<PAGE>
<PAGE> FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 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 executive offices) (Zip Code)
(828) 456-9092
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-----------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of August 13, 1998, shares of common stock outstanding
were 1,250,356.<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION> June 30, December 31,
1998 1997
------------ ------------
Assets (Unaudited)
------
<S> <C> <C>
Cash on hand and in banks $ 1,014,838 1,736,787
Interest-bearing balances in other banks 2,028,029 418,967
Federal funds sold 725,294 2,039,247
Investment securities:
Held to maturity (fair value of $10,784,635
and $11,303,051, at June 30, 1998 and
December 31, 1997, respectively) 10,742,708 11,242,929
Available for sale (cost of $16,692,312
and $15,719,503 at June 30, 1998 and
December 31, 1997, respectively) 16,773,911 15,805,611
Loans receivable (net of allowance for loan
losses of $748,547 and $738,547, at June
30, 1998 and December 31, 1997, respectively) 113,169,114 114,150,356
Real estate acquired in settlement of loans 7,192 246,078
Federal Home Loan Bank stock, at cost 1,427,300 1,427,300
Premises and equipment 1,520,934 1,551,510
Investment in mortgage servicing rights 1,958,834 3,027,116
Goodwill 701,480 727,530
Other assets 1,648,566 1,106,143
------------ -----------
$151,718,200 153,479,574
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposit accounts:
Noninterest-bearing $ 208,842 199,170
Interest-bearing, including $14,198,798
and $13,973,839, respectively, of time
deposits for $100,000 or more 116,754,359 118,471,286
------------ -----------
116,963,201 118,670,456
Advances from Federal Home Loan Bank 10,500,000 10,500,000
Accrued expenses and other liabilities 2,154,317 2,135,586
------------ -----------
Total liabilities 129,617,518 131,306,042
------------ -----------
Stockholders' equity:
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; 1,250,356 shares issued
and outstanding, respectively 1,250,356 1,250,356
Additional paid-in capital 3,497,815 3,437,275
Retained income, substantially restricted 17,325,772 17,487,686
Accumulated other comprehensive income 53,855 56,831
Less obligation in connection with funds
used to acquire common shares by ESOP (27,116) (58,616)
------------ -----------
Total stockholders' equity 22,100,682 22,173,532
------------ -----------
$151,718,200 153,479,574
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION> Six Months Ended June 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 4,582,544 4,467,686
Investment securities 915,387 657,392
Interest-bearing balances in other banks 15,201 8,087
Federal funds sold 30,084 17,464
Other 52,204 51,314
----------- ----------
Total interest income 5,595,420 5,201,943
----------- ----------
Interest expense:
Deposits, including $324,816 in 1998 and
$302,733 in 1997, on time deposits for
$100,000 or more 2,770,705 2,684,339
Other borrowed money 301,997 200,791
----------- ----------
Total interest expense 3,072,702 2,885,130
----------- ----------
Net interest income 2,522,718 2,316,813
Provision for loan losses 10,000 10,000
----------- -----------
Net interest income after provision
for loan losses 2,512,718 2,306,813
----------- -----------
Other income:
Insurance income, net 77,313 91,304
Service charges on deposits 30,345 38,151
Rental income 25,367 29,172
Gain on sale of real estate acquired
in settlement of loans 426,872 -
Real estate operations, net 1,210 204,956
Gain on sale of investment securities
available for sale 6,418 -
Income (loss) on investment in mortgage
servicing rights (1,176,957) 61,995
Other income 39,511 19,138
----------- -----------
Total other income (expense), net (569,921) 444,716
----------- -----------
General and administrative expenses:
Salaries and employee benefits 891,537 933,709
Occupancy and equipment 162,650 175,272
Federal and other insurance premiums 40,217 42,209
Amortization of goodwill 26,250 26,250
Other expenses 429,162 415,213
----------- -----------
Total general and administrative
expenses 1,549,816 1,592,653
----------- -----------
Income before income taxes 392,981 1,158,876
Income taxes 149,000 433,000
----------- -----------
