<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File No. 1-11819
HAYWOOD BANCSHARES, INC.
-----------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-1918006
----------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
370 NORTH MAIN STREET, WAYNESVILLE, NORTH CAROLINA 28786
-------------------------------------------------- ---------------
(ADDRESS OF PRINCIPAL OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (704) 456-9092
--------------
Securities registered under Section 12(b) of the Act:
Title of Class
--------------
COMMON STOCK, PAR VALUE $1.00 PER SHARE
Name of Exchange on Which Registered
------------------------------------
AMERICAN STOCK EXCHANGE
Securities registered under Section 12(g) of the Act: NONE
----
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sale price of $17.125 on March 20, 1997 on the American
Stock Exchange, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, at March 20, 1997, was $14.1 million (824,149
shares at $17.125 per share). Solely for purposes of this computation, it is
assumed that directors, officers and 5% stockholders are affiliates.
As of March 20, 1997, there were issued and outstanding 1,251,856 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
-----------------
GENERAL
THE COMPANY. Haywood Bancshares, Inc. (the "Company") is a registered
bank holding company incorporated in North Carolina in 1995. The Company was
formed for the purpose of serving as the holding company for Haywood Savings
Bank, Inc., SSB ("Haywood Savings" or the "Bank"), a North Carolina chartered
savings bank. On June 30, 1995, the holding company reorganization was
consummated when the Company acquired all of the outstanding stock of Haywood
Savings and the stockholders of Haywood Savings became stockholders of the
Company. The Company's primary activities consist of holding the stock of
Haywood Savings and operating the business of the Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to Haywood Savings.
The principal executive offices of the Company are located at 370 North
Main Street, Waynesville, North Carolina 28786 and its main telephone number
is (704) 456-9092.
HAYWOOD SAVINGS. The Bank began operations as a North Carolina chartered
savings and loan association in 1919 and converted from mutual to stock form
on December 18, 1987. The Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposits have been federally insured since 1948.
Effective November 30, 1992, Haywood Savings converted from a North
Carolina savings and loan association to a North Carolina savings bank. The
conversion to a savings bank was undertaken primarily to reduce the regulatory
and compliance burden imposed previously on the Bank by the overlapping and
duplicative federal regulatory system governing state-chartered savings
associations. As a result of the conversion, the Bank is now only subject to
examination and supervision by one federal regulator rather than two. As a
savings bank, the Bank's deposit accounts continue to be insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").
Haywood Savings is primarily engaged in the business of accepting deposits
from the general public and investing such funds primarily in loans secured by
residential real estate and, to a lesser extent, in investment securities.
The Bank also makes second mortgage, home improvement and commercial real
estate loans, and home equity lines of credit.
In 1982, the Bank acquired Cherokee Savings and Loan Association in a
transaction accounted for as a purchase. At the time of the acquisition,
Cherokee Savings and Loan Association had approximately $6 million in assets
and one office in Murphy, North Carolina. As a result of the acquisition,
Haywood Savings had $780,000 in goodwill on its balance sheet as of December
31, 1996, which is being amortized over a remaining period of 14 years at a
rate of $53,000 per year. The Bank is also accreting into income the discount
on the loans acquired in the merger. Discount accretion amounted to $48,244
during the year ended December 31, 1996. At December 31, 1996, such discount
had been fully accreted.
Haywood Savings conducts its business through its home office in
Waynesville, North Carolina, and through three branch offices located in
Sylva, Andrews and Murphy, North Carolina. The Bank's principal executive
offices are located at 370 North Main Street, Waynesville, North Carolina
28786; telephone number (704) 456-9092.
RECENT LEGISLATIVE DEVELOPMENTS
During the quarter ended September 30, 1996, the Company incurred an
after-tax charge of approximately $473,000 as the result of the imposition of
a special assessment by the FDIC to recapitalize the SAIF. The FDIC operates
two deposit insurance funds: the Bank Insurance Fund ("BIF") which generally
insures the deposits of commercial banks and the SAIF which generally insures
the deposits of savings associations. Because the reserves of the SAIF have
2
<PAGE>
been below statutorily required minimums, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay substantially higher
deposit insurance premiums than institutions with deposits insured by the BIF
for the past several semi-annual periods. In order to recapitalize the SAIF
and address the premium disparity, the recently-enacted Deposit Insurance
Funds Act of 1996 authorized the FDIC to impose a one-time special assessment
on institutions with SAIF-assessable deposits based on the amount determined
by the FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points based on the amount of their SAIF-
assessable deposits as of March 31, 1995.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for institutions in the lowest risk
assessment classification would be reduced to zero and institutions in the
highest risk assessment classification will be assessed at the rate of 27
basis points. Until December 31, 1999, however, SAIF-member institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis
points 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. During this period, BIF members will
be assessed for FICO obligations 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.
The Deposit Insurance Funds Act of 1996 provides that the BIF and the SAIF
will be merged into a single Deposit Insurance Fund effective December 31,
1999 but only if there are no insured savings associations on that date. The
legislation directs the Department of Treasury to make recommendations to
Congress by March 31, 1997 for the establishment of a single charter for banks
and thrifts. The Bank cannot predict what the effect of this legislation will
be on Haywood Savings.
PRIMARY MARKET AREA
Haywood Savings' primary market area consists of Haywood, Cherokee and
Jackson Counties and adjacent counties in western North Carolina near the
Great Smoky Mountains, where its offices are located. Management estimates
that approximately 80% of the Bank's savings deposits are derived from
residents of Haywood, Cherokee and Jackson Counties and approximately 95% of
its loans are secured by properties in this area.
LENDING ACTIVITIES
GENERAL. Haywood Savings' principal lending activities have historically
consisted of the origination of conventional first mortgage loans (i.e., loans
that have neither been insured nor partially guaranteed by a government
agency) for the construction or purchase of single-family properties. The
Bank has also originated loans secured by commercial real estate. The Bank
also makes mobile home loans if the mobile home meets strict construction
standards and is affixed to real property which can be included in a mortgage
so that the Bank has both a real estate mortgage and a lien on the title to
the mobile home. Although the Bank is authorized to make or purchase loans on
a nationwide basis, the Bank's lending has generally been confined to loans
secured by properties within its primary market areas in western North
Carolina with most loans secured by properties in Haywood, Cherokee and
Jackson Counties.
At December 31, 1996, the Bank's net loan portfolio totaled $109.3
million representing 84% of its total assets. On that date, 85.62% of gross
outstanding loans consisted of loans secured by first mortgages on residential
real estate. The balance of the Bank's loan portfolio consisted of commercial
real estate loans, construction loans, home improvement loans, home equity
lines of credit and loans secured by deposit accounts.
3
<PAGE>
LOAN PORTFOLIO ANALYSIS. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated. Other than as disclosed below, there were no
concentrations of loans which exceeded 10% of total loans at December 31,
1996.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- -------------
$ % $ % $ %
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Conventional real estate loans
Interim construction loans.......... $ 6,729,300 5.92% $ 5,410,011 5.01% $ 5,816,998 5.57%
Loans on existing property(1)....... 103,312,198 90.87 99,243,092 91.96 95,603,568 91.51
Participation loans purchased....... 417,329 0.37 334,323 0.31 221,094 0.21
Loans secured by deposit accounts..... 701,428 0.61 609,025 0.57 768,245 0.74
Home improvement loans................ 145,651 0.13 178,818 0.17 145,801 0.14
Home equity lines of credit........... 2,388,470 2.10 2,141,833 1.98 1,914,047 1.83
------------ ------ ------------ ------ ------------ ------
113,694,376 100.00% 107,917,102 100.00% 104,469,753 100.00%
====== ====== ======
Less:
Loans in process.................... (3,142,363) (2,663,256) (3,351,528)
Allowance for loan losses........... (718,547) (703,547) (683,547)
Allowance for uncollected interest.. (37,375) (88,389) (144,183)
Deferred loan fees.................. (451,685) (394,755) (331,928)
Discounts on loans acquired
through merger..................... -- (48,244) (79,744)
------------ ------------ ------------
Total............................ $109,344,406 $104,018,911 $ 99,878,823
============ ============ ============
TYPE OF SECURITY:
Residential real estate............... $ 97,343,634 85.62% $ 94,485,440 87.55% $ 90,778,541 86.89%
Commercial real estate................ 13,115,193 11.54 10,501,986 9.73 10,863,119 10.40
Deposit accounts...................... 701,428 0.61 609,025 0.57 768,245 0.74
Other................................. 2,534,121 2.23 2,320,651 2.15 2,059,848 1.97
------------ ------ ------------ ------ ------------ ------
Total............................ 113,694,376 100.00% 107,917,102 100.00% 104,469,753 100.00%
====== ====== ======
Less:
Loans in process.................... (3,142,363) (2,663,256) (3,351,528)
Allowance for loan losses........... (718,547) (703,547) (683,547)
Allowance for uncollected interest.. (37,375) (88,389) (144,183)
Deferred loan fees.................. (451,685) (394,755) (331,928)
Discounts on loans acquired
through merger..................... -- (48,244) (79,744)
------------ ------------ ------------
Total............................ $109,344,406 $104,018,911 $ 99,878,823
============ ============ ============
- --------------------
</TABLE>
(1) Includes construction loans converted to permanent loans.
4
<PAGE>
LOAN MATURITY SCHEDULE AND RATE SENSITIVITY. The following table sets
forth certain information at December 31, 1996 regarding the dollar amount of
loans maturing in the Bank's portfolio based on their contractual terms to
maturity. Demand loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE DUE WITHIN DUE
WITHIN ONE TO AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real estate loans and real estate
mortgage-backed securities....... $ 5,144,103 $24,214,744 $63,789,608 $ 93,148,455
Construction loans (1)............. 3,586,937 -- -- 3,586,937
Commercial loans................... 722,128 3,478,513 8,914,552 13,115,193
Loans secured by deposits.......... 701,428 -- -- 701,428
----------- ----------- ----------- ------------
$10,154,596 $27,693,257 $72,704,160 $110,552,013
=========== =========== =========== ============
- --------------------
</TABLE>
(1) Amount shown net of loans in process.
The next table sets forth the dollar amount of all loans due after one
year from December 31, 1996 which have predetermined interest rates and the
amount of such loans which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Predetermined rates................... $ 30,872,205
Adjustable or floating rates.......... 69,525,212
------------
Total............................... $100,397,417
============
</TABLE>
RESIDENTIAL LENDING. The Bank offers adjustable-rate mortgage loans
("ARMs") on residential properties which generally provide for interest rate
adjustments on an annual basis. The interest rates on these loans are
generally tied to the National Average Contract Interest Rate for Major
Lenders on Previously Occupied Homes ("National Average Index"), an index
prepared by the Federal Housing Finance Board ("FHFB") with specified minimum
and maximum interest rate adjustments. The Bank has not used discounted
introductory rates on its ARMs and the Bank's ARMs do not provide for negative
amortization. At December 31, 1996, approximately $76 million, or 69%, of
Haywood Savings' mortgage loans consisted of ARMs. Most ARMs are subject to a
maximum annual change in rates of two percentage points each year and a
maximum interest rate from 12-15%. Fixed-rate loans are offered for a maximum
term of 20 years. These loans are originated on Federal National Mortgage
Association ("FNMA")/Federal Home Loan Mortgage Corporation ("FHLMC")
documentation in order to facilitate their resale in the secondary market.
The Bank has also participated in loan swaps with FHLMC, swapping fixed-rate
loans for FHLMC Participation Certificates which are marketable and have a
lower risk-weight under the FDIC's risk-based capital regulations. See
"Regulation -- Capital Requirements."
Haywood Savings' conventional first mortgage loans customarily include
due-on-sale clauses giving Haywood Savings the right to declare a loan
immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the property subject to the mortgage
and the loan is not repaid. Haywood Savings has actively enforced due-on-sale
clauses in its mortgage contracts for the purpose of increasing its loan
portfolio yield, often through the authorization of assumptions of existing
loans at market rates of interest.
5
<PAGE>
Residential loans made by the Bank on single-family properties have been
predominantly originated in amounts up to 80% of appraised value, although
loans may be made up to 95% of appraised value for owner-occupied residences.
The Bank requires private mortgage insurance on all conventional loans with
loan-to-value ratios in excess of 80%. The initial contractual loan payment
period for residential mortgage loans does not exceed 20 years. Borrowers may
refinance or prepay loans at their option without penalty. The federal banking
agencies, including the FDIC, have adopted regulations that establish loan-to-
value ratio requirements for specific categories of real estate loans.
CONSTRUCTION LENDING. The Bank also originates loans for the
construction of single-family homes and commercial properties. These loans
are originated as construction loans with a term of six months with provision
for conversion of the construction loan into a permanent loan upon completion
of construction. Essentially all of the Bank's construction loans convert
into permanent loans. Permanent loans are made at fixed or adjustable rates,
which adjust annually, and have terms not to exceed twenty years. At December
31, 1996, the Bank had $3.6 million of construction loans outstanding (net of
loans in process balances).
Construction loans are generally at a rate adjusting annually. These
loans, which are made to qualified builders, are generally limited to 80% of
the appraised value of the property upon completion. Construction loan funds
are periodically disbursed but only for phases of construction completed. The
Bank does not require construction borrowers to obtain takeout commitments for
permanent financing. As a general matter, the Bank will not make a
residential construction loan with a principal amount in excess of $250,000.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved occupied real estate.
The Bank's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of construction cost proves to be inaccurate,
the Bank may be required to advance funds beyond the amount originally
committed to permit completion of the development. 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 project with a value which is insufficient to
assure full repayment.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
the reputation of the borrower and the contractor, the amount of the
borrower's equity in the project, independent valuations and reviews of cost
estimates, pre-construction sale and leasing information, and cash flow
projections of the borrower. To reduce the risks inherent in construction
lending, the Bank also requires, where appropriate, personal guarantees of the
principals of the borrower.
COMMERCIAL REAL ESTATE LENDING. At December 31, 1996, the Bank's
commercial real estate portfolio totaled $13.1 million, or 11.54%, of the
Bank's gross loan portfolio. At December 31, 1996, the Bank's largest
commercial real estate loan consisted of a $1.1 million loan secured by an
apartment complex in Clyde, North Carolina. The Bank does not anticipate a
significant increase in commercial real estate loan originations in the near
future. The Bank generally requires all commercial real estate loans to have
a loan-to-value ratio no greater than 80%. Commercial real estate loans are
generally made with provision for annual rate adjustments and for terms not to
exceed 20 years.
Commercial real estate lending entails significant additional risks,
compared to residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience of such loans is typically dependent upon
the successful operation of the real estate project. These risks can be
significantly affected by supply and demand conditions in the market for
office, retail or industrial space and as such may be subject, to a greater
extent, to adverse conditions in the economy. In dealing with these risks,
the Bank reviews the financial condition of the borrower, limits the size of
such loans and generally lends on the security of property located within its
primary market area.
6
<PAGE>
Under North Carolina law, with certain limited exceptions, loans and
extensions of credit by a savings bank to a person outstanding at one time
generally shall not exceed the greater of (i) 15% of net worth and (ii)
$500,000. At December 31, 1996, the largest amount lent by the Bank to one
borrower was $1.8 million, which was approximately 8.8% of the Bank's
stockholders' equity at that date.
CONSUMER LENDING. The Bank's consumer loan portfolio consists of home
equity lines of credit which the Bank began making in 1991, home improvement
loans and loans secured by deposit accounts. The Bank does not make consumer
installment loans. At December 31, 1996, consumer loans totaled $3.2 million
or approximately 2.84% of the gross loan portfolio and included $701,428 in
loans secured by deposit accounts in the Bank.
Home equity loans are extended in the form of lines of credit with
interest on outstanding balances indexed to the prime rate. The maximum loan
term is 15 years and all outstanding indebtedness against the security
property may not exceed 80% of appraised value. Home equity loans are
initially being marketed to existing mortgage customers. As of December 31,
1996, $2.4 million in home equity loans were outstanding, which was
approximately 2.10% of the loan portfolio.
LOAN SOLICITATION AND PROCESSING. The Bank actively solicits mortgage
loan applications from existing customers, local real estate agents, builders,
real estate developers, and various other persons. Upon receipt of a loan
application from a prospective borrower, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. This information may be further verified by personal
contacts with other reference sources. An appraisal of the real estate
intended to secure the proposed loan is undertaken by a staff appraiser who is
accompanied by a member of the Board of Directors. As soon as the required
information has been obtained and the appraisal completed, the loan is
submitted to a loan committee, composed of Directors Ammons, Burgin and
Stovall and seven alternates, which has the authority to approve loans up to
$100,000, with all loans in excess of that amount being subject to approval by
the full Board of Directors. All borrowers are required to obtain fire and
casualty insurance in an amount equal to the value of the structures located
on the property.
Loan commitments are typically made for periods of up to 60 days from the
date of approval of the application and a fee equal to 1% of loan principal is
charged if a letter of commitment is issued to be used to obtain funds for
construction from a source other than the Bank.
LOAN ORIGINATIONS, PURCHASES AND SALES. In general, Haywood Savings
originates residential loans solely for retention in its own loan portfolio.
However, occasionally the Bank originates loans on terms and conditions which
make them eligible for sale in the secondary market. The Bank generally
continues to collect payments on and otherwise service any loans sold for
which it is allowed by the loan purchaser to retain a portion of the loan
payment.
