and facility improvements
at its main office and branch locations in 1998 and 1999, respectively.
F-23
<PAGE>
25. Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed balance sheets as of December 31, 1998 and 1999, and
condensed statements of income and cash flows for the years ended December
31, 1997, 1998 and 1999, for Twin City Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
Parent Company Only
Balance Sheets (in thousands) December 31,
- ----------------------------- ----------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 266 $ 187
Loans receivable from ESOP 431 359
Equity in net assets of bank subsidiary 12,926 12,723
Other 543 273
------- -------
Total assets $14,166 $13,542
======= =======
Liabilities $ 14 $ 15
------- -------
Total stockholders' equity 14,152 13,527
------- -------
Total liabilities and stockholders' equity $14,166 $13,542
======= =======
</TABLE>
<TABLE>
<CAPTION>
Parent Company Only Years Ended December 31,
Statements of Income (in thousands) ------------------------------------------------------------
- ------------------------------------ 1997 1998 1999
---------------- -------------------- --------------------
<S> <C> <C> <C>
Interest and dividend income $1,621 $1,017 $1,261
Expenses (55) (49) (57)
Income tax benefit 18 13 18
------ ------ ------
Income before equity earnings
of bank subsidiary 1,584 981 1,222
Dividends in excess of equity earnings (506) - (38)
Undistributed equity earnings of bank
subsidiary - 283 -
------ ------ ------
Net income $1,078 $1,264 $1,184
====== ====== ======
</TABLE>
The bank subsidiary paid cash dividends to the parent company for the years
ended December 31, 1997, 1998 and 1999 of $1,600,000, $1,000,000 and
$1,250,000, respectively.
<TABLE>
<CAPTION>
Parent Company Only Years Ended December 31,
Statements of Income (in thousands) ------------------------------------------------------------
- ------------------------------------ 1997 1998 1999
---------------- -------------------- --------------------
<S> <C> <C> <C>
Operating activities:
Net income $1,078 $1,264 $1,184
Undistributed equity earnings of bank
subsidiary - (283) -
Dividends in excess of equity earnings 506 - 38
Net changes in operating assets
and liabilities (64) 58 269
------ ------ ------
Net cash provided by operating
activities 1,520 1,039 1,491
------ ------ ------
</TABLE>
(continued)
F-24
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- ---------------------
<S> <C> <C> <C>
Investing activities:
Maturities of investment securities $ 525 $ - $ -
Repayments from (advances to)
bank subsidiary (170) (365) -
Repayment of ESOP loan - 144 72
------- ------- -------
Net cash provided (used) by
investing activities 355 (221) 72
------- ------- -------
Financing activities:
Dividends paid (501) (465) (495)
Proceeds from stock option exercises - 10 -
Purchase of treasury stock (158) (924) (1,147)
Net advances from (repayments to)
bank subsidiary (522) - -
------- ------- -------
Net cash used by financing
activities (1,181) (1,379) (1,642)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 694 (561) (79)
Cash and cash equivalents at beginning
of year 133 827 266
------- ------- -------
Cash and cash equivalents at end of year $ 827 $ 266 $ 187
======= ======= =======
</TABLE>
F-25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TWIN CITY BANCORP, INC.
Date: March 27, 2000 By: /s/ Thad R. Bowers
------------------
Thad R. Bowers
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Thad R. Bowers March 27, 2000
--------------------------------------------------------
Thad R. Bowers
President, Chief Executive Officer and Director
(Principal Executive, and Financial and Accounting
Officer)
By: /s/ William C. Burriss, Jr. March 27, 2000
--------------------------------------------------------
William C. Burriss, Jr.
Director
By: /s/ Sid Oakley March 27, 2000
--------------------------------------------------------
Sid Oakley
Director
By: /s/ John M. Vann March 27, 2000
--------------------------------------------------------
John M. Vann
Director
By: /s/ Paul R. Wohlford March 27, 2000
---------------------------------------------------------
Paul R. Wohlford
Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Twin City Bancorp, Inc.
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiary (1) Incorporation Ownership
- -------------- --------------- ----------
<S> <C> <C>
Twin City Federal Savings Bank United States 100%
Subsidiaries of Twin City Federal Savings Bank (1)
- --------------------------------------------------
TCF Investors, Inc. Tennessee 100%
Magnolia Investment, Inc. Tennessee 100%
</TABLE>
- ------------
(1) The assets, liabilities and operations of the subsidiaries are included
in the Consolidated Financial Statements contained in the Annual Report
to Stockholders attached hereto as Exhibit 13.
<PAGE>
Exhibit 23
[LETTERHEAD OF CRISP HUGHES EVANS LLP]
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated February 4, 2000, accompanying the consolidated
financial statements and schedules included in the Annual Report of Twin City
Bancorp, Inc. and Subsidiary on Form 10-KSB for the year ending December 31,
1999. We consent to the incorporation by reference of the aforementioned report
into the Company's Registration Statements on Form S-8 (file nos. 33-92848 and
33-86602).
/s/ Crisp Hughes Evans LLP
---------------------------
CRISP HUGHES EVANS LLP
Asheville, North Carolina
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,998
<INT-BEARING-DEPOSITS> 2,277
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,079
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 87,589
<ALLOWANCE> 215
<TOTAL-ASSETS> 116,011
<DEPOSITS> 92,165
<SHORT-TERM> 8,850
<LIABILITIES-OTHER> 1,469
<LONG-TERM> 0
0
0
<COMMON> 1,220
<OTHER-SE> 12,307
<TOTAL-LIABILITIES-AND-EQUITY> 116,011
<INTEREST-LOAN> 7,260
<INTEREST-INVEST> 1,099
<INTEREST-OTHER> 151
<INTEREST-TOTAL> 8,510
<INTEREST-DEPOSIT> 3,787
<INTEREST-EXPENSE> 4,269
<INTEREST-INCOME-NET> 4,241
<LOAN-LOSSES> 85
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,052
<INCOME-PRETAX> 1,974
<INCOME-PRE-EXTRAORDINARY> 1,974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,184
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.86
<LOANS-NON> 0
<LOANS-PAST> 209
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 194
<CHARGE-OFFS> 103
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 215
<ALLOWANCE-DOMESTIC> 215
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