Net income $ 243,981 725,876
=========== ===========
Per share amounts:
Net income - basic $ .20 $ .59
=========== ===========
Net income - diluted $ .20 $ .59
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION> Three Months Ended June 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 2,283,593 2,267,831
Investment securities 458,849 452,242
Interest-bearing balances in other banks 7,191 4,101
Federal funds sold 13,476 11,224
Other 26,689 25,799
----------- ----------
Total interest income 2,789,798 2,761,197
----------- ----------
Interest expense:
Deposits, including $152,759 in 1998 and
$148,239 in 1997, on time deposits for
$100,000 or more 1,383,579 1,395,051
Other borrowed money 152,087 151,166
----------- ----------
Total interest expense 1,535,666 1,546,217
----------- ----------
Net interest income 1,254,132 1,214,980
Provision for loan losses 5,000 5,000
----------- ----------
Net interest income after provision
for loan losses 1,249,132 1,209,980
----------- ----------
Other income:
Insurance income, net 32,338 51,521
Service charges on deposits 14,056 17,560
Rental income 12,904 15,159
Gain on sale of real estate acquired in
settlement of loans 20,000 -
Real estate operations, net (36) 108,335
Income (loss) on investment in mortgage
servicing rights (1,215,792) 23,721
Other income 33,364 9,371
----------- ----------
Total other investment in income (expense),
net (1,103,166) 225,667
----------- ----------
General and administrative expenses:
Salaries and employee benefits 447,067 491,543
Occupancy and equipment 78,930 82,371
Federal and other insurance premiums 20,148 9,430
Amortization of goodwill 13,125 13,125
Other expenses 235,498 184,366
----------- ----------
Total general and administrative
expenses 794,768 780,835
----------- ----------
Income (loss) before income taxes (648,802) 654,812
Income taxes (benefit) (258,000) 239,000
----------- ----------
Net income (loss) $ (390,802) 415,812
=========== ==========
Per share amounts:
Net income (loss) - basic $ (.31) $ .33
=========== ==========
Net income (loss) - diluted $ (.31) $ .33
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Six Months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Obligation Total
Common Paid-in Retained Comprehensive of the Stockholders'
Stock Capital Income Income ESOP Equity
---------- ----------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $1,250,356 3,437,275 17,487,686 56,831 (58,616) 22,173,532
Net income -- -- 243,981 -- -- 243,981
Cash dividends declared on
common stock, $.30 per share -- -- (375,106) -- -- (375,106)
Principal repayment of ESOP debt -- -- -- -- 31,500 31,500
Release and allocation of ESOP
shares -- 60,540 (30,789) -- -- 29,751
Net unrealized loss on
securities, net of tax
effect of $1,533 -- -- -- (2,976) -- (2,976)
---------- ---------- ---------- -------- -------- ----------
Balance at June 30, 1998 $1,250,356 3,497,815 17,325,772 53,855 (27,116) 22,100,682
========== ========== ========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other Obligation Total
Common Paid-in Retained Comprehensive of the Stockholders'
Stock Capital Income Income ESOP Equity
---------- ----------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1,211,856 3,218,006 16,298,440 -- (201,408) 20,526,894
Stock options exercised 44,000 194,750 -- -- -- 238,750
Repurchase of Common Stock (5,500) (82,157) -- -- -- (87,657)
Net income -- -- 725,876 -- -- 725,876
Cash dividends declared on
common stock, $.28 per share -- -- (351,081) -- -- (351,081)
Principal repayment of
ESOP debt -- -- -- -- 31,500 31,500
Release and allocation of
ESOP shares -- 32,368 (13,062) -- -- 19,306
Net unrealized loss on securities
net of tax effect of $74,246 -- -- -- (144,091) -- (144,091)
---------- ---------- ---------- -------- -------- ----------
Balance at June 30, 1997 $1,250,356 3,362,967 16,660,173 (144,091) (169,908) 20,959,497
========== ========== ========== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION> Six Months Ended June 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 243,981 725,876
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 10,000 10,000
Depreciation and amortization 115,970 85,932
Amortization of goodwill 26,050 26,250
Loss (income) from investment in mortgage