The Bank may in the future become more active in the secondary mortgage
market through the sale of loans. At December 31, 1996, the Bank was
servicing loans for others aggregating $401,000.
A portion of the Bank's loan originations consists of construction loans.
For the years ended December 31, 1994, 1995 and 1996, the Bank originated
construction loans in the amount of $7.9 million, $6.0 million and $6.0
million, respectively. The majority of the construction loans are for the
construction of residential real estate and are made on an adjustable-rate
basis.
7
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction loans.................. $ 5,986,844 $ 6,004,522 $ 7,905,800
(Increase) decrease in undisbursed
loans in process.................. (479,106) 688,272 (2,143,599)
Loans on existing property.......... 9,946,660 6,631,240 8,195,730
Loans refinanced.................... 5,668,300 4,384,400 5,463,100
Other loans........................... 4,466,200 5,051,400 2,915,525
----------- ----------- -----------
Total loans originated (net)...... $25,588,898 $22,759,834 $22,336,556
=========== =========== ===========
</TABLE>
Loan originations increased by $2.8 million, or 12.4%, during 1996 as a
result of increased originations of loans on existing properties and
refinancings. These increases offset declines in construction lending and
other loans. Overall, the loan portfolio increased by approximately $5.3
million, or 5.12%.
LOAN ORIGINATION FEES AND OTHER FEES. In addition to interest earned on
loans and fees for making loan commitments, the Bank receives loan origination
fees for originating loans. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for creation of
the loan. In accordance with generally accepted accounting principles, loan
origination fees and certain origination expenses are deferred and amortized
over the life of the loan.
The Bank also receives other fees and charges relating to existing loans,
which include late charges and fees collected in connection with a change in
borrower or other loan modifications. These fees and charges, however, have
not constituted a material source of income to the Bank.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES. The Bank provides
for loan losses on the allowance method. Additions to the allowance for loan
losses are provided by charges to operations based on inherent loss
considerations within the loan portfolio and various other factors which, in
management's judgment, warrant current recognition in estimating possible
losses. Such factors considered include collateral values, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates available information periodically and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ from the assumptions used in making the evaluations. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examination.
Loans are reviewed on a regular basis and an allowance for uncollected
interest is established when, in the opinion of management, the collection of
additional interest is doubtful. An allowance for uncollected interest is
established for residential mortgage loans when either principal or interest
is 90 days or more past due. Consumer loans generally are charged off when
the loan becomes over 120 days delinquent. An allowance for uncollected
interest is established with respect to commercial business and real estate
loans when the loan is 90 days or more past due. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
8
<PAGE>
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired, it is recorded at the lower of the
unpaid principal balance of the related loan or its fair market value (net of
estimated selling costs). Any write-down of the property reduces the amount
recorded as real estate acquired.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods
presented, the Bank had no loans accounted for as troubled debt
restructurings.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans....................... $ 814 $1,285 $1,622
Accruing loans which are contractually
past due 90 days or more.............. -- -- --
------ ------ ------
Total non-accruing loans and accruing
loans past due 90 days or more........ $ 814 $1,285 $1,622
====== ====== ======
Percentage of total loans............... 0.74% 1.24% 1.63%
====== ====== ======
Other non-performing assets (1)......... $1,790 $1,835 $1,741
====== ====== ======
- --------------------
</TABLE>
(1) Other non-performing assets represent property acquired through
foreclosure or repossession. See Note 5 of Notes to Consolidated
Financial Statements for a description of the Company's accounting
policies related to acquisition of such property.
Non-accrual loans decreased $471,000, or 37%, in 1996. Management
attributes this decrease to the improving economy. Other non-performing
assets at December 31, 1996 included a shopping center that the Bank acquired
through in-substance foreclosure in 1992 and classified as real estate owned.
The Bank acquired legal title to the shopping center during fiscal year 1993.
The shopping center is currently 95% leased and generated net rental income of
$348,000 during 1996. Substantially all of the Bank's remaining other non-
performing assets at December 31, 1996 consisted of single-family properties.
The Bank had non-accrual loans of approximately $814,000 at December 31,
1996. Had these loans performed in accordance with their contractual terms,
approximately $57,000 in additional interest income would been recorded during
1996. Interest income of $30,000 was recognized in connection with nonaccrual
loans during 1996.
At December 31, 1996, there were no loans which were not classified as
nonaccrual, past due 90 days or more or restructured, but where known
information about possible credit problems of borrowers caused management to
have serious doubts as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as non-accrual, 90 days past
due or restructured.
9
<PAGE>
The following table sets forth an analysis of the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............... $703,547 $683,547 $623,547
Loans charged-off:
Real estate:
Residential.............................. -- -- --
Non-residential.......................... -- -- --
Construction............................. -- -- --
Consumer and other........................ -- -- --
-------- -------- --------
Total charge-offs.......................... -- -- --
-------- -------- --------
Recoveries:
Real estate:
Residential.............................. -- -- --
Non-residential.......................... -- -- --
Construction............................. -- -- --
Consumer and other........................ -- -- --
-------- -------- --------
Total recoveries........................... -- -- --
-------- -------- --------
Net loans charged-off...................... -- -- --
-------- -------- --------
Provision for possible loan losses......... 15,000 20,000 60,000
-------- -------- --------
Balance at end of year..................... $718,547 $703,547 $683,547
======== ======== ========
Ratio of net charge-offs to average loans
outstanding during the fiscal year........ --% --% --%
======== ======== =========
</TABLE>
The following table breaks down the allowance for loan losses by loan
category for the periods indicated. Management believes that the allowance
can be allocated by category only on an approximate basis. 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,
-------------------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------------- --------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential....................... $375,082 79.70% $367,252 82.54% $356,812 81.33%
Non-residential................... 179,637 11.54 175,887 9.73 170,887 10.40
Construction...................... 127,901 5.92 125,231 5.01 121,671 5.57
Equity lines of credit............ 35,927 2.10 35,177 1.98 34,177 1.83
Consumer installment and other...... -- 0.74 -- 0.74 -- 0.87
-------- ------ -------- ------ -------- ------
Total allowance for loan losses $718,547 100.00% $703,547 100.00% $683,547 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
10
<PAGE>
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 114 prescribes the recognition criterion for loan impairment and the
measurement methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings. When a loan is impaired a creditor
must measure impairment based on (1) the present value of the impaired loan's
expected future cash flows discounted at the loan's original effective
interest rate, (2) the observable market price of the impaired loan, or (3)
the fair value of the collateral for a collateral-dependent loan. Any
measurement losses are to be recognized through additions to the allowance for
loan losses. SFAS No. 118 amended SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan and by
requiring additional disclosure about how a creditor recognizes interest
income related to impaired loans.
Management considers loans to be impaired when based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to contractual terms of the loan agreement.
Factors that influence management's judgments include, but are not limited to,
loan payment pattern, source of repayment, and value of collateral. A loan
would not be considered impaired if an insignificant delay in loan payment
occurs and management expects to collect all amounts due. The major sources
for identification of loans to be evaluated for impairment include past due
and nonaccrual reports, internally generated lists of loans of certain risk
grades, and regulatory reports of examination. Impaired loans are measured
using either the discounted expected cash flow method or the value of
collateral method. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal.
At December 31, 1996, the recorded investments in loans that were
considered to be impaired under Statement 114 was approximately $741,000 of
which all were on nonaccrual. The related allowance for loan losses on these
loans was approximately $98,500. The average recorded investment in impaired
loans for the twelve months ended was approximately $780,000. For the twelve
months ended December 31, 1996, the Bank recognized interest income on
impaired loans of $31,000.
INVESTMENT ACTIVITIES
Haywood Savings is permitted to invest in certain securities. Investment
decisions are made by authorized officers of the Bank within policies
established by the Bank's Board of Directors. At December 31, 1996, the
Bank's investment securities portfolio had a net book value of $10.9 million
and a quoted market value of $10.7 million and consisted of United States
Government agency obligations. Purchases of securities are funded either
through the sale or maturity of other securities or from cash flow arising in
the ordinary course of business. Under North Carolina law, savings banks are
required to maintain cash and readily marketable investments in an amount that
may be established by the Administrator of the North Carolina Savings
Institution Division (the "Administrator") but which may not be less than 10%
of the Bank's assets. The Bank was in compliance with the current 10%
liquidity requirement at December 31, 1996.
The following table sets forth the carrying value of the Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. government and
federal agency
obligations........... $10,894 $17,100 $22,300
------- ------- -------
Total.............. $10,894 $17,100 $22,300
======= ======= =======
</TABLE>
11
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio of debt
securities at December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL INVESTMENTS
------------------ ------------------ ----------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government and federal
agency obligations............ $2,757 6.47% $8,137 6.30% $10,894 $10,745 6.34%
-------- ------- -------- ------- -------- -------- -------
Total investment securities.. $2,757 6.47% $8,137 6.30% $10,894 $10,745 6.34%
======== ======= ======== ======= ======== ======== =======
</TABLE>
Effective January 1, 1994, the Bank adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Investments
in Certain Debt and Equity Securities" which requires the Bank to classify
investment securities into one of three categories:
Held-to-maturity - includes investment securities which the Bank has the
positive intent and ability to hold to maturity.
Trading securities - includes investment securities purchased and held
principally for the purpose of selling in the near future.
Available-for-sale - includes investment securities not classified as
held-to-maturity or trading.
Upon adoption of SFAS No. 115, the Bank classified all securities as
held-to-maturity securities.
Accounting for investment securities which shall be categorized upon
their acquisition under SFAS No. 115 is summarized as follows:
Held-to-maturity securities are carried at amortized cost, adjusted for
amortization of premiums and accretion of discounts using the interest method.
Available-for-sale securities, if acquired, will be carried at fair
value. Realized gains and losses, based on the amortized cost of the
specific security, will be included in income. Unrealized gains and losses
will be recorded, net of related income tax effects, in a separate component
of stockholders' equity until realized.
Prior to January 1, 1994, investment securities were considered held for
investment and were carried at cost, adjusted for amortization of premiums and
accretion of discounts using methods which approximate the interest method.
The cost of securities sold was determined by specific identification.
The Company has made a $3.0 million commitment to be a limited partner in
Dovenmuehle Mortgage Company L.P. ("DMCLP") Tranche VIII Servicing Division of
Dovenmuehle Mortgage Inc. ("DMI"). DMI provides mortgage servicing for a
national portfolio of residential, multi-family and commercial mortgage loans.
These loans are owned or securitized by national mortgage agencies, and by a
variety of private banks, thrifts, insurance companies and other loan
investors. DMI formed DMCLP as a funding vehicle to purchase portfolios of
the Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation nonrecourse residential servicing. DMI provides the mortgage
servicing for these portfolios for a fixed fee. Under this structure,
investors in DMCLP invest in separate tranches, each of which has its own
12
<PAGE>
identified servicing rights and each of which may be owned by one or a group
of investors. The equity investors in each tranche benefit from a financial
return based solely on the performance of the mortgage servicing rights
purchased for the tranche. The tranche will be liquidated no later than the
seventh anniversary of the closing of the Offering.
Servicing rights represent the right to service loans for which the
servicer generally receives a fee based on the outstanding principal of the
loan being serviced. The costs of acquiring servicing rights are capitalized
and amortized over the estimated life of the servicing right. Investments in
mortgage servicing rights may be subject to certain volatility because the
carrying values of such assets must be periodically evaluated in relation to
future estimated servicing revenues. As interest rates decline, prepayment
rates tend to accelerate, thereby decreasing the average life of the servicing
portfolio and adversely impacting its servicing-related earnings primarily due
to increased amortization of the servicing assets, a decreased rate of
interest earned on custodial balances, and increased interest costs incurred
on payoffs.
At December 31, 1996, the Company had funded $1.7 million of its $3.0
million commitment. The investment is accounted for under the equity method
and no equity earnings (losses) have been recorded in 1996.
MORTGAGE-BACKED SECURITIES
The Bank maintains a significant portfolio of mortgage-backed securities
in the form of Government National Mortgage Association ("GNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC") participation or pass-through
certificates. GNMA certificates are guaranteed as to principal and interest
by the full faith and credit of the United States, while FHLMC certificates
are guaranteed by that agency only. 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 for which they are exchanged, they present
substantially lower credit risk and are more liquid than the individual
mortgage loans and may be used to collateralize obligations of the Bank.
Because the Bank receives regular payments of principal and interest from its
mortgage-backed securities, these investments provide more consistent cash
flows than investments in other debt securities which generally only pay
principal at maturity.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans
with interest rates within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or ARM
loans. As a result, the interest rate risk characteristics of the underlying
pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security is equal to the life of the underlying mortgages.
Mortgage-backed securities, however, expose the Bank to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Bank to the risk that it will be unable
to obtain comparable yields upon reinvestment of the proceeds. In the event
the mortgage-backed security has been funded with an interest-bearing
liability with a maturity comparable to the original estimated life of the
mortgage-backed security, the Bank's interest rate spread could be adversely
affected. Conversely, in a rising interest rate environment, the Bank may
experience a lower than estimated rate of repayment on the underlying
mortgages, effectively extending the estimated life of the mortgage-backed
security and exposing the Bank to the risk that it may be required to fund the
asset with a liability bearing a higher rate of interest.
Investments in GNMA mortgage-backed securities and FHLMC participation
certificates totaled $1.1 million at December 31, 1996, representing 0.82% of
the Bank's total assets. All such securities are classified as held-to-
maturity for accounting purposes.
13
<PAGE>
The following table sets forth the composition of the Bank's mortgage-
backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GNMA... $ 395 36.95% $ 619 43.59% $ 717 42.23%
FHLMC.. 674 63.05 801 56.41 981 57.77
------ ------ ------ ------ ------ -------
$1,069 100.00% $1,420 100.00% $1,698 100.00%
====== ====== ====== ====== ====== =======
</TABLE>
The following table sets forth the scheduled maturities, amortized cost,
market values and weighted average yields for the Bank's mortgage-backed
securities at December 31, 1996. 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>
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------------
ONE TO FIVE YEARS GREATER THAN FIVE YEARS TOTAL
------------------------ ------------------------ -----------------------------------
WEIGHTED WEIGHTED APPROXIMATE WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST YIELD COST VALUE YIELD
------------ --------- ---------- ------ --------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
GNMA........................ $ 51 8.74% $344 8.72% $ 395 $ 412 8.72%
FHLMC....................... 210 8.50 464 8.50 674 706 8.50
---- ---- ------ ------
$261 8.55 $808 8.59 $1,069 $1,118 8.58
==== ==== ====== ======
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, Haywood Savings
derives funds from loan principal repayments, interest payments and periodic
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, money market
accounts, regular savings accounts, term certificate accounts (including "Mini
Jumbo" and "Jumbo" certificates in denominations of $50,000 and $100,000 or
more, respectively) and retirement savings plans. The Bank solicits jumbo
certificates from individuals and corporations located in its market area.
The Bank does not obtain funds through brokers, nor does it solicit funds
outside the State of North Carolina.
14
<PAGE>
The Bank has emphasized the attraction of one-year certificate of
deposits through competitive pricing of these types of accounts. In addition,
the Bank has attempted to develop and price deposit accounts in order to
appeal to retirees in the Bank's market area. During fiscal year 1996, the
Bank experienced a decrease in certificate accounts (other than jumbo
certificates) and money market deposit accounts. Management attributes the
outflow in the accounts to the competition from mutual funds.
Deposits in the Bank at December 31, 1996 were represented by the various
types of deposits described below.
<TABLE>
<CAPTION>
AVERAGE
INTEREST MINIMUM MINIMUM PERCENTAGE OF
RATE TERM CATEGORY AMOUNT BALANCES TOTAL DEPOSITS
- -------- ----------- ------------------------------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
0.00% none Commercial checking none $ 196,526 0.18%
2.25 none NOW accounts none 9,215,138 8.58
2.50 none Super NOW accounts none 924,127 0.86
3.00 none Optional savings accounts none 12,303,154 11.46
5.25 none Full-paid savings accounts none 7,000 0.01
3.25 none 90-day savings accounts none 1,198,164 1.12
3.00 none Money market deposit accounts $ 2,500 6,479,892 6.04
3.50 none Optional public funds none 36,824 0.03
CERTIFICATES OF DEPOSIT
-------------------------------
4.64 91 day 91-day certificate 500 3,451,229 3.22
5.09 6 months 6-month money market
certificate 500 24,374,281 22.71
5.48 1 year 1-year certificate 500 20,415,462 19.02
5.78 18 months 18-month certificate 500 1,815,960 1.69
5.83 30 months 30-month certificate 500 8,439,452 7.86
5.64 18 months IRA certificates 500 4,292,849 4.00
6.50 2 years 6-1/2% certificates 500 473 0.00
6.75 30 months 6-3/4% certificates 500 14,534 0.01
7.50 4 years 7-1/2% certificates 500 226,386 0.21
7.75 6 years 7-3/4% certificates 500 23,425 0.02
8.00 8 years 8% certificates 500 185,831 0.17
5.14 6 months 6-month Mini-Jumbo certificates 50,000 148,869 0.14
5.28 12 months 12-month Mini-Jumbo
certificates 50,000 22,275 0.02
5.30 90 days Jumbo certificates 100,000 11,129,365 10.37
5.59 various Public Funds various 155,147 0.14
5.41 various Negotiated CDs various 604,479 0.56
6.30 24 months Negotiated CDs various 1,682,537 1.58
------------ ------
$107,343,379 100.00%
============ ======
</TABLE>
15
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
BALANCE AT FROM BALANCE AT FROM BALANCE AT
DECEMBER 31, % DECEMBER 31, DECEMBER 31, % DECEMBER 31, DECEMBER 31, %
1996 DEPOSITS 1995 1994 DEPOSITS 1994 1993 DEPOSITS
------------ --------- ------------- ------------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial checking........ $ 196,526 0.18% $ 74,099 $ 122,427 0.11% $ 22,218 $ 100,209 0.09%
NOW checking accounts...... 9,215,138 8.58 165,520 9,049,618 8.32 268,762 8,780,856 7.97
Super NOW checking accounts 924,127 0.86 (32,010) 956,137 0.88 192,498 763,639 0.69
Passbook and regular
savings................... 13,545,142 12.62 158,685 13,386,457 12.31 (2,853,907) 16,240,364 14.73
Money market deposit
accounts.................. 6,479,892 6.04 (1,392,240) 7,872,132 7.24 (1,348,778) 9,220,910 8.37
Fixed-rate certificate
accounts.................. 450,649 0.41 (28,590) 479,239 0.44 (155,871) 635,110 0.58
Money market certificates.. 24,374,281 22.71 (75,417) 24,449,698 22.48 (3,399,775) 27,849,473 25.27
Jumbo certificates......... 11,129,365 10.37 374,436 10,754,929 9.89 596,398 10,158,531 9.22
Other certificates......... 41,028,259 38.23 (664,359) 41,692,618 38.33% 5,237,108 36,455,510 33.08
------------ ------ ----------- ------------ ------ ----------- ------------ ------
$107,343,379 100.00% $(1,419,876) $108,763,255 100.00% $(1,441,347) $110,204,602 100.00%
============ ====== =========== ============ ====== =========== ============ ======
</TABLE>
16
<PAGE>
The following table sets forth the time deposits in the Bank classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
4.01 - 6.00%.. $74,849,368 $76,897,245 $74,463,514
6.01 - 8.00%.. 2,133,186 479,239 635,110
----------- ----------- -----------
Total...... $76,982,554 $77,376,484 $75,098,624
=========== =========== ===========
</TABLE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ---- ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
4.01-6.00%...... $58,914,000 $10,723,000 $5,213,000 $ -- $74,850,000
6.01-8.00%...... -- 1,682,000 -- 451,000 2,133,000
----------- ----------- ---------- -------- -----------
$58,914,000 $12,405,000 $5,213,000 $451,000 $76,983,000
=========== =========== ========== ======== ===========
</TABLE>
The following table sets forth the deposit account activities of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Deposits................................. $ 120,887,730 $ 125,409,908 $ 108,883,733
Withdrawals.............................. (125,756,781) (130,871,005) (121,346,540)
------------- ------------- -------------
Net decrease before interest credited.. (4,869,051) (5,461,097) (12,462,807)
Interest credited........................ 3,449,175 4,019,750 3,354,730
------------- ------------- -------------
Net decrease in deposits............... $ (1,419,876) $ (1,441,347) $ (9,108,077)
============= ============= =============
</TABLE>
The decrease in the Bank's deposits during fiscal year 1996 occurred
primarily in shorter term accounts such as money market deposit accounts,
savings accounts, and six-month, twelve-month, and 18-month certificates.
Management attributes the decrease to the high stock market enticing new
investors into mutual funds.
BORROWINGS. Savings deposits are the primary source of funds for the
Bank's lending activities and other general business activities. Haywood
Savings does, however, periodically use borrowed money to supplement its
supply of lendable funds and for other operational purposes.
The Bank has established a $3.0 million line of credit with First Union
National Bank with an interest rate equal to First Union National Bank's prime
rate. The Bank is required to pay off this line of credit at some point
during each year and to leave it unused for a period of 60 days. At December
31, 1996, the Bank had borrowed $1.2 million under this line of credit.
17
<PAGE>
COMPETITION
Haywood Savings faces strong competition both in attracting and making
real estate and other loans. Its most direct competition for deposits has
historically come from other savings and loan associations, commercial banks
and credit unions, many of which have substantially greater resources than the
Bank. Particularly in times of high interest rates, the Bank faces additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities.
Haywood Savings' competition for real estate loans comes principally from
other savings and loan associations, commercial banks, mortgage banking
companies, insurance companies and other institutional lenders. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers and
their real estate brokers. It competes for savings by offering a variety of
savings accounts at competitive rates and convenient branch locations.
SUBSIDIARIES
In 1984, the Bank formed Great Smokies Financial Corporation ("Great
Smokies"), a wholly-owned subsidiary service corporation organized under North
Carolina law. Great Smokies' primary activity had been to build houses on
properties which the Bank had acquired through foreclosure. In addition,
Great Smokies holds second mortgage loans on properties on which the Bank has
foreclosed in order to facilitate the sale of the property by the Bank.
In 1988, Haywood Savings purchased a small insurance agency for $36,000,
now named Great Smokies Insurance Agency, Inc. The agency acts as an
insurance broker for property and casualty insurance. During 1996, Great
Smokies Insurance Agency earned approximately $168,000 in commissions on
policies sold.
As a North Carolina-chartered savings bank, the Bank is authorized to
invest up to 10% of its assets in subsidiary or service corporations engaged
in activities that are permissible to subsidiaries of federal savings
associations. After December 19, 1992, subsidiaries of state-chartered
savings banks generally, however, may not engage as principal in any activity
that is not permissible for a subsidiary of a national banks unless the FDIC
determines that the activities do not pose a significant risk to the
appropriate insurance fund and the bank complies with all applicable capital
requirements. Under regulations adopted by the FDIC to clarify the foregoing
restriction, a subsidiary acting as agent for the sale of insurance would not
be considered engaged as principal in an activity that is not permissible for
a subsidiary of a national bank. Accordingly, neither of the Bank's
subsidiaries would be considered engaged as principal in an activity that is
not permissible for a subsidiary of a national bank.
REGULATION
GENERAL. As a North Carolina chartered savings bank with deposits
insured by the SAIF, the Bank is extensively regulated by the Administrator of
the Savings Institutions Division of the State of North Carolina (the
"Administrator") and the FDIC. As a bank holding company, the Company is also
subject to extensive regulation under federal and state law. These laws and
regulations are intended primarily for the protection of depositors and of the
FDIC.
The following discussion of statutes and regulations affecting North
Carolina-chartered savings banks and bank holding companies does not purport
to be complete. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. The
operations of the Company and the Bank may be affected by legislative changes
and by the policies of various regulatory authorities. The Company and the
Bank are unable to predict the nature or the extent of the effects on their
business and earnings that fiscal or monetary policies or new federal or state
legislation or regulation may have in the future.
18
<PAGE>
REGULATION OF THE COMPANY. The Company is a bank holding company subject
to regulation by the Federal Reserve Board under the BHCA. The Company is
also a savings institution holding company subject to supervision by the
Administrator under North Carolina law. As a result, the activities of the
Company are subject to certain limitations, which are described below. In
addition, as a bank holding company, the Company is required to file annual
and quarterly reports with the Federal Reserve Board and to furnish such
additional information as the Federal Reserve Board may require pursuant to
the BHCA. The Company is also subject to regular examination by the Federal
Reserve Board.
With certain exceptions, the BHCA prohibits a bank holding company from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of a company that is not a bank or a bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation
or order, have been identified as activities closely related to the business
of banking. The activities of the Company are subject to these legal and
regulatory limitations under the BHCA and the related Federal Reserve Board
regulations. Notwithstanding the Federal Reserve Board's prior approval of
specific nonbanking activities, the Federal Reserve Board has the power to
order a holding company or its subsidiaries to terminate any activity, or to
terminate its ownership or control of any subsidiary, when it has reasonable
cause to believe that the continuation of such activity or such ownership or
control constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company. In addition to the
above restrictions under the BHCA, the Company's investments are limited under
North Carolina law to those investments permitted for North Carolina savings
banks.
Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after
such acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial
condition, particularly with regard to capital adequacy, and satisfactory
Community Reinvestment Act ("CRA") ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle Neal Act") allows the Federal
Reserve Board to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all
or substantially all of the assets of, a bank located in a state other than
such holding company's home state, without regard to whether the transaction
is prohibited by the laws of any state. The Federal Reserve Board may not
approve the acquisition of bank that has not been in existence for the minimum
time period (not exceeding five years) specified by the statutory law of the
host state. The Riegle-Neal Act also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home
state or in any state in which the target bank maintains a branch. The
Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation
does not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit
contained in the Riegle-Neal Act.
Additionally, beginning on June 1, 1997, the federal banking agencies
will be authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the
home state of one of the banks opts out of the Riegle-Neal Act by adopting a
law after the date of enactment of the Riegle-Neal Act and prior to June 1,
1997 which applies equally to all out-of-state banks and expressly prohibits
merger transactions involving out-of-state banks. Interstate acquisitions of
branches will be permitted only if the law of the state in which the branch is
located permits such acquisitions. Interstate mergers and branch acquisitions
will also be subject to the nationwide and statewide insured deposit
concentration amounts described above.
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The Riegle-Neal Act authorizes the OCC and FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching. The Riegle-Neal Act also
requires the appropriate federal banking agencies to prescribe regulations by
June 1, 1997 which prohibit any out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit production. These
regulations must include guidelines to ensure that interstate branches
operated by an out-of-state bank in a host state are reasonably helping to
meet the credit needs of the communities which they serve.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of
the BHCA, "control" is defined as ownership of more than 25% of any class of
voting securities of the Company or the Bank, the ability to control the
election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank. In
addition, the Change in Bank Control Act and the related regulations of the
Federal Reserve Board require any person or persons acting in concert (except
for companies required to make application under the BHCA), to file a written
notice with the Federal Reserve Board before such person or persons may
acquire control of the Company or the Bank. The Change in Bank Control Act
defines "control" as the power, directly or indirectly, to vote 25% or more of
any voting securities or to direct the management or policies of a bank
holding company or an insured bank. Furthermore, no person or company may
acquire control of the Company or the Bank without the prior written approval
of the Administrator. The definition of "control" for this purpose is the
same as the definition under the Change in Bank Control Act.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "-- Capital Requirements."
HOLDING COMPANY DIVIDENDS AND STOCK REPURCHASES. The Federal Reserve
Board has the power to prohibit dividends by bank holding companies if their
actions constitute unsafe or unsound practices. The Federal Reserve Board has
issued a policy statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserve Board's view that a bank
holding company should pay cash dividends only to the extent that the
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the
company's capital needs, asset quality, and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a bank
holding company experiencing serious financial problems to borrow funds to pay
dividends. Under the prompt corrective action regulations adopted by the
Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized." See "--
Prompt Corrective Regulatory Action."
As a bank holding company, the Company is required to give the Federal
Reserve Board prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding 12 months, is equal to 10% or
more of the Company's consolidated net worth. The Federal Reserve Board may
disapprove such a purchase or redemption if it determines that the proposal
would violate any law, regulation, Federal Reserve Board order, directive, or
any condition imposed by, or written agreement with, the Federal Reserve
Board. This requirement does not apply to bank holding companies that are
"well-capitalized," received one of the two highest examination ratings at
their last examination and are not the subject of any unresolved supervisory
issues.
BANK REGULATION. As a state-chartered savings bank which is not a member
of the Federal Reserve System (a "state non-member bank"), the Bank is subject
to the primary federal supervision of the FDIC under the Federal Deposit
Insurance Act (the "FDIA"). The Bank also is subject to comprehensive
regulation and supervision by the Administrator. The prior approval of the
FDIC and of the Administrator is required for the Bank to establish or
relocate a branch office or to engage in any merger, consolidation or
significant purchase of assets. In addition, the Bank is subject to numerous
federal and state laws and regulations that set forth specific restrictions
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and procedural requirements with respect to the establishment of branches,
investments, interest rates on loans, credit practices, the disclosure of
credit terms and discrimination in credit transactions.
The FDIC and the Administrator regularly examine the operations and
condition of the Bank, including but not limited to capital adequacy,
reserves, loans, investments and management practices. These examinations are
for the protection of the Bank's depositors and the SAIF and not its
stockholders. In addition, the Bank is required to furnish quarterly and
annual reports to the FDIC as well as annual reports to the Administrator.
The FDIC's enforcement authority includes the power to remove officers and
directors and the authority to issue orders to prevent a bank from engaging in
unsafe or unsound practices or violating laws or regulations governing its
business. Any North Carolina savings bank that does not operate in accordance
with the regulations, policies and directives of the Administrator may be
subject to sanctions for non-compliance. The Administrator may under certain
circumstances suspend or remove, directors or officers who have violated the
law, conducted the bank's business in a manner which is unsafe, unsound or
contrary to the depositors' interests, or been negligent in the performance of
their duties.
The CRA requires that, in connection with examinations of financial
institutions within their jurisdiction, the Federal Reserve Board and the FDIC
evaluate the record of the financial institutions in meeting the credit needs
of their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors
are also considered by the Federal Reserve Board and the FDIC in evaluating
mergers, acquisitions and applications to open a branch or facility.
North Carolina savings banks are authorized to operate branches through
the State of North Carolina. Branch approvals are subject to statutory
standards relating to safety and soundness, competition, public convenience
and CRA performance.
CAPITAL REQUIREMENTS. The Federal Reserve Board and the FDIC have
established guidelines with respect to the maintenance of appropriate levels
of capital by bank holding companies with consolidated assets of $150 million
or more and state non-member banks, respectively. For bank holding companies
with less than $150 million in consolidated assets, the Federal Reserve Board
applies the guidelines on a bank-only basis unless the bank holding company
has publicly held debt securities or is engaged in non-bank activities
involving significant leverage. The regulations impose two sets of capital
adequacy requirements: minimum leverage rules, which require bank holding
companies and state non-member banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the FDIC and the Federal Reserve Board require bank holding
companies and state non-member banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" to total assets of 3.0%. Tier 1 capital is
the sum of common stockholders' equity, certain perpetual preferred stock
(which must be noncumulative with respect to banks), including any related
surplus, and minority interests in consolidated subsidiaries; minus all
intangible assets (other than certain purchased mortgage servicing rights and
purchased credit card receivables), identified losses and investments in
certain subsidiaries. As a SAIF-insured, state-chartered bank, the Bank must
also deduct from Tier 1 capital an amount equal to its investments in, and
extensions of credit to, subsidiaries engaged in activities that are not
permissible for national banks, other than debt and equity investments in
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities or in subsidiary depository institutions or their
holding companies. Although setting a minimum 3.0% leverage ratio, the
capital regulations state that only the strongest bank holding companies and
banks, with composite examination ratings of 1 under the rating system used by
the federal bank regulators, would be permitted to operate at or near such
minimum level of capital. All other bank holding companies and banks are
expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding companies
experiencing or anticipating significant growth would be expected to maintain
capital well above the minimum levels. In addition, the Federal Reserve Board
has indicated that whenever appropriate, and in particular when a bank holding
company is undertaking expansion, seeking to engage in new activities or
otherwise facing unusual or abnormal risks, it will consider, on a case-by-
case basis, the level of an organization's ratio of tangible Tier 1 capital to
total assets in making an overall assessment of capital.
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In addition to the leverage ratio, the regulations of the Federal Reserve
Board and the FDIC require bank holding companies and state-chartered
nonmember banks to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of at least 8.0% of which at least four percentage points
must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital
plus Tier 2 or supplementary capital items which include allowances for loan
losses in an amount of up to 1.25% of risk-weighted assets, cumulative
preferred stock and preferred stock with a maturity of 20 years or more and
certain other capital instruments. The includable amount of Tier 2 capital
cannot exceed the institution's Tier 1 capital. Qualifying total capital is
further reduced by the amount of the bank's investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks and
certain other deductions. The risk-based capital regulations assign balance
sheet assets and the credit equivalent amounts of certain off-balance sheet
items to one of four broad risk weight categories. The aggregate dollar amount
of each category is multiplied by the risk weight assigned to that category
based principally on the degree of credit risk associated with the obligor.
The sum of these weighted values equals the bank holding company or the bank's
risk-weighted assets.
As of December 31, 1996, the Bank's level of Tier 1 Capital was well in
excess of the minimum required by the FDIC capital regulations.
The federal bank regulators, including the Federal Reserve Board and the
FDIC, have proposed to revise their risk-based capital requirements to ensure
that such requirements provide for explicit consideration of interest rate
risk. Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the proposal or
the bank's internal model for measuring such exposure, if such model is
determined to be adequate by the bank's examiner. If the dollar amount of a
bank's interest rate risk exposure, as measured under either measurement
system, exceeds 1% of the bank's total assets, the bank would be required
under the proposed rule to hold additional capital equal to the dollar amount
of the excess. Management of the Bank has not determined what effect, if any,
the FDIC's proposed interest rate risk component would have on the Bank's
capital if adopted as proposed. The FDIC has adopted a regulation that
provides that the FDIC may take into account whether a bank has significant
risks from concentrations of credit or nontraditional activities in
determining the adequacy of its capital. The Bank has not been advised that
it will be required to maintain any additional capital under this regulation.
The proposed interest rate risk component would not apply to bank holding
companies on a consolidated basis.