servicing rights 1,176,957 (61,995)
Increase (decrease) in allowance for
uncollected interest 10,198 11,707
Net gain on sale of real estate acquired
in settlement of loans (426,872) -
Net gain on sale of investment securities
available for sale (6,418) -
Decrease in other assets (542,423) (39,624)
Increase in accrued expenses and
other liabilities 51,764 350,220
Increase in deferred loan fees 30,331 29,144
Net noncash expense recorded for ESOP 29,751 19,306
----------- -----------
Net cash provided by operating
activities 719,289 1,156,816
----------- -----------
Cash flows from investing activities:
Purchases of investment securities held to
maturity (4,500,000) (3,000,000)
Proceeds from maturities and issuer calls
of investment securities held to maturity 4,800,000 4,357,142
Purchase of investment securities available
for sale (6,026,250) (4,001,975)
Proceeds from maturities and issuer calls
of investment securities available for sale 1,500,000 -
Proceeds from sale of investment securities
available for sale 3,505,963 -
Principal collected on mortgage-backed
securities held to maturity 200,221 111,621
Purchase of mortgage-backed securities
available for sale - (10,725,345)
Repayment (origination) of loans, net 894,277 (2,320,556)
Purchases of premises and equipment (31,498) (18,719)
Purchase of investment in mortgage servicing
rights (108,675) (1,163,250)
Proceeds from sales of real estate acquired
in settlement of loans 702,194 -
----------- -----------
Net cash provided by (used in)
investing activities 936,232 (16,761,082)
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in certificates
of deposit (2,535,142) 9,572,478
Net increase (decrease) in other deposits 827,887 (115,928)
Advances from FHLB - 10,500,000
Repayment of note payable - (1,200,000)
Repurchase of common stock - (87,657)
Cash dividends paid (375,106) (343,940)
Proceeds from issuance of common stock upon
exercise of stock options - 238,750
----------- -----------
<PAGE>
Net cash provided by (used in)
financing activities (2,082,361) 18,563,703
----------- -----------
Net increase (decrease) in cash and cash
equivalents (426,840) 2,959,437
Cash and cash equivalents at beginning of
period 4,195,001 1,326,503
----------- -----------
Cash and cash equivalents at end of period $3,768,161 4,285,940
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION> Six Months Ended June 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $3,093,832 2,845,630
========== =========
Income taxes $ 206,273 406,342
========== =========
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to real estate acquired in
settlement of loans $ 36,436 -
========== =========
Dividends payable $ 187,553 175,821
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
7<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(1) Presentation of Financial Statements
------------------------------------
The consolidated financial statements include the accounts
of Haywood Bancshares, Inc. (the Corporation) and its
wholly-owned subsidiary Haywood Savings Bank, SSB (Haywood
Savings). All intercompany transactions and balances are
eliminated in consolidation.
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 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.
All adjustments considered necessary for a fair
presentation of the results for the interim periods
presented have been included (such adjustments are normal
and recurring in nature). Operating results for the three
and six month periods ended June 30, 1998, are not
necessarily indicative of the results that may be expected
for the year ending December 31, 1998. The Consolidated
Statement of Financial Condition as of December 31, 1997
was derived from the Corporation's audited Consolidated
Statement of Financial Condition as of December 31, 1997,
included in the Corporation's 1997 Annual Report on Form
10-K.
(2) Summary of Significant Accounting Policies
------------------------------------------
For a description of the significant accounting and
reporting policies, see note (1) in the notes to the
December 31, 1997 consolidated financial statements of the
1997 annual report. Also see note (4) to the consolidated
financial statements for accounting policies related to
the investment in mortgage servicing rights.