Under North Carolina law, savings banks must maintain a net worth of not
less than 5% of assets. In computing its compliance with this requirement,
the savings bank must deduct intangible assets from both net worth and assets.
In connection with the approval by the Administrator of the Bank's holding
company reorganization, the Company executed a Capital Maintenance Agreement,
pursuant to which the Company agreed to infuse additional capital into the
Bank in the event the Bank's net worth fell below the minimum net worth
requirement under North Carolina law. The Bank was in compliance with the
North Carolina net worth requirement at December 31, 1996.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires the federal banking
regulators 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 of
capital 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 that would cause the institution to
fail to satisfy the minimum levels for any of its capital requirements. An
institution that failed 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
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significantly undercapitalized institution, as well as any undercapitalized
institution that did 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 the institution. Any company controlling the
institution could 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. If an institution's ratio of tangible capital to total
assets falls below a level established by the appropriate federal banking
regulator, which may not be less than 2% nor more than 65% of the minimum
tangible capital level otherwise required (the "critical capital level"), the
institution will be subject to conservatorship or receivership within 90 days
unless periodic determinations are made that forbearance from such action
would better protect the deposit insurance fund. Unless appropriate findings
and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized.
Federal banking regulators, including the FDIC, have adopted regulations
implementing the prompt corrective action provisions of FDICIA. Under these
regulations, the federal banking regulators measure a depository institution's
capital adequacy on the basis of the institution's total risk-based capital
ratio (the ratio of its qualifying total capital to risk-weighted assets),
Tier 1 risk-based capital ratio (the ratio of its Tier 1 capital to risk-
weighted assets) and leverage ratio (the ratio of its Tier 1 capital to
adjusted total assets). Under the regulations, a savings bank that is not
subject to an order or written directive to meet or maintain a specific
capital level will be deemed "well capitalized" if it also has: (i) a total
risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital
ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An
"adequately capitalized" institution is an institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio
of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater;
and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the
institution has a composite 1 CAMEL rating). An "undercapitalized
institution" is an institution that has (i) a total risk-based capital ratio
less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%;
or (iii) a leverage ratio of less than 4.0% (or 3.0% if the institution has a
composite 1 CAMEL rating). A "significantly undercapitalized" institution is
defined as an institution that has: (i) a total risk-based capital ratio of
less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%;
or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized"
institution is defined as an institution that has a ratio of "tangible equity"
to total assets of less than 2.0%. For purposes of the prompt corrective
action regulations, tangible equity is equivalent to Tier 1 capital plus
outstanding cumulative perpetual preferred stock (and related surplus) minus
all intangible assets other than certain purchased mortgage servicing rights.
The FDIC may reclassify a well capitalized 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 if the FDIC 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 CAMEL rating category.
DIVIDEND LIMITATIONS. The Bank may not 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.
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 stockholders 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. The Bank intends to make full use of this
favorable tax treatment and does not contemplate use of any earnings in a
manner which would limit the Bank's bad debt deduction or create federal tax
liabilities.
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank 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 leverage ratio of less than 4.0%.
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The Company is subject to limitations on dividends imposed by the Federal
Reserve Board. See "-- Holding Company Dividends and Stock Repurchases."
DEPOSIT INSURANCE. The Bank is required to pay assessments to the FDIC
based on a percent of its insured deposits 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 to maintain the
designated reserve ratio of the SAIF at 1.25% of estimated deposits or at a
higher percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which
is 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 used
under the prompt corrective action regulations. 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.
For the past several semi-annual periods, institutions with SAIF-
assessable deposits, like the Bank, have been required to pay higher deposit
insurance premiums than institutions with deposits insured by the BIF. In
order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to
increase the reserve levels of the SAIF to the designated reserve ratio of
1.25% of insured deposits. Institutions were assessed at the rate of 65.7
basis points based on the amount of their SAIF-assessable deposits as of March
31, 1995. As a result of the special assessment the Bank incurred an after-
tax expense of $473,000 during the quarter ended September 30, 1996.
The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however, SAIF
member institutions will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds
issued by FICO an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for these obligations 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.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under FDICIA, state-chartered banks
with deposits insured by the FDIC are generally prohibited from acquiring or
retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner. State-
chartered banks are also prohibited from engaging as principal in any type of
activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks may not engage as principal in any
type of activity that is not permissible for a subsidiary of a national bank
unless in either case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and the bank is,
and continues to be, in compliance with applicable capital standards.
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries.
Under the regulations, the term activity refers to the authorized conduct of
business by an insured state bank and includes acquiring or retaining any
investment other than an equity investment. A bank or subsidiary is
considered acting as principal when conducted other than as an agent for a
customer, as trustee, or in a brokerage, custodial, advisory or administrative
capacity. An activity permissible for a national bank includes any activity
expressly authorized for national banks by statute or recognized as
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permissible in regulations, official circulars or bulletins or in any order or
written interpretation issued by the Office of the Comptroller of the Currency
("OCC"). In its regulations, the FDIC indicates that it will not permit state
banks to directly engage in commercial ventures or directly or indirectly
engage in any insurance underwriting activity other than to the extent such
activities are permissible for a national bank or a national bank subsidiary
or except for certain other limited forms of insurance underwriting permitted
under the regulations. Under the regulations, the FDIC permits state banks
that meet applicable minimum capital requirements to engage as principal in
certain activities that are not permissible to national banks including
guaranteeing obligations of others, activities which the Federal Reserve Board
has found by regulation or order to be closely related to banking and certain
securities activities conducted through subsidiaries.
SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the FDIC and the Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository 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 depository 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 appropriate federal banking agency determines
that a depository 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 depository institution must
submit an acceptable compliance plan to its primary federal regulator 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 already meets substantially all
the standards adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards will materially
affect the operations of the Bank.
Additionally under FDICIA, as amended by the CDRI Act, the federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July
10, 1995, the federal banking agencies, including the FDIC and the Federal
Reserve Board, issued proposed guidelines relating to asset quality and
earnings. Under the proposed guidelines, an FDIC insured depository
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 believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the
operations of the Bank.
TRANSACTIONS WITH AFFILIATES. The affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act apply to
transactions between the Bank and the Company or the Bank's other affiliates.
Generally, Sections 23A and 23B (i) limit the extent to which the savings bank
or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. A bank holding company and its subsidiaries, as well as any
company under common control with a bank, are considered "affiliates" of the
Bank under Sections 23A and 23B. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of a guarantee and similar other
types of transactions. In addition to the restrictions imposed by Sections
23A and 23B, the Bank may not (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 Bank.
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FEDERAL HOME LOAN BANK 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
Atlanta, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Atlanta in an amount at least equal to 1% of the aggregate unpaid
principal 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 Atlanta, whichever is greater. The Bank was in
compliance with this requirement with investment in FHLB of Atlanta stock at
December 31, 1996, of $1.4 million.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts equal to 3% on the first $49.3
million of transaction accounts 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, 1996, the Bank met its reserve requirements.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Thrift institutions are subject to provisions of the
Internal Revenue Code of 1986, as amended (the "Code") in the same general
manner as other corporations. Prior to recent legislation, institutions such
as the Bank which met certain definitional tests and other conditions
prescribed by the Code benefitted 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 were separated
into "qualifying real property loans," which generally are loans secured by
certain interests in 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. The amount of the bad debt
reserve deduction with respect to qualifying real property loans could be
based upon (a) actual loss experience or (b) a percentage of taxable income
before such deduction.
The Bank, which files its federal income tax returns on a calendar year
basis, could generally elected to use the method which resulted in the
greatest deduction for federal income tax purposes, which generally was the
percentage of taxable income method.
Earnings appropriated to an institution's bad debt reserve and claimed as
a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with
the amount deemed necessary to pay the resulting federal income tax.
Legislation recently signed by the President repealed the percentage of
taxable income method of calculating the bad debt reserve. Savings
associations, like the Bank, which have previously used that method are
required to recapture into taxable income post-1987 reserves in excess of the
reserves calculated under the experience method over a six-year period
beginning with the first taxable year beginning after December 31, 1995. The
start of such recapture may be delayed until the third taxable year beginning
after December 31, 1995 if the dollar amount of the institution's residential
loan originations in each year is not less than the average dollar amount of
residential loan originated in each of the six most recent years disregarding
the years with the highest and lowest originations during such period. For
purposes of this test, residential loan originations would not include
refinancings and home equity loans. The Bank has provided deferred taxes for
the amount of the recapture.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with
less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
26
<PAGE>
The Bank's income tax returns for 1993 and subsequent years are subject
to final determination by the taxing authorities.
STATE INCOME TAXATION. Under North Carolina law, the Bank is subject to
an annual corporate income tax of 7.75% of its federal taxable income as
computed under the Code, subject to certain prescribed adjustments. In
addition to the state income tax, Haywood Savings is also subject to an annual
state franchise tax.
The Bank's state income tax returns have not been audited for the past
five years.
For further information regarding federal and state taxes payable by the
Bank, see Note 8 of Notes to Consolidated Financial Statements.
EMPLOYEES
As of December 31, 1996, the Bank had 34 full-time and three part-time
employees. The employees are not represented by a collective bargaining
agreement. The Bank believes its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
At December 31, 1996, the executive officers of the Company were as
follows:
NAME AGE POSITION
---- --- --------
Larry R. Ammons 52 President and Managing Officer
Jack T. Nichols 56 Treasurer and Chief Financial Officer
LARRY R. AMMONS has been employed by the Bank in various positions since
1972. In 1976, he was elected Executive Vice President and Managing Officer,
and in 1987 became President. He became President of the Company upon its
incorporation. Mr. Ammons is responsible for the daily operations of the
Company and the Bank under policies and procedures established by the Board of
Directors.
JACK T. NICHOLS has been employed by the Bank since 1966 and currently
serves as Chief Financial Officer, Treasurer and Controller.
27
<PAGE>
ITEM 2. PROPERTIES
-------------------
The following table sets forth the location of the Bank's office
properties (including furniture, fixtures and equipment), as well as
additional information relating to these offices at December 31, 1996. All
such properties are owned by the Bank.
<TABLE>
<CAPTION>
YEAR NET BOOK
OFFICE LOCATION CONSTRUCTED VALUE
--------------- ----------- --------
<S> <C> <C>
Main Office................. 1974 $955,782
370 North Main Street
Waynesville, NC 28786
Sylva Branch................ 1981 181,726
6 Grindstaff Cover Road
Sylva, NC 28779
Murphy Branch............... 1984 305,557
King and Hiwassee Street
Murphy, NC 28906
Andrews Branch.............. 1986 202,624
Main Street
Andrews, NC 28901
</TABLE>
The Bank utilizes an in-house data processing system for accounting and
record-keeping purposes.
The total net book value of all the Bank's property and equipment at
December 31, 1996 was $1,660,387. For further information, see Note 6 of
Notes to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
From time to time the Company and/or the Bank is a party to legal
proceedings in the ordinary course of business. At December 31, 1996, none of
the Company or any of its subsidiaries is engaged in any legal proceedings of
a material nature.
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 the fiscal year ended December 31, 1996.
28
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
------------------------------------------------------------------------------
MATTERS
-------
The Company's common stock began trading on the American Stock Exchange
under the symbol "HBS" on June 11, 1996. Prior to June 11, 1996, there was no
established market for the common stock. The following table sets forth for
the past two fiscal years the high and low closing sales prices for the common
stock for each full fiscal quarter that it has traded on the American Stock
Exchange and for each quarter prior thereto the high and low bid and asked
price for the common stock as quoted by Interstate/Johnson Lane as well as
dividends declared on the common stock in each quarter.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
<S> <C> <C> <C>
1996
----
First Quarter $17.50 $17.00 $0.13
Second Quarter 17.50 17.00 0.13
Third Quarter 19.25 18.25 0.13
Fourth Quarter 18.75 18.25 0.14
1995
----
First Quarter $15.00 $15.00 $0.12
Second Quarter 15.00 16.50 0.12
Third Quarter 16.50 16.50 0.12
Fourth Quarter 16.50 17.50 0.13
</TABLE>
At December 31, 1996 there were 1,211,856 shares of common stock
outstanding and 414 stockholders of record.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The following tables set forth certain information concerning the
financial position and results of operations of the Company at the dates and
for the periods indicted:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
- ---------------------------------------------
Cash....................................... $ 1,030 $ 1,468 $ 1,291 $ 2,493 $ 1,555
Investments (1)............................ 13,687 21,289 25,927 32,314 24,399
Loans, net................................. 109,344 104,019 99,879 99,980 103,763
Goodwill................................... 780 832 885 937 990
Investment in mortgage servicing rights.... 1,728 -- -- -- --
All other assets........................... 4,332 4,461 4,449 4,533 4,711
-------- -------- -------- -------- --------
Total assets............................. $130,901 $132,069 $132,431 $140,257 $135,418
======== ======== ======== ======== ========
Deposits................................... 107,343 108,763 110,205 119,312 115,832
Borrowings................................. 1,200 -- -- -- --
All other liabilities...................... 1,831 1,900 1,818 1,336 1,534
Stockholders' equity....................... 20,527 21,406 20,408 19,609 18,052
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity................... $130,901 $132,069 $132,431 $140,257 $135,418
======== ======== ======== ======== ========
SUMMARY OF OPERATIONS
- ---------------------------------------------
Interest income............................ 9,867 $ 10,043 $ 9,479 $ 10,186 $ 11,247
Interest expense........................... (5,036) (5,217) (4,156) (4,703) (5,843)
-------- -------- -------- -------- --------
Net interest income...................... 4,831 4,826 5,323 5,483 5,404
Provision for loan losses.................. (15) (20) (60) (60) (300)
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses........................ 4,816 4,806 5,263 5,423 5,104
Total other income, net.................... 661 512 421 295 341
Total general and administrative
expenses (2)............................. (3,812) (3,144) (2,975) (2,783) (2,735)
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting
principle................................ 1,665 2,174 2,709 2,935 2,710
Income taxes............................... (571) (813) (1,004) (1,124) (1,036)
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principle.................. 1,094 1,361 1,705 1,811 1,674
Cumulative effect of change in accounting
principle................................ -- -- -- 146 --
-------- -------- -------- -------- --------
Net income................................. $ 1,094 $ 1,361 $ 1,705 $ 1,957 $ 1,674
======== ======== ======== ======== ========
Per share data (3):
Income before cumulative effect
of change in accounting principle...... $0.89 $1.08 $1.34 $1.43 $1.33
Cumulative effect of change in
accounting principle................... -- -- -- .12 --
-------- -------- -------- -------- --------
Net income............................... 0.89 1.08 1.34 1.55 1.33
======== ======== ======== ======== ========
Cash dividends declared.................. $0.53 $0.49 $0.45 $0.43 $0.40
======== ======== ======== ======== ========
- --------------
</TABLE>
(1) Includes investment securities, interest-bearing balances in other banks,
federal funds sold, mortgage-backed securities, and Federal Home Loan
Bank stock.
(2) For the year ending December 31, 1996, includes a special assessment paid
to the FDIC in the amount of $720,000.
(3) Per share data has been restated to reflect the 2 for 1 stock split
distributed in 1993.
30
<PAGE>
KEY OPERATING RATIOS
The table below sets forth certain performance ratios of the Company
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided
by average total assets)..................... 0.83% 1.02% 1.25% 1.41%(1) 1.26%
Return on average equity (net income divided
by average equity)........................... 5.43% 6.49% 8.50% 10.38%(1) 9.85%
Equity to assets ratio (average equity
divided by average total assets)............. 15.24% 15.72% 14.75% 13.52% 12.76%
Dividend payout ratio (dividends declared
per share divided by net income per share)... 59.55% 45.37% 33.58% 27.75%(1) 30.19%
- --------------------
</TABLE>
(1) Excluding the $146,354 cumulative effect adjustment for a change in
accounting principle, these ratios would be 1.30%, 9.60% and 30.07%,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following narrative should be read in conjunction with the
consolidated financial statements and related notes found elsewhere in this
report.
ASSET/LIABILITY MANAGEMENT. The Bank's net interest income is dependent
primarily upon the difference or spread between the average yield earned on
loans, investment securities and the average rate paid on deposits, as well as
the relative amounts of such assets and liabilities. Haywood Savings, as
other financial institutions, is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice at different times, or
on a different basis, than its interest-earning assets.
Key components of a successful asset/liability management strategy are
the monitoring and managing of interest rate sensitivity of both the interest-
earning asset and interest-bearing liability portfolios. Financial
institutions are subject to interest rate risk to the degree that their
interest-bearing liabilities (consisting primarily of customer deposits)
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets (generally consisting of intermediate or long-term
loans and investment securities). The regular evaluation of the sensitivity
of net interest income to changes in interest rates is an integral part of the
Company's interest rate risk management.
The Bank has employed various strategies intended to minimize the adverse
effect of interest rate risk on future operations by providing a better match
between the interest rate sensitivity of its assets and liabilities. In
particular, the Bank's strategies are intended to stabilize net interest
income for the long-term by protecting its interest rate spread against
increases in interest rates. Such strategies include the origination for
portfolio of one-year, adjustable-rate loans and the origination of other
types of adjustable-rate and short-term loans with greater interest rate
sensitivities than long-term, fixed-rate loans. Management intends to
continue employing these strategies to minimize the potential negative impact
on earnings due to interest rate fluctuations.
31
<PAGE>
GAP ANALYSIS
The term "interest rate sensitivity" refers to those assets and
liabilities which reprice periodically in response to fluctuations in market
rates and yields. Thrift institutions have historically operated in a
mismatched position with interest-sensitive liabilities greatly exceeding
interest-sensitive assets. The Bank is attempting, through the use of
adjustable rate mortgages and short-term investments, to achieve a better
match of the maturities of its assets and liabilities.
Increases in the Bank's adjustable-rate mortgage loan portfolio and
construction loans reflects management's strategy of reducing the Bank's gap
between interest-bearing liabilities and interest-earning assets that mature
(or reprice) in similar time periods.
The following table sets forth the Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities as of
December 31, 1996 based on their contractual terms to repricing or maturity.
<TABLE>
<CAPTION>
SIX MONTHS OVER ONE OVER THREE OVER FIVE OVER TEN OVER
LESS THAN THROUGH THROUGH THROUGH THROUGH THROUGH TWENTY
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS YEARS TOTAL
----------- ----------- ------------ ----------- ---------- ------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1)......... $ 3,054 $ -- $ 2,937 $ 5,200 $ -- $ -- $ -- $ 11,191
Fixed-rate residential loans(2).. 994 79 245 441 7,359 25,206 -- 34,324
Adjustable-rate loans............ 52,723 24,574 -- -- -- -- -- 77,297
------- ------- -------- -------- -------- ----------- ------- --------
Total.......................... 56,771 24,653 3,182 5,641 7,359 25,206 -- 122,812
------- ------- -------- -------- -------- ----------- ------- --------
Interest-bearing liabilities:
Deposits......................... 59,621 29,457 17,618 451 -- -- -- 107,147
------- ------- -------- -------- -------- ----------- ------- --------
Interest sensitivity gap.......... $(2,850) $(4,804) $(14,436) $ 5,190 $ 7,359 $25,206 $ -- $ 15,665
======= ======= ======== ======== ======== =========== ======= ========
Cumulative difference between
interest-earning assets and
interest-bearing liabilities..... $(2,850) $(7,654) $(22,090) $(16,900) $(9,541) $15,665 $15,665 $ 15,665
======= ======= ======== ======== ======== =========== ======= ========
Cumulative difference between
interest-earning assets and
interest-bearing liabilities
as a percent of total assets..... (2.18)% (5.85)% (16.88)% (12.91)% (7.29)% 11.97% 11.97% 11.97%
======= ======= ======== ======== ======== =========== ======= =======
- ------------------
</TABLE>
(1) Includes U.S. agency obligations, interest bearing balances in other
banks, federal funds sold and other investments.
(2) Includes mortgage-backed securities in the amount of $1,069,323 at
December 31, 1996.
32
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the Bank'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 daily balance of assets or liabilities, respectively,
for the periods indicated. The average balances of loans and mortgage-backed
securities include loans on non-accrual status for each period. The table
also presents information for the periods indicated with respect to the
Company's "net interest margin," which is its net interest income divided by
the average balance of interest-earning assets, and is a statistic which
financial institutions have traditionally used as an indicator of
profitability. Net interest margin is affected by the interest rate spread
(the difference between the weighted average yield earned on interest-earning
assets and weighted average rate paid on interest-bearing liabilities) and by
the relative amounts of interest-earning assets and interest-bearing
liabilities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- ----------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------------ ----------- -------- ------------ ------------ ------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and mortgage-backed
securities, net......... $108,563,713 $8,866,944 8.17% $104,634,180 $ 8,771,221 8.38% $101,038,176 $8,039,786 7.96%
Investment securities.... 15,145,199 834,428 5.51 20,503,187 1,084,040 5.29 20,243,067 1,027,883 5.08
Interest-bearing
balances in
other banks............. 337,926 19,876 5.88 883,741 43,498 4.92 6,634,523 242,836 3.66
Other interest-earning
assets.................. 2,228,336 145,549 6.53 2,440,440 143,986 5.90 3,064,277 168,887 5.51
------------ ---------- ------------ ----------- ------------ ----------
Total
interest-earning
assets............... 126,275,174 9,866,797 7.81 128,461,548 10,042,745 7.82 130,980,043 9,479,392 7.24
---------- ----------- ----------
Noninterest-earning assets. 5,839,576 4,972,233 4,897,816
------------ ------------ ------------
Total assets.......... $132,114,750 $133,433,781 $135,877,859
============ ============ ============
Interest-bearing
liabilities:
Deposits................. $110,111,811 5,018,715 4.56% $110,238,538 $ 5,217,208 4.73% $115,651,391 4,156,623 3.59
Other borrowed money..... 209,685 17,299 8.25 -- -- -- -- -- --
------------ ---------- ------------ ----------- ------------ ----------
Total
interest-bearing
liabilities.......... 110,321,496 110,238,538 5,217,208 4.73 115,651,391 4,156,623 3.59
----------- ----------
Noninterest-bearing
liabilities.............. 1,661,097 5,036,014 4.56 2,222,593 180,467
------------ ---------- ------------ ------------
Total liabilities..... 111,982,593 112,461,131 115,831,858
Stockholders' equity...... 20,132,157 20,972,650 20,046,001
------------ ------------ ------------
Total liabilities and
stockholders'
equity.............. $132,114,750 $133,433,781 $135,877,859
============ ============ ============
Net interest income....... $4,830,783 $ 4,825,537 $5,322,769
========== =========== ==========
Interest rate spread...... 3.25% 3.09% 3.65%
==== ==== ====
Net interest margin....... 3.83% 3.76% 4.06%
========== =========== ==========
</TABLE>
33
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume, multiplied by old rate); (2) changes in rate (changes in
rate, multiplied by old volume); and (3) changes in rate-volume (changes in
rate multiplied by the change in volume.) The change in interest income or
expense attributable to the combination of rate variance and volume variance
is included in the table, but such amount has also been allocated between, and
included in the amounts shown as, changes due to rate and changes due to
volume. The change due to rate/volume variance has been allocated equally
between the amounts due solely to rate variance and solely to volume variance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------------------------------- --------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------------------- --------------------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
---------- ------------------- ---------- ------------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and mortgage-backed
securities................... $(229,452) $ 325,175 $ 95,723 $ 437,641 $ 293,794 $ 731,435
Investments.................... 39,631 (289,243) (249,612) 25,007 1,525 26,532
Interest-bearing balances in
other banks.................. 5,862 (29,484) (23,622) 47,434 (246,772) (199,338)
Other interest-earning assets.. 14,747 (13,184) 1,563 82,968 (78,244) 4,724
--------- --------- --------- ---------- --------- ----------
Total interest income....... (169,212) (6,736) (175,948) 593,050 (29,697) 563,353
Interest expense:
Deposits....................... (192,607) (5,886) (198,493) 1,282,647 (225,277) 1,057,370
Borrowings..................... 8,649 8,650 17,299 -- 3,215 3,215
--------- --------- --------- ---------- --------- ----------
Total interest expense........ (183,958) 2,764 (181,194) 1,282,647 (222,062) 1,060,585
--------- --------- --------- ---------- --------- ----------
Net interest income............. $ 14,746 $ (9,500) $ 5,246 $ (689,597) $ 192,365 $ (497,232)
========= ========= ========= ========== ========= ==========
</TABLE>
GENERAL
-------
The Company realized net earnings in 1996 of $1,093,796, or $.89 per
share, resulting in a return of .83% on average assets and 5.43% on average
equity. Net income for 1995 was $1,361,098, or $1.08 per share, which
resulted in a return of 1.02% on average assets and 6.49% on average equity.
A quarterly dividend of $.14 per share was declared payable on January 6, 1997
to shareholders of record on December 16, 1996.
During 1996, the Company remained focused on single family residential
lending in its primary market area and, generally, has limited its commercial
real estate lending. The Company does not make installment consumer loans
and, until 1991, did not originate home equity loans. This conservative
lending philosophy has historically allowed the Company to avoid significant
loan losses. Management uses available information such as delinquency
trends, the state of the local economy, and composition and collateralization
of the loan portfolio to help determine the level of allowance for loan
losses.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS 1996 VERSUS 1995
------------------------------------------------------------------------
Net income was $1,093,796, or $.89 per share, in 1996 compared to net
income of $1,361,098, or $1.08 per share, in 1995 which represents a 19.6%
decrease. The decline in net income during 1996 was attributable to a one-time
special assessment which Haywood Savings, like all institutions with SAIF-
assessable deposits, was required to pay during the third quarter to
recapitalize the SAIF of the FDIC. Haywood Savings' special assessment
resulted in an after-tax reduction in earnings of $473,000, or $.38 per share.
34
<PAGE>
Without the special assessment, the Company's net income would have improved
to $1,566,796, or $1.27 per share, for 1996 reflecting increases in net
interest income and other income.
Total interest income decreased $175,948, or 1.75%, to $9,866,797 in 1996
from $10,042,745 in 1995. The decrease in interest income is principally due
to a decrease in investment securities interest income of $249,612, which is
attributable to a decrease in average volume of approximately $5 million. As
investment securities matured during 1996, the proceeds were used in part to
fund the Company's loan growth.
Also contributing to the decrease in interest income is a decrease in the
average interest earned on loans and mortgage-backed securities of 21 basis
points from 8.38% in 1995 to 8.17% in 1996. This was partially offset by an
increase in the average volume of $3.9 million.
Total interest expense decreased $181,194 or 3.47%, in 1996. This is
mainly due to a decrease in the average cost of funds on the Company's deposit
base from 4.73% in 1995 to 4.56% in 1996. The average balance of deposits
decreased only $127,000 during 1996.
The overall net effect of these changes was a $5,246, or 0.11%, increase
in net interest income in 1996 compared to 1995. The interest rate spread
increased to 3.25% in 1996 from 3.09% in 1995. Net interest income as a
percentage of average interest-earning assets was 3.83% in 1996 compared to
3.76% in 1995.
During 1996 and 1995, management recorded provisions for loan losses of
$15,000 and $20,000, respectively. The decrease in the provision for loan
losses was due to the lack of charge-offs in 1996 and 1995.
Other income increased $148,096, or 28.9%, in 1996, primarily as a result
of an increase in net real estate operations, which relates to net rental
income from a significant piece of real estate owned.
General and administrative expenses increased $667,731, or 21.2%. The
increase is primarily due to a one-time cost of approximately $720,000
pertaining to a special assessment by the FDIC on all SAIF insured financial
institutions to recapitalize the SAIF. Federal and other insurance premiums
increased $664,074 to $930,297 as a result of this special assessment. As a
result of the recapitalization of the SAIF, the FDIC reduced Haywood Savings'
annual assessment rate for deposit insurance from 0.23% of insured deposits to
zero effective October 1, 1996 and Haywood Savings received a refund of a
previously paid deposit insurance premium of approximately $63,000.
The Company's effective income tax rate was 34.3% in 1996 compared to
37.4% in 1995.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS 1995 VERSUS 1994
------------------------------------------------------------------------
Income before income taxes for 1995 was $2,174,185, down 19.7% from
$2,709,133 in 1994. Net income was $1,361,098, or $1.08 per share, in 1995
compared to income of $1,704,833, or $1.34 per share, in 1994 which represents
a 20.2% decrease.
Total interest income increased $563,353, or 5.9%, in 1995 from 1994 due
principally to an increase in the average yield on interest-earning assets to
7.82% compared to 7.24% in 1994, despite a decrease of $2.5 million in the
average balance of total interest-earning assets. The average yield on loans
and mortgage-backed securities increased from 7.96% in 1994 to 8.38% in 1995
with the average balance for the year increasing by $3.6 million. Average
balances for the Company's other interest-earning assets decreased in 1995 by
$6.1 million to $23.8 million while the average yield on these assets
increased from 4.81% to 5.34%.
Total interest expense increased $1,060,585 or 25.5%, in 1995. In 1995,
the average cost of funds on the Company's deposit base increased to 4.73%
from 3.59% in 1994 while the average balance of deposits decreased $5.4
million, or 4.7%.
35
<PAGE>
The overall net effect of these changes was a $497,332, or 9.3% decrease
in net interest income in 1995 compared to 1994. The interest rate spread
declined slightly to 3.09% from 3.65% in 1994. Net interest income as a
percentage of average interest-earning assets decreased to 3.76% in 1995 from
4.06% in 1994.
During 1995 and 1994, management recorded provisions for loan losses of
$20,000 and $60,000, respectively. The decrease in the provision for loan
losses was due to the lack of charge-offs in 1995 and 1994.
Other income increased $91,625, or 21.8%, in 1995. Increases were
realized in net real estate operations, which relates to increased net rental
income from a significant piece of real estate owned, insurance income, rental
income, and other income. These increases more than offset the decrease in
service charges on deposits.
General and administrative expenses increased $169,341, or 5.7%.
Increases were experienced in salaries and employee benefits and other
expenses. These increases were partially offset by decreases in occupancy and
equipment expenses and federal and other insurance premiums.
The Company's effective income tax rate was 37.4% in 1995 compared to
37.1% in 1994.
ASSET QUALITY
-------------
At December 31, 1996, the Company had approximately $814,000 of loans in
nonaccrual status as compared to $1,285,000 at December 31, 1995. At December
31, 1996, loans delinquent 60 days or more as a percentage of loans were 2.21%
which is a decrease from 1995's percentage of 2.80%. At December 31, 1996 and
1995, the recorded investments in loans that were considered to be impaired
under Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," was approximately $741,000 and $713,000,
respectively, of which all were on nonaccrual. The related allowance for loan
losses on these impaired loans was approximately $98,500 and $95,700 at
December 31, 1996 and 1995, respectively. There were no loans contractually
past due 90 days or more and still accruing at December 31, 1996 and 1995. In
the opinion of Management, there are no other loans which cause management to
have serious doubts as to the ability of such borrowers to comply with the
present repayment terms which could result in becoming classified as problem
assets. The Company's year-end allowance for loan losses was $718,547, or
.65% of outstanding loans. This compares to .67% and .68% for 1995 and 1994,
respectively. Management remains conscious of the judgmental nature of the
allowance for loan losses and the need for continuous evaluation of the risk
inherent in the loan portfolio.
LIQUIDITY AND ASSET LIABILITY MANAGEMENT
----------------------------------------
The Company's asset-liability management policy is to maintain and
enhance the net interest income and provide adequate liquidity to meet
continuing loan demand, withdrawal requirements, and pay for normal operating
expenses. Liquidity is provided by the ability to attract deposits, short-
term investment strategy, loan repayments, and current earnings.
At December 31, 1996, the Company had approximately $12.2 million in
cash, interest-bearing balances in other banks, federal funds sold, and
investment securities. Management believes that the level of liquidity at
December 31, 1996 is adequate and in compliance with regulatory requirements.
A primary objective in interest rate management is the avoidance of wide
fluctuations in net interest income due to interest rate movements.
Management conducts, on a regular basis, various analyses to determine the gap
representing the difference between repricing assets and repricing
liabilities. At December 31, 1996, the Company's balance sheet is liability
sensitive, meaning that in a given period there will be more liabilities than
assets subject to immediate repricing as market rates change. Because
immediately rate sensitive interest bearing liabilities exceed rate sensitive
assets, the earnings position could improve in a declining rate environment
and could deteriorate in a rising rate environment, depending on the
correlation of rate changes in these two categories. At December 31, 1996
total rate sensitive liabilities within one year were $89.1 million compared
to rate sensitive assets of $81.4 million for a cumulative gap of $7.7
million. It should be noted that interest-sensitivity of the balance sheet as
of a specific date is not necessarily indicative of the Company's position on
other dates.
36
<PAGE>
COMMITTED RESOURCES
-------------------
The Company had loan commitments, including undisbursed proceeds on loans
in process and preapproved but unused lines of credit for home equity loans,
of approximately $3,560,900 outstanding at December 31, 1996. Of this amount,
$2,494,000 represent adjustable rate commitments and $1,066,900 represent
fixed rate commitments. These commitments were primarily for construction and
conventional lending and will be funded primarily from loan principal
repayments and other normal sources of liquidity.
CAPITAL RESOURCES
-----------------
As a North Carolina-chartered savings bank, Haywood Savings is subject to
the capital requirements of the FDIC and the N.C. Administrator of Savings
Institutions ("the Administrator"). The FDIC requires Haywood Savings to
maintain minimum ratios of Tier I capital to total risk-weighted assets and
total capital to risk-weighted assets of 4% and 8%, respectively. To be "well
capitalized," the FDIC requires ratios of Tier I capital to total risk-
weighted assets and total capital to risk-weighted assets of 6% and 10%,
respectively. Tier I capital consists of total stockholders' equity
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier I capital plus
certain adjustments, the only one of which is applicable to Haywood Savings is
the allowance for loan losses. Risk-weighted assets reflect Haywood Savings'
on- and off-balance sheet exposures after such exposures have been adjusted
for their relative risk levels using formulas set forth in FDIC regulations.
Haywood Savings is also subject to a leverage capital requirement, which calls
for a minimum ratio of Tier I capital (as defined above) to quarterly average
total assets of 3%, and a ratio of 5% to be "well capitalized." The
Administrator requires a net worth equal to at least 5% of assets. At
December 31, 1996, Haywood Savings was in compliance with the capital
requirements of both the FDIC and the Administrator and is deemed to be "well
capitalized."
ACCOUNTING CHANGES
------------------
Certain new and proposed accounting standards which have affected or
could affect the consolidated financial statements of the Company are
discussed in note 1 to the consolidated financial statements.
EFFECTS OF INFLATION
--------------------
The major portions of a bank's assets and liabilities are monetary in
nature. As a result of this distinct asset and liability structure,
performance may be more significantly influenced by changes in interest rates
than by inflation. Although inflation has a lesser influence on a bank's
performance, operating expenses may be affected in that personnel expenses,
supply costs, and outside services tend to increase during periods of
inflation. Also, inflation affects the level of interest rates prevailing at
any one time.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report 39
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995 40
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994 41
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 42
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994 43
Notes to Consolidated Financial Statements for the years ended December 31,
1996, 1995 and 1994 45
</TABLE>
38
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Haywood Bancshares, Inc.
Waynesville, North Carolina:
We have audited the consolidated statements of financial condition of Haywood
Bancshares, Inc. and subsidiary (the Corporation) as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Corporation'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 Haywood Bancshares,
Inc. and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Charlotte, North Carolina
February 7, 1997
39
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ------------ ------------
<S> <C> <C>
Cash on hand and in banks $ 1,029,850 1,467,946
Interest-bearing balances in other banks 143,806 816,890
Federal funds sold 152,847 440,248
Investment securities (market value of $10,744,961 in
1996 and $17,113,475 in 1995) (note 2) 10,894,099 17,100,000
Mortgage-backed securities (market value of $1,118,023
in 1996 and $1,488,416 in 1995) (note 3) 1,069,323 1,419,707
Loans (net of allowance for loan losses of $718,547
in 1996 and $703,547 in 1995) (note 4) 109,344,406 104,018,911
Real estate acquired in settlement of loans (note 5) 1,790,187 1,834,567
Federal Home Loan Bank stock, at cost 1,427,300 1,512,200
Premises and equipment (note 6) 1,660,387 1,827,077
Investment in mortgage servicing rights (note 7) 1,728,075 --
Goodwill 780,030 832,530
Other assets (note 8) 881,054 799,417
------------ -----------
$130,901,364 132,069,493
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposit accounts:
Noninterest-bearing 196,526 122,427
Interest-bearing, including $11,129,365 in 1996
and $10,754,929 in 1995 of time deposits for
$100,000 or more 107,146,853 108,640,828
------------ -----------
107,343,379 108,763,255
Note payable (note 14) 1,200,000 --
Accrued expenses and other liabilities (notes 8 and 9) 1,831,091 1,899,969
------------ -----------
Total liabilities 110,374,470 110,663,224
------------ -----------
Stockholders' equity (notes 11, 12 and 13):
Serial preferred stock, $1.00 par value, 5,000,000
shares authorized; no shares issued or outstanding -- --
Common stock, $1.00 par value, 10,000,000 shares
authorized; issued and outstanding 1,211,856
shares in 1996 and 1,287,372 shares in 1995 1,211,856 1,287,372
Additional paid-in capital 3,218,006 4,652,561
Retained income, substantially restricted 16,298,440 15,825,090
Less obligation in connection with funds used to
acquire common shares by ESOP (201,408) (358,754)
------------ -----------
Total stockholders' equity 20,526,894 21,406,269
Commitments (note 4)
$130,901,364 132,069,493
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Interest income:
Loans $8,760,804 8,637,329 7,879,773
Investment securities:
U.S. Government agencies 834,428 1,084,040 1,027,883
Other - - 29,625
Mortgage-backed securities 106,140 133,892 160,013
Interest-bearing balances in other banks 19,876 43,498 242,836
Federal funds sold 35,948 34,352 42,992
Other 109,601 109,634 96,270
---------- ---------- ---------
Total interest income 9,866,797 10,042,745 9,479,392
---------- ---------- ---------
Interest expense:
Deposits, including $434,257 in 1996,
$601,633 in 1995, and $442,459 in 1994
on time deposits for $100,000 or more 5,018,715 5,213,993 4,156,623
Other (note 14) 17,299 3,215 -
---------- ---------- ---------
Total interest expense 5,036,014 5,217,208 4,156,623
---------- ---------- ---------
Net interest income 4,830,783 4,825,537 5,322,769
Provision for loan losses (note 4) 15,000 20,000 60,000
---------- ---------- ---------
Net interest income after provision
for loan losses 4,815,783 4,805,537 5,262,769
---------- ---------- ---------
Other income:
Insurance income, net 168,063 128,696 125,022
Rental income 50,835 55,654 49,846
Service charges on deposits 66,064 55,510 62,761
Real estate operations, net (note 5) 348,293 214,662 152,524
Other income 27,421 58,058 30,802
---------- ---------- ---------
Total other income 660,676 512,580 420,955
---------- ---------- ---------
General and administrative expenses:
Salaries and employee benefits (notes 9 and 13) 1,673,844 1,684,334 1,467,545
Occupancy and equipment 369,390 367,033 469,698
Federal and other insurance premiums (note 10) 930,297 266,223 310,840
Amortization of goodwill 52,500 52,500 52,500
Other expenses 785,632 773,842 674,008
---------- ---------- ---------
Total general and administrative expenses 3,811,663 3,143,932 2,974,591
---------- ---------- ---------
Income before income taxes 1,664,796 2,174,185 2,709,133
Income taxes (note 8) 571,000 813,087 1,004,300
---------- ---------- ---------
Net income $1,093,796 1,361,098 1,704,833
========== ========== =========
Per share amounts:
Net income $.89 1.08 1.34
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Obligation Stockholders'
Stock Capital Income of ESOP Equity
----------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $1,262,072 4,446,927 13,951,184 (51,311) 19,608,872
Stock options exercised 18,650 78,756 - - 97,406
Net income - - 1,704,833 - 1,704,833
Cash dividends declared on
common stock, $.45 per share - - (571,491) - (571,491)
Principal repayment of ESOP debt - - - 130,178 130,178
Proceeds from loan to purchase
shares for ESOP - - - (588,000) (588,000)
Tax benefit of cash dividends
paid to ESOP - - 26,237 - 26,237
---------- ---------- ---------- -------- -------------
Balance at December 31, 1994 1,280,722 4,525,683 15,110,763 (509,133) 20,408,035
Stock options exercised 6,650 30,756 - - 37,406
Net income - - 1,361,098 - 1,361,098
Cash dividends declared on
common stock, $.49 per share - - (630,213) - (630,213)
Principal repayment of ESOP debt - - - 150,379 150,379
Release and allocation of
ESOP shares - 49,123 (16,558) - 32,565
Tax benefit on stock options - 46,999 - - 46,999
---------- ---------- ---------- -------- -------------
Balance at December 31, 1995 1,287,372 4,652,561 15,825,090 (358,754) 21,406,269
Stock options exercised 16,700 70,988 - - 87,688
Repurchase of common stock (92,216) (1,569,097) - - (1,661,313)
Net income - - 1,093,796 - 1,093,796
Cash dividends declared on
common stock, $.53 per share - - (649,222) - (649,222)
Principal repayment of ESOP debt - - - 157,346 157,346
Release and allocation of ESOP
shares - 63,554 (23,443) - 40,111
Tax benefit on stock options - - 52,219 - 52,219
---------- ---------- ---------- -------- -------------
Balance at December 31, 1996 $1,211,856 3,218,006 16,298,440 (201,408) 20,526,894
========== ========== ========== ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,093,796 1,361,098 1,704,833
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 15,000 20,000 60,000
Accretion of discount on loans (48,244) (31,500) (40,389)
Depreciation 190,400 193,981 205,112
Amortization of goodwill 52,500 52,500 52,500
Increase (decrease) in allowance for
uncollected interest (51,014) (55,794) 7,028
Net gain on sale of assets - - (25,954)
Net gain on sale of real estate acquired
in settlement of loans (12,695) (7,849) -
Increase in other assets (81,637) (98,266) (117,588)
Increase in accrued expenses and
other liabilities 139,365 265,171 36,118
Increase in deferred loan fees 56,927 62,827 29,273
Net noncash expense recorded for ESOP 40,111 32,565 -
---------- ---------- ----------
Net cash provided by operating
activities 1,394,509 1,794,733 1,910,933
---------- ---------- ----------
Cash flows from investing activities:
Purchases of investment securities (4,800,000) (3,700,000) (7,500,000)
Proceeds from maturities/calls of investment
securities 11,005,901 8,900,000 1,800,000
Principal collected on mortgage-backed
securities 350,384 278,463 621,233
Origination of loans, net (5,298,164) (4,182,899) (187,947)
Proceeds from sales of real estate acquired
in settlement of loans 57,075 44,937 304,877
Capital items related to real estate acquired
in settlement of loans - (83,685) (19,100)
Purchases of premises and equipment (23,710) (13,880) (44,429)
Sales of premises and equipment - - 14,050
Proceeds from sale of FHLMC preferred stock - - 500,000
Purchase of mortgage servicing rights (1,728,075) - -
Proceeds from redemption of FHLB stock 84,900 - -
---------- ---------- ----------
Net cash provided by (used in)
investing activities (351,689) 1,242,936 (4,511,316)
---------- ---------- ----------
</TABLE>
(Continued)
43
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in certificates
of deposit $ (344,420) 2,271,774 (7,059,820)
Net decrease in other deposits (1,075,456) (3,713,121) (2,048,257)
Cash dividends paid (647,900) (616,542) (556,632)
Proceeds from issuance of common stock
upon exercise of stock options 87,688 37,406 97,406
Proceeds from note payable 2,200,000 - -
Repayment of note payable (1,000,000) - -
Repurchase of common stock (1,661,313) - -
----------- ---------- -----------
Net cash used in financing activities (2,441,401) (2,020,483) (9,567,303)
----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents (1,398,581) 1,017,186 (12,167,686)
Cash and cash equivalents, beginning of year 2,725,084 1,707,898 13,875,584
----------- ---------- -----------
Cash and cash equivalents, end of year $ 1,326,503 2,725,084 1,707,898
=========== ========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 5,052,824 5,200,010 4,160,802
Income taxes 597,937 775,427 1,076,000
=========== ========== ===========
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to real estate acquired
in settlement of loans $ - 47,278 233,533
Dividends payable 168,680 167,358 153,687
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
The following is a description of the more significant accounting and
reporting policies Haywood Bancshares, Inc. (the Corporation) and its
subsidiary, Haywood Savings Bank, SSB (Haywood Savings) follow in preparing
and presenting their consolidated financial statements.
(a) Formation of Bank Holding Company and Principles of Consolidation
-----------------------------------------------------------------
Effective on February 28, 1995, the Corporation was incorporated, solely
for the purpose of becoming the holding company for Haywood Savings. The
Corporation's registration statement on Form S-4 became effective with
the Securities and Exchange Commission on April 7, 1995. The stockholders
of Haywood Savings approved the Agreement and the Plan of Reorganization
on May 2, 1995 and the reorganization was completed on June 30, 1995.
The accompanying consolidated financial statements include the accounts
of the Corporation, Haywood Savings and its wholly owned subsidiaries,
Great Smokies Financial Corporation, Inc. and Great Smokies Insurance
Agency, Inc. Haywood Savings subsidiaries' principal business activities
are the sale of real estate held for investment and the sale of insurance
products in an agency capacity, respectively. For purposes of the
consolidated financial statements, all significant intercompany accounts
and transactions have been eliminated.
(b) Basis of Presentation
---------------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements, as well as the amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
In certain instances, amounts previously reported in the 1995 and 1994
consolidated financial statements have been reclassified to present them
in the format selected for 1996. Such reclassifications have no effect on
the net income or retained earnings as previously reported.
45
<PAGE>
(c) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand and in banks, interest-
bearing balances in other banks, and federal funds sold. Generally,
federal funds are sold for one-day periods.
(d) Investment and Mortgage-Backed Securities
-----------------------------------------
The Corporation accounts for investments and mortgage-backed securities
under Statement of Financial Accounting Standards No. 115 ("SFAS No.
115"), "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair
values and all investments in debt securities. These investments are
classified into three categories as follows:
. held-to-maturity securities - reported at amortized cost,
. trading securities - reported at fair value with unrealized gains and
losses included in income, or
. available-for-sale securities - reported at fair value with unrealized
gains and losses reported as a separate component of stockholders'
equity (net of tax effect).
At December 31, 1996 and 1995, all investment and mortgage-backed
securities are classified as held-to-maturity and reported at amortized
cost since management has the intent and ability to hold these
investments to maturity.
As a state chartered savings bank, liquidity (consisting of cash and
readily marketable securities) must be at least 10% of Haywood Savings'
assets. Haywood Savings was in compliance with such regulation at
December 31, 1996.
(e) Allowance for Loan Losses
-------------------------
The Corporation provides for loan losses on the allowance method.
Additions to the allowance for loan losses are provided by charges to
operations based on inherent loss considerations within the loan
portfolio and various other factors which, in management's judgment,
warrant current recognition in estimating possible losses. Such factors
considered include collateral values, growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to
outstanding loans, delinquency trends, and economic conditions.
Management evaluates available information periodically and the allowance
is adjusted accordingly. While management uses the best information
available to make evaluations, future adjustments to the allowance may be
necessary if conditions differ from the assumptions used in making the
evaluations. In addition, various regulatory agencies, as an integral
part of their examination
46
<PAGE>
process, periodically review the Corporation's allowance for loan losses.
Such agencies may require the Corporation to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examination.
(f) Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans is initially recorded at the
lower of cost or net fair value (less estimated costs to sell). If cost
exceeds net fair value, the asset is written down to net fair value with
the difference being charged against the allowance for loan losses.
Subsequent to foreclosure, such assets are carried at the lower of cost
or net fair value with any additional write downs being charged as real
estate losses.
(g) Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the related
assets principally on a straight-line basis. Estimated lives are ten to
forty years for buildings, building components and improvements; five to
ten years for furniture, fixtures, and equipment; and four years for
automobiles.
Maintenance and repairs are charged to expense as incurred and
improvements are capitalized. The costs and accumulated depreciation
relating to premises and equipment retired or otherwise disposed of are
eliminated from the accounts and any resulting gains or losses are
credited or charged to income.
(h) Goodwill
--------
Goodwill, representing the excess cost of investment over the fair value
of net assets acquired, is being amortized by charges to operations over
a remaining period of 14 years at December 31, 1996 using the straight-
line method.
(i) Loans
-----
Loans are carried at their principal amount outstanding plus any accrued
interest. The Corporation provides an allowance for uncollected interest
on accrued interest for loans 90 days or more past due. This allowance is
a reduction of loans for financial statement reporting because such
accrued interest is included in the related loan balances.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114 ("SFAS No. 114"), "Accounting by Creditors
for Impairment of a Loan" and Statement of Financial Accounting Standards
No. 118 ("SFAS No. 118"), "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" (collectively hereafter
referred to as "SFAS"). SFAS prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans
47
<PAGE>
and loans whose terms are modified in troubled debt restructurings. When
a loan is impaired, a creditor must measure impairment based on (1) the
present value of the impaired loan's expected future cash flows
discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan, or (3) the fair value of
the collateral for a collateral-dependent loan. Any measurement losses
are to be recognized through additions to the allowance for loan losses.
The adoption of SFAS required no increase to the allowance for loan
losses and has had no impact on net income. See note 4 for additional
disclosures regarding impaired loans.
Management considers loans to be impaired when based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to contractual terms of the loan
agreement. Factors that influence managementOs judgments include, but are
not limited to, loan payment pattern, source of repayment, and value of
collateral. A loan would not be considered impaired if an insignificant
delay in loan payment occurs and management expects to collect all
amounts due. The major sources for identification of loans to be
evaluated for impairment include past due and nonaccrual reports,
internally generated lists of loans of certain risk grades, and
regulatory reports of examination. Impaired loans are measured using
either the discounted expected cash flow method or the value of
collateral method. When the ultimate collectibility of an impaired loanOs
principal is in doubt, wholly or partially, all cash receipts are applied
to principal.
(j) Loan Origination Fees and Costs
-------------------------------
The Corporation defers loan origination fees and certain direct loan
origination costs. Net deferred fees are being amortized to loan
interest income over the actual life of the loan using a level yield
method.
(k) Income Taxes
------------
The Corporation accounts for income taxes using the asset and liability
method, the objective of which is to establish deferred tax assets and
liabilities for the temporary differences between the financial reporting
basis and the respective income tax basis of the Corporation's assets and
liabilities using enacted rates expected to be in effect when such
amounts are realized or settled.
(l) Net Income Per Share
--------------------
Net income per share is computed by dividing consolidated net income by
the weighted average number of shares of common stock outstanding during
the year. The effect of common stock equivalent shares applicable to
stock options has not been included in the calculation of net income per
share because such effect is not materially dilutive.
48
<PAGE>
(m) Other Accounting Changes
------------------------
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS No. 121
had no impact on the Corporation's financial statements in 1996.
The Corporation adopted Statement of Financial Accounting Standards No.
122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights,"
effective January 1, 1996. SFAS No. 122 requires that a mortgage banking
enterprise recognize as separate assets the rights to service mortgage
loans for others, however those servicing rights are acquired. As the
Corporation does not generally originate loans held for sale, the
adoption of SFAS No. 122 had no effect on the financial statements in
1996.
The Corporation adopted Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," on
January 1, 1996. SFAS No. 123 encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation cost would be shown as an expense on
the income statement. Companies may choose to continue to measure
compensation for stock-based plans using the intrinsic method of
accounting prescribed by APB Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." Entities electing to continue the accounting
prescribed in APB 25 will be required to disclose in the notes to the
financial statements what net income and earnings per share would have
been if the fair value-based method of accounting defined in SFAS No. 123
had been applied. See note 12 for additional disclosures regarding the
adoption of SFAS No. 123 and the impact on the Corporation.
In August 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities using a financial-components approach that focuses on control
of the asset or liability. It requires that an entity recognize only
assets it controls and liabilities it has incurred and should derecognize
assets only when control has been surrendered and derecognize liabilities
only when they have been extinguished. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Corporation plans to adopt this Statement on January
1, 1997 without any impact on its consolidated financial statements.
49
<PAGE>
(2) Investment Securities
---------------------
Investment securities held-to-maturity consist of the following:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $10,894,099 17,335 (166,473) 10,744,961
=========== ========== ========== ==========
December 31, 1995
------------------------------------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $17,100,000 57,795 (44,320) 17,113,475
========== ========== ========== ==========
</TABLE>
The following table shows investment securities held by the Corporation by
maturity category at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
Book Market Book Market
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,757,143 2,757,765 9,000,000 8,987,782
Due after one year through
five years 8,136,956 7,987,196 8,100,000 8,125,693
---------- ---------- ---------- ----------
$10,894,099 10,744,961 17,100,000 17,113,475
=========== ========== ========== ==========
</TABLE>
There were no sales of investment securities during 1996, 1995, and 1994,
except for the sale of FHLMC preferred stock in 1994 on which there was no
gain or loss recognized.
50
<PAGE>
(3) Mortgage-Backed Securities
--------------------------
Mortgage-backed securities held-to-maturity consist of the following:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
FHLMC certificates, 8.50%,
maturing from 2005
to 2009 $ 674,184 31,451 - 705,635
GNMA securities, 8.50% to
9.00%, maturing from
2009 to 2017 395,139 17,249 - 412,388
--------- ---------- ---------- ---------
$1,069,323 48,700 - 1,118,023
========== ========== ========== =========
December 31, 1995
---------------------------------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
FHLMC certificates, 8.50%,
maturing from 2005
to 2009 $ 800,463 35,139 - 835,602
GNMA securities, 8.50% to
9.00%, maturing from
2009 to 2017 619,244 33,570 - 652,814
--------- ---------- ---------- ---------
$1,419,707 68,709 - 1,488,416
========== ========== ========== =========
</TABLE>
There were no sales of mortgage-backed securities during 1996, 1995, and
1994.
51
<PAGE>
(4) Loans
-----
<TABLE>
<CAPTION>
Loans consist of the following:
December 31,
------------
1996 1995
----------- -----------
<S> <C> <C>
Loans secured by first mortgages on real
estate:
Conventional, primarily one to four
family $90,197,005 88,741,106
Commercial 13,115,193 10,501,986
Construction 6,729,300 5,410,011
Participation loans purchased 417,329 334,323
----------- -----------
110,458,827 104,987,426
Home equity lines of credit 2,388,470 2,141,833
Loans secured by deposit accounts 701,428 609,025
Home improvement loans 145,651 178,818
----------- -----------
113,694,376 107,917,102
Undisbursed proceeds on loans in process (3,142,363) (2,663,256)
Discount on loans acquired through merger - (48,244)
Deferred loan fees (451,685) (394,755)
Allowance for loan losses (718,547) (703,547)
Allowance for uncollected interest (37,375) (88,389)
----------- -----------
$109,344,406 104,018,911
=========== ===========
</TABLE>
The Corporation grants residential, residential and non-residential
construction, and commercial real estate loans to customers throughout its
general market area of Haywood, Cherokee, and Jackson counties of western
North Carolina. As reflected in the summary of loans at December 31, 1996,
the largest component of the Corporation's loan portfolio consists of lower-
risk single-family, 1-4 unit, residential loans. The higher risk component
of the loan portfolio consists of real estate construction loans and
commercial real estate loans for which repayment is more dependent on current
real estate markets and general economic conditions. Management actively
monitors the higher risk portion of the portfolio and provides increased
provision for loan losses when considered necessary.
The following summarizes the activity in the allowance for loan losses for
the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 703,547 683,547 623,547
Provision for loan losses 15,000 20,000 60,000
Less loan chargeoffs - - -
-------- ------- -------
Balance at end of year $ 718,547 703,547 683,547
======== ======= =======
</TABLE>
52
<PAGE>
The Corporation had nonaccrual loans of approximately $814,000 and $1,285,000
at December 31, 1996 and 1995, respectively. Had these loans performed in
accordance with their contractual terms, approximately $57,000 and $85,000 of
interest income would have been recorded during the years ended December 31,
1996 and 1995, respectively. Interest income of approximately $30,000 was
recorded in connection with loans classified as nonaccrual in 1996 and 1995.
At December 31, 1996 and 1995, the recorded investments in loans that were
considered to be impaired under SFAS was approximately $741,000 and $713,000,
respectively, of which all were on nonaccrual. The related allowance for
loan losses on these loans was approximately $98,500 and $95,700 at December
31, 1996 and 1995, respectively. During the years ended December 31, 1996 and
1995, the average recorded investment in impaired loans was approximately
$780,000 and $692,000, respectively. The Corporation recognized
approximately $31,000 of interest income on impaired loans in 1996. No
income was recognized on impaired loans in 1995.
At December 31, 1996, the Corporation had adjustable rate loan commitments
outstanding aggregating $1,379,500, and fixed rate loan commitments
outstanding aggregating $401,900. In addition, the Corporation has committed
to participate in 49 "affordable housing" fixed rate construction projects in
the aggregate sum of $665,000. Also, preapproved but unused variable rate
lines of credit for home equity loans approximate $1,114,500 at December 31,
1996. In the opinion of management, these loan commitments, including
undisbursed proceeds on loans in process reflected above, represent no more
than normal lending risk to the Corporation and will be funded from normal
sources of liquidity.
Loans serviced for others approximated $401,000, $604,000, and $812,000, at
December 31, 1996, 1995, and 1994, respectively.
The following is a reconciliation of aggregate loans outstanding to executive
officers, directors, and their immediate families for the year ended December
31, 1996, for such loan amounts aggregating in excess of $60,000.
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $ 1,503,433
New loans 2,341
Principal repayments (154,948)
-----------
Balance at end of year $ 1,350,826
===========
</TABLE>
53
<PAGE>
(5) Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans, net of related allowance for
real estate losses, consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---------- ---------
<S> <C> <C>
Shopping center-Waynesville, North Carolina $1,782,995 1,782,995
Other, primarily single family residences 7,192 51,572
---------- ---------
$1,790,187 1,834,567
========== =========
</TABLE>
Net rental income related to the operations of real estate acquired in
settlement of loans was approximately $348,000, $215,000 and $153,000 in
1996, 1995 and 1994, respectively.
(6) Premises and Equipment
----------------------
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Depreciation Value
----------- ------------ -------------
<S> <C> <C> <C>
December 31, 1996:
Land and land improvements $ 368,064 - 368,064
Office buildings and improvements 2,506,493 1,448,162 1,058,331
Furniture, fixtures, and equipment 1,402,184 1,182,890 219,294
Automobiles 27,561 12,863 14,698
---------- --------- ---------
$4,304,302 2,643,915 1,660,387
========== ========= =========
December 31, 1995:
Land and land improvements $ 368,064 - 368,064
Office buildings and improvements 2,499,707 1,358,481 1,141,226
Furniture, fixtures, and equipment 1,385,293 1,087,718 297,575
Automobiles 27,561 7,349 20,212
---------- --------- ---------
$4,280,625 2,453,548 1,827,077
========== ========= =========
</TABLE>
(7) Investment in Mortgage Servicing Rights
---------------------------------------
During 1996, the Corporation made a $3,000,000 commitment to be a limited
partner in Dovenmuehle Mortgage Company L.P. ("DMCLP") Tranche VIII Servicing
Division of Dovenmuehle Mortgage Inc. ("DMI"). DMI provides mortgage
servicing for a national portfolio of residential, multi-family and
commercial mortgage loans. These loans are owned or securitized by national
mortgage agencies, and by a variety of private banks, thrifts, insurance
companies and other loan investors. DMI formed DMCLP as a funding vehicle to
purchase portfolios of the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation nonrecourse residential servicing.
DMI provides the mortgage servicing for these portfolios. Under this
structure investors in DMCLP invest in separate tranches, each of which has
its own identified servicing rights and each of which may be owned by one or
a group of investors. The equity investors in each tranche benefit from a
financial return based solely on the performance of the mortgage servicing
rights purchased for the tranche.
54
<PAGE>
In December 1996, the Corporation funded $1,728,075 of its $3,000,000
commitment. The investment is accounted for under the equity method and no
equity earnings (losses) have been recorded in 1996.
(8) Income Taxes
------------
Income tax expense consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ---------
<S> <C> <C> <C>
Current expense:
Federal $596,781 730,842 883,300
State 54,219 90,245 128,300
-------- ------- ---------
651,000 821,087 1,011,600
-------- ------- ---------
Deferred benefit:
Federal (65,781) (6,314) (6,000)
State (14,219) (1,686) (1,300)
-------- ------- ---------
(80,000) (8,000) (7,300)
-------- ------- ---------
$571,000 813,087 1,004,300
======== ======= =========
</TABLE>
The statutory income tax amounts are reconciled with the effective income tax
amounts as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ---------
<S> <C> <C> <C>
Tax at federal rate (34%) $566,031 739,223 921,105
Differences:
State income taxes, net of federal
income tax benefit 26,400 58,449 83,820
Other, net (21,431) 15,415 (625)
-------- ------- ---------
$571,000 813,087 1,004,300
======== ======= =========
Effective tax rate 34.3% 37.4% 37.1%
======== ======= =========
</TABLE>
55
<PAGE>
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
--------- --------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 281,060 275,192
Deferred compensation 295,997 250,795
Net loan fees, deferred for financial reporting 92,738 111,286
Accrued pension liability 121,817 82,509
Other 22,440 40,381
-------- --------
Total gross deferred tax assets 814,052 760,163
Less valuation allowance - -
-------- --------
Net deferred tax assets 814,052 760,163
-------- --------
Deferred tax liabilities:
Tax bad debt reserve (343,845) (322,198)
Depreciable basis of fixed assets (141,807) (164,704)
Mortgage-backed securities, book basis in excess of tax (58,225) (69,155)
FHLB stock, book basis in excess of tax (234,175) (248,106)
-------- --------
Total gross deferred tax liabilities (778,052) (804,163)
-------- --------
Net deferred tax asset (liability) $ 36,000 (44,000)
======== ========
</TABLE>
There was no valuation allowance during 1996 or 1995. It is management's
contention that realization of the deferred tax assets is more likely than
not, based upon the history of taxable income and estimates of future taxable
income.
The Corporation has been permitted under the Internal Revenue Code to deduct
an annual addition to the tax reserve for bad debts based on 8% of taxable
income (the "percentage of taxable income method") or actual loan loss
experience (the "experience method"). For the period ending December 31,
1996, Haywood Savings is required to change its overall tax method of
accounting for bad debts to either the experience method or the specific
charge-off method to comply with recent tax legislation. Beginning in 1996,
the new legislation requires the recapture of any tax reserves in excess of
pre-1988 base year amounts over approximately eight years. The Corporation
has approximately $815,000 of excess tax reserves as of December 31, 1996.
The Corporation's income tax returns for 1993 and subsequent years are
subject to final determination by the taxing authorities.
56
<PAGE>
(9) Pension and Deferred Compensation Plans
---------------------------------------
The Corporation has a defined benefit pension plan covering substantially all
of its employees. Based upon actuarial computations at December 31, 1996 and
1995, the plan's funded status and amounts recognized in the Corporation's
consolidated statements of financial condition at December 31, 1996 and 1995,
are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$502,659 in 1996 and $545,325 in 1995 $ 511,298 549,444
========== ==========
Projected benefit obligation for service rendered
to date (972,627) (1,068,431)
Plan assets at fair value, primarily deposits at
Haywood Savings and an insurance company 509,630 690,334
---------- ----------
Plan assets less than projected benefit obligation (462,997) (378,097)
Unrecognized prior service costs 93,384 99,609
Unrecognized net obligation being amortized over
19 years 45,522 50,074
Unrecognized net (gain) loss 12,657 (18,999)
---------- ----------
Accrued pension cost included in other liabilities $(311,434) (247,413)
========= ==========
Net periodic pension cost included the following components:
Years ended December 31,
---------------------------------
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
Service cost - benefits earned during the
period $ 69,243 142,602 61,182
Interest cost on projected benefit obligation 71,801 70,367 70,639
Actual return on plan assets (44,541) (45,894) (40,610)
Net amortization and deferral 12,811 12,181 15,584
--------- ---------- --------
Net periodic pension cost included in
salaries and employee benefits $ 109,314 179,256 106,795
========= ========== ========
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation in 1996, 1995 and 1994 were 7.5%, and 5.5%,
respectively. The related expected long-term rate of return on plan assets
was 7.5%. Normal retirement benefits are based on final average salary and
years of service and integrated with Social Security benefits. The
Corporation's contributions to the plan are based on computations by
independent actuarial consultants.
57
<PAGE>
The Corporation has a retirement plan for non-employee directors. The plan
states that the Corporation will annually pay directors, based on a vesting
schedule, for up to ten years following retirement, an amount equal to the
directors' fees paid during the year immediately preceding the retirement
date. The Corporation recorded an expense of $51,048, $51,048 and $25,524 in
1996, 1995 and 1994, respectively, related to this plan.
Certain directors of the Corporation have elected to forego current payments
for directors' fees and to participate in a deferred compensation plan.
Expense for service cost for benefits earned during 1996, 1995, and 1994 was
$49,212, $46,097, and $43,942, respectively. The assumed weighted average
discount rate used to measure the projected benefit obligation is 8%.
Also, effective since 1991, certain employees of the Corporation have been
provided with supplemental income agreements for the purpose of additional
retirement benefits. Expense for service cost for benefits earned during
1996, 1995 and 1994 was $23,904, $23,904, and $23,574, respectively. The
assumed weighted average discount rate used to measure the projected benefit
obligation is 8%.
(10) Federal Deposit Insurance Expense
---------------------------------
Eligible deposit accounts are insured up to $100,000 by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Federal deposit insurance expense amounted to
approximately $908,000, $255,000 and $255,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
On September 30, 1996, Congress passed legislation allowing a special
assessment to be levied by the FDIC to recapitalize the SAIF. The special
assessment was based on the level of SAIF assessable deposits a financial
institution had as of March 31, 1995 subject to a 20% reduction for certain
qualifying deposits. Haywood Savings' special assessment totaled
approximately $720,000 and is included in the 1996 federal deposit insurance
expense above. On December 11, 1996, the FDIC approved a final rule
retroactive to October 1, 1996 which lowered rates on assessments paid to the
SAIF. Haywood Savings received a refund of approximately $63,000, which
reduced federal deposit insurance expense and is also included above.
(11) Stockholders' Equity
--------------------
The Corporation may not pay cash dividends on its common stock if its
regulatory capital would be reduced below the amount required for the
liquidation account established for the benefit of certain depositors of
Haywood Savings at the time of its 1987 conversion to stock ownership.
58
<PAGE>
The Corporation repurchased 86,516 shares of common stock at $18 per share in
April and May 1996, and 5,700 shares of common stock at $18.25 per share in
July of 1996 in connection with the stock repurchase program announced on
August 8, 1995, which permits repurchases of up to 10% of the 1,287,372
outstanding shares. The Corporation retires all repurchased shares under
this program.
As a North Carolina-chartered savings bank, Haywood Savings is subject to the
capital requirements of the FDIC and the N.C. Administrator of Savings
Institutions ("the Administrator"). The FDIC requires Haywood Savings to
maintain minimum ratios of Tier I capital to total risk-weighted assets and
total capital to risk-weighted assets of 4% and 8%, respectively. To be
"well capitalized," the FDIC requires ratios of Tier I capital to total risk-
weighted assets and total capital to risk-weighted assets of 6% and 10%,
respectively. Tier I capital consists of total stockholders' equity
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier I capital plus
certain adjustments, the only one of which is applicable to Haywood Savings
is the allowance for loan losses. Risk-weighted assets reflect Haywood
Savings' on- and off-balance sheet exposures after such exposures have been
adjusted for their relative risk levels using formulas set forth in FDIC
regulations. Haywood Savings is also subject to a leverage capital
requirement, which calls for a minimum ratio of Tier I capital (as defined
above) to quarterly average total assets of 3%, and a ratio of 5% to be "well
capitalized." The Administrator requires a net worth equal to at least 5% of
assets.
At December 31, 1996 and 1995, Haywood Savings was in compliance with all of
the aforementioned capital requirements as summarized below.
<TABLE>
<CAPTION>
At December 31,
----------------
1996 1995
---- -----
<S> <C> <C>
Risk-based capital ratios:
Tier I capital as a percent of risk-weighted assets 26.50% 30.81
Minimum required Tier I capital 4.00 4.00
Total capital as a percent of risk-weighted assets 27.47 31.86
Minimum required total capital 8.00 8.00
Leverage capital ratios:
Tier I capital as a percent of fourth quarter
average assets 15.06 15.49
Minimum required Tier I leverage capital 3.00 3.00
North Carolina regulatory capital:
Total capital as a percent of fourth
quarter average assets 15.60 16.02
Minimum required North Carolina capital 5.00 5.00
</TABLE>
59
<PAGE>
(12) Stock Options and Incentive Plan
--------------------------------
The Corporation has a Stock Option and Incentive Plan. An aggregate number
of shares, amounting to 126,208 or 10% of the stock issued in the conversion,
was reserved for future issuance by the Corporation for stock options to be
granted to certain directors, officers, and employees under the plan. The
plan provides for incentive options for officers and employees and non-
incentive options and stock appreciation rights for directors, officers, and
employees. The plan is administered by a three member committee of the board
of directors (Committee).
Incentive stock options granted under the Stock Option and Incentive Plan may
be granted only to full-time officers and employees at the fair market value
of the stock on the date of grant. Non-incentive stock options were granted
to non-employee members of the board of directors at an exercise price equal
to the actual offering price of the common stock issued in conjunction with
Haywood SavingsO conversion from a mutual to a stock association in 1987.
Both types of options are exercisable upon issuance and for a ten year period
thereafter. Incentive stock options are generally forfeited at or within 3
months following termination of employment. Forfeiture of non-incentive
stock options is at the sole discretion of the Committee.
All incentive and non-incentive stock options granted to date were granted on
January 11, 1988. During 1996, 6,700 incentive stock options were exercised
at an option price of $5.63 per share and 10,000 non-incentive stock options
were exercised at an option price of $5.00 per share. At December 31, 1996
and 1995, 30,000 and 36,700 incentive stock options were outstanding at an
option price of $5.63 per share, respectively, and 14,000 and 24,000 non-
incentive options were outstanding at an option price of $5.00 per share at
December 31, 1996 and 1995, respectively. No options have been forfeited and
40,208 shares remain available for future grant under the Stock Option and
Incentive Plan. No stock appreciation rights had been granted at December
31, 1996.
Upon adoption of SFAS No. 123, the Corporation elected to continue to measure
compensation cost using APB 25. The Corporation made no grants of stock
options during the years ended December 31, 1996 and 1995, and therefore no
pro forma disclosures have been made as prescribed by SFAS No. 123.
(13) Employee Stock Ownership Plan
-----------------------------
The Corporation has an employee stock ownership plan (ESOP) whereby 126,000
shares, or approximately 10% of the stock issued in conjunction with Haywood
SavingsO conversion from a mutual to a stock association, were purchased for
future issuance to employees. Additionally, in 1994, the Plan purchased
49,000 shares of common stock at $12.00 per share for future issuance to
employees.
60
<PAGE>
Contributions to the plan are made by the Corporation on a discretionary
basis, and are allocated to each eligible employee based on his/her salary in
relation to total compensation expense. At retirement or termination of
employment each employee will receive an amount equal to his/her vested
interest in previous contributions in the form of Corporation common stock.
The original purchase of 126,000 shares was funded by a loan with an original
amount of $630,000 from a North Carolina bank. All of these shares have been
released to employees and the loan was paid off in 1994. The purchase of
49,000 shares was also funded by a loan from a North Carolina bank with an
original amount of $588,000 and a balance of $201,408 as of December 31,
1996. The loan is payable primarily in annual installments of approximately
$63,000 plus interest quarterly at prime. The loan is secured by the
unreleased shares of stock purchased for the plan, and it is not guaranteed
by the Corporation. Principal and interest payments on this loan are funded
primarily from contributions by the Corporation and cash dividends paid on
the ESOP shares. At December 31, 1996 there were 16,916 unreleased shares.
In accordance with Statement of Position 93-6, the Corporation records
compensation expense for shares released to employees, as a result of
contributions by the Corporation or dividends paid on unreleased shares in
the ESOP, equal to the fair value of the shares. For the three years ended
December 31, 1996, the Corporation recorded ESOP related expenses of
$121,262, $152,417 and $107,066, respectively.
(14) Line of Credit
--------------
The Corporation has established a $3,000,000 line of credit with a North
Carolina bank with an interest rate equal to prime. The Corporation is
required to pay off this line of credit at some point during each year and to
leave it unused for a period of 60 days. At December 31, 1996, the
Corporation had outstanding borrowings against this line of $1,200,000, with
interest expense of $17,299 in 1996. At December 31, 1995, the Corporation
had no outstanding borrowings under this line of credit.
(15) Fair Value of Financial Instruments
-----------------------------------
The Corporation is required under Statement of Financial Accounting Standards
No. 107, "Disclosures about Fair Value of Financial Instruments" to disclose
in its financial statements the fair value of all financial instruments,
including assets and liabilities both on- and off-balance sheet, for which it
is practicable to estimate such fair value. Fair value estimates, methods,
and assumptions for the Corporation are set forth below and are subject to
the following limitations.
Fair value estimates are made at a specific point in 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 at one time the Corporation's entire holdings of a
particular financial instrument. Because no market exists for a portion of
the Corporation's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, 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 assumptions could significantly affect the estimates.
61
<PAGE>
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. Significant assets and liabilities that
are not considered financial assets or liabilities include deferred tax
assets and premises 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.
The Corporation's fair value methods and assumptions are as follows:
. Cash on hand and in banks, interest-bearing balances in other banks,
federal funds sold, Federal Home Loan Bank Stock, accrued interest
receivable, and accrued interest payable - the carrying value is a
reasonable estimate of fair value.
. Investment and mortgage-backed securities - fair value is based on
available quoted market prices or quoted market prices for similar
securities if a quoted market price is not available.
. Loans - the carrying value for variable rate loans is a reasonable estimate
of fair value due to contractual interest rates based on prime. Fair value
for fixed rate loans is estimated based upon discounted future cash flows
using discount rates comparable to rates currently offered for such loans.
. Deposit accounts - the fair value of certificates of deposit is estimated
using rates currently offered for deposits of similar remaining maturities.
The fair value of all other deposit account types is the amount payable on
demand at year-end.
. Commitments to extend credit and standby letters of credit - the large
majority of the Corporation's loan commitments are at variable rates and,
therefore, are subject to minimal interest rate risk exposure.
62
<PAGE>
Based on the limitations, methods, and assumptions noted above, the
estimated fair values of the Corporation's financial instruments at December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
---------------------------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash on hand and in banks $1,029,850 1,029,850
Interest-bearing balances in other banks 143,806 143,806
Federal funds sold 152,847 152,847
Investment securities 10,894,099 10,744,961
Mortgage-backed securities 1,069,323 1,118,023
Loans 109,344,406 110,566,000
Federal Home Loan Bank stock 1,427,300 1,427,300
Accrued interest receivable 197,263 197,263
Financial liabilities:
Deposit accounts 107,343,379 107,452,000
Accrued interest payable 275,065 275,065
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash on hand and in banks $1,467,946 1,467,946
Interest-bearing balances in other banks 816,890 816,890
Federal funds sold 440,248 440,248
Investment securities 17,100,000 17,113,475
Mortgage-backed securities 1,419,707 1,488,416
Loans 104,018,911 106,489,000
Federal Home Loan Bank stock 1,512,200 1,512,200
Accrued interest receivable 288,435 288,435
Financial liabilities:
Deposit accounts 108,763,255 108,883,000
Accrued interest payable 291,875 291,875
</TABLE>
63
<PAGE>
(16) Selected Quarterly Financial Information (unaudited)
---------------------------------------------------
Selected quarterly financial information for the years ended December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------
(in thousands, except net income per share)
First Second Third Fourth
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest income $ 2,477 2,477 2,434 2,479
Interest expense 1,264 1,277 1,157 1,338
-------- -------- -------- --------
Net interest income 1,213 1,200 1,277 1,141
Provision for loan losses 5 5 5 -
-------- -------- -------- --------
Net interest income after
provision for loan losses 1,208 1,195 1,272 1,141
Other income 187 174 175 125
General and administrative
expenses 802 846 1,504 660
-------- -------- -------- --------
Income before income taxes 593 523 (57) 606
Income taxes 222 187 (44) 206
-------- -------- -------- --------
Net income $ 371 336 (13) 400
======== ======== ======== ========
Net income per share $ .29 .29 (.01) .32
======== ======== ======== ========
1995
------------------------------------------
(in thousands, except net income per share)
First Second Third Fourth
--------- ---------- --------- --------
Interest income $ 2,411 2,547 2,516 2,569
Interest expense 1,132 1,355 1,283 1,447
-------- -------- -------- --------
Net interest income 1,279 1,192 1,233 1,122
Provision for loan losses 5 5 5 5
-------- -------- -------- --------
Net interest income after
provision for loan losses 1,274 1,187 1,228 1,117
Other income 130 142 128 112
General and administrative
expenses 791 804 743 806
-------- -------- -------- --------
Income before income taxes 613 525 613 423
Income taxes 231 205 192 185
-------- -------- -------- --------
Net income $ 382 320 421 238
======== ======== ======== ========
Net income per share $ .31 .25 .33 .19
======== ======== ======== ========
</TABLE>
64
<PAGE>
(17) Haywood Bancshares, Inc. (Parent Company)
-----------------------------------------
The principal asset of the Parent Company is its investment in Haywood
Savings, and its principal source of income is dividends from Haywood
Savings. Certain regulatory and other requirements restrict the lending of
funds by Haywood Savings to the Parent Company and the amount of dividends
which can be paid to the Parent Company. In addition, certain regulatory
agencies may prohibit the payment of dividends by Haywood Savings if it
determines that such payment would constitute an unsafe or unsound practice.
At December 31, 1996, Haywood Savings had no available undivided profits for
payment of dividends without obtaining prior regulatory approval.
The Parent Company's balance sheet data as of December 31, 1996 and 1995 and
related income and cash flow statement data for the years ended December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Balance sheet data:
Investment in subsidiaries $20,526,894 21,406,269
Receivable from subsidiaries 168,680 167,358
----------- ----------
$20,695,574 21,573,627
=========== ==========
Accrued liabilities 168,680 167,358
Shareholders' equity 20,526,894 21,406,269
----------- ----------
$20,695,574 21,573,627
=========== ==========
Income statement data:
Dividends from subsidiaries $ 647,900 321,843
Equity in undistributed net income of
subsidiaries 445,896 1,039,255
----------- ----------
Net income $ 1,093,796 1,361,098
=========== ==========
Cash flow statement data:
Cash flows from operating activities:
Net income $ 1,093,796 1,361,098
Increase in receivable from subsidiaries (1,322) (167,358)
Increase in accrued liabilities 1,322 167,358
Increase in investment in subsidiaries (445,896) (1,039,255)
----------- ----------
Net cash provided by operating activities 647,900 321,843
----------- ----------
Cash flows from financing activities:
Cash dividends paid (647,900) (321,843)
----------- ----------
Net cash used by financing activities (647,900) (321,843)
----------- ----------
Net increase (decrease) in cash - -
----------- ----------
Cash at beginning of year - -
----------- ----------
Cash at end of year $ - -
=========== ==========
</TABLE>
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
(A) DIRECTORS OF THE REGISTRANT
The information contained under the section captioned "Proposal
I--Election of Directors" in the Proxy Statement is incorporated herein by
reference.
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Item 1.
Business--Executive Officers of the Registrant" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the section captioned "Proposal I--
Election of Directors--Executive Compensation" and "--Director Compensation" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. 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 Principal
Holders Thereof"" in the Proxy Statement.
(B) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I--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
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item its incorporated herein by
reference to the section captioned "Certain Transactions" in the Proxy
Statement.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(A) CONTENTS. The following documents are filed as part of this Annual
--------
Report on Form 10-K.
(1) Consolidated Financial Statements
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31,
1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements for the years ended
December 31, 1996, 1995 and 1994.
(2) Financial Statment Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
--------
Annual Report of Form 10-K and is also the Exhibit Index.
No. Description
---- -----------
* 3.1 Articles of Incorporation of Haywood Bancshares, Inc.
* 3.2 Bylaws of Haywood Bancshares, Inc.
(dagger)*** 10.1 Employment Agreement of Larry R. Ammons
(dagger)*** 10.2 Employment Agreement of Jack T. Nichols
(dagger)** 10.3 Haywood Bancshares, Inc. 1988 Stock Option and Incentive
Plan
(dagger)* 10.4 Retirement Payment Agreement between Larry R. Ammons and
the Bank
(dagger)* 10.5 Supplemental Income Agreement between Larry R. Ammons
and the Bank, dated October 1, 1989
(dagger)* 10.6 Supplemental Income Agreement between Jack T. Nichols
and the Bank, dated October 1, 1989
(dagger)* 10.7 Haywood Savings Bank, Inc., SSB Retirement Plan for
Non-Employee Directors
* 10.8 Capital Maintenance Agreement
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (EDGAR Only)
- -----------------
* Incorporated by reference to similarly numbered exhibits to the
Company's Registration Statement on Form S-4 (File No. 33-90186).
67
<PAGE>
** Incorporated by reference to Exhibit 99.1 to the Company's Post-
Effective Amendment No. 1 on Form S-8 to Registration Statement
on Form S-4 (File No. 33-90186).
*** Incorporated by reference to similarly numbered exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995.
(dagger) Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(B) REPORTS ON FORM 8-K. The Registrant did not file any
-------------------
Current Reports on Form 8-K during the last quarter of the fiscal year ending
December 31, 1996.
(C) EXHIBITS. The exhibits requred by Item 601 of Regulation S-K
--------
are either filed as part of this Annual Report on Form 10-K or incorporated by
reference herein.
(D) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL
-------------------------------------------------------
REPORT. There are no other financial statements and financial statement
- ------
schedules which were excluded from the Annual Report to Stockholders pursuant to
Rule 14a-3(b)(1) which are required to be included herein.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HAYWOOD BANCSHARES, INC.
Date: March 25, 1997 By: /s/ Larry R. Ammons
------------------------------
Larry R. Ammons
President
Pursuant to the requirement of the Securities Exchange Act of 1934, 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/ Larry R. Ammons By: /s/ R. Bruce Norman
-------------------- -------------------
Larry R. Ammons R. Bruce Norman
President and a Director Director
(Principal Executive Officer)
Date: March 25, 1997 Date: March 25, 1997
By: /s/ Jack T. Nichols By: /s/ C. Jeff Reece, Jr.
---------------------- --------------------------
Jack T. Nichols C. Jeff Reece, Jr.
Chief Financial Officer Director
(Principal Financial and
Accounting Officer)
Date: March 25, 1997 Date: March 25, 1997
By: /s/ Glenn W. Brown By: /s/ G. D. Stovall, Jr.
---------------------- --------------------------
Glenn W. Brown G. D. Stovall, Jr.
Director Director
Date: March 25, 1997 Date: March 25, 1997
By: /s/ William P. Burgin By: /s/ Joseph E. Taylor, Jr.
---------------------- --------------------------
William P. Burgin Joseph E. Taylor, Jr.
Director Director
Date: March 25, 1997 Date: March 25, 1997
By: /s/ Philip S. Dooly By: /s/ C. Leon Turner
---------------------- --------------------------
Philip S. Dooly C. Leon Turner
Director Director
Date: March 25, 1997 Date: March 25, 1996
By: /s/ R. Neal Ensley
----------------------
R. Neal Ensley
Director
Date: March 25, 1997
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
------
Haywood Bancshares, Inc.
PERCENTAGE STATE OF
SUBSIDIARIES (1) OWNED INCORPORATION
---------------- ---------- ---------------
Haywood Savings Bank, Inc., SSB 100% North Carolina
SUBSIDIARIES OF HAYWOOD SAVINGS BANK, INC., SSB
-----------------------------------------------
Great Smokies Financial Corporation 100% North Carolina
Great Smokies Insurance Agency, Inc.(1) 100% North Carolina
- ---------------------
(1) Wholly owned subsidiary of Great Smokies Financial Corporation.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Haywood Bancshares, Inc.
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Haywood Bancshares, Inc. of our report dated February 7, 1997, relating
to the consolidated statements of financial condition of Haywood Bancshares,
Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1996, included
in the December 31, 1996 annual report on Form 10-K of Haywood Bancshares,
Inc.
KPMG Peat Marwick LLP
Charlotte, North Carolina
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,029,850
<INT-BEARING-DEPOSITS> 143,806
<FED-FUNDS-SOLD> 152,847
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 12,053,422
<INVESTMENTS-MARKET> 11,862,984
<LOANS> 109,344,406
<ALLOWANCE> 718,547
<TOTAL-ASSETS> 130,901,364
<DEPOSITS> 107,343,379
<SHORT-TERM> 1,200,000
<LIABILITIES-OTHER> 1,831,091
<LONG-TERM> 0
0
0
<COMMON> 1,211,856
<OTHER-SE> 19,315,038
<TOTAL-LIABILITIES-AND-EQUITY> 130,901,364
<INTEREST-LOAN> 8,760,804
<INTEREST-INVEST> 940,568
<INTEREST-OTHER> 165,425
<INTEREST-TOTAL> 9,866,797
<INTEREST-DEPOSIT> 5,018,715
<INTEREST-EXPENSE> 5,036,014
<INTEREST-INCOME-NET> 4,830,783
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,811,663
<INCOME-PRETAX> 1,664,796
<INCOME-PRE-EXTRAORDINARY> 1,093,796
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,093,796
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 3.83
<LOANS-NON> 814,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 703,547
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 718,547
<ALLOWANCE-DOMESTIC> 718,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