On January 1, 1998 the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and displaying
comprehensive income and its components (revenues,
expense, gains and losses) in a full set of general-purpose
financial statements. This Statement requires that an
enterprise (a) classify items of other comprehensive income
by their nature in the financial statement and (b) display
the accumulated balance of other comprehensive income
separately from retained earnings and additional
paid-in-capital in the equity section of a statement of
financial position. In accordance with the provisions of
SFAS No. 130, comparative financial statements presented
for earlier periods have been reclassified to reflect the
provisions of the statement.
Comprehensive income is the change in equity of a
Corporation during the period from transactions and other
events and circumstances from nonowner sources.
Comprehensive income is divided into net income and other
comprehensive income. The Corporation's other
comprehensive income for the three and six months ended
June 30, 1998 and 1997 consists of unrealized gains and
losses on certain investments in debt and equity
securities. Comprehensive income(loss) for the three months
ended June 30, 1998 and 1997 is ($315,221) and $500,726,
respectively. Comprehensive income for the six months
ended June 30, 1998 and 1997 is $241,005 and $581,785,
respectively.
8<PAGE>
<PAGE>
(3) 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, cash and cash equivalents are considered
to have maturities of three months or less.
(4) 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. The
Corporation has funded all of its $3,000,000 commitment.
The investment is accounted for under the equity method.
Management periodically evaluates the fair value of the
mortgage servicing rights owned by DMCLP using appraisals
prepared by a third party and adjusts the carrying value of
their investment when there is impairment.
During the three months ended June 30, 1998, the Corporation
recognized an impairment valuation adjustment totaling
$1,234,521. The impairment and write-down of the mortgage
servicing rights is due to significant prepayments of the
underlying mortgage loans due to a decline in mortgage loan
interest rates. Total earnings (loss) were ($1,215,792) and
$23,721 for the three months ended June 30, 1998 and 1997,
respectively, and ($1,176,957) and $61,995 for the six
months ended June 30, 1998 and 1997, respectively.
(5) Allowance for Loan Losses
-------------------------
The following is a reconciliation of the allowance for loan
losses for the three and six months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 743,547 723,547 738,547 718,547
Provision for loan losses 5,000 5,000 10,000 10,000
--------- ------- ------- -------
Balance at end of period $ 748,547 728,547 748,547 728,547
--------- ------- ------- -------
</TABLE>
(6) Borrowings
----------
The Corporation has $10,500,000 in advances from the Federal
Home Loan Bank of Atlanta. These advances bear interest at
a floating rate equal to one month LIBOR and mature on
February 24, 1999.
(Continued)
9<PAGE>
<PAGE>
(7) Earnings per Share
------------------
The Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per
Share", (SFAS No. 128) during 1997. The statement
establishes standards for computing and presenting earnings
per share (EPS). In accordance with SFAS No. 128, all prior
period EPS has been restated. Basic EPS is computed by
dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if the Corporation's
dilutive stock options were exercised. The numerator of the
basic net income per share computation is the same as the
numerator of the diluted net income per share computation
for all periods presented. A reconciliation of the
denominator of the basic net income EPS computation is as
follows:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Basic EPS denominator: weighted average
number of common shares outstanding 1,250,356 1,252,252 1,250,356 1,224,225
Dilutive effect arising from assumed
exercise of stock options - - - 1,427
--------- --------- --------- ---------
Diluted EPS denominator 1,250,356 1,252,252 1,250,356 1,225,652
--------- --------- --------- ---------
</TABLE>
(8) Other Accounting Changes
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS 131 establishes
standards for the way that public businesses report
information about operating segments in annual financial
statements and requires that those enterprise report
selected information about operating segments in interim
financial reports issued to shareholders. It also
establishes standards for related disclosures about products
and services, geographic areas, and major customers. This
Statement is effective for financial statements for periods
beginning after December 15, 1997 and in the initial year of
application, comparative information for earlier years is to
be restated. The Corporation will adopt SFAS No. 131 in
1998 without any significant impact on its consolidated
financial statements as the Corporation operates as one
segment.
In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132,
"Employer's Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
standardizes the disclosure requirements of pensions and
other postretirement benefits. It does not change any
measurement or recognition provisions, and thus will not
materially impact the Corporation. SFAS No. 132 is
effective for fiscal years beginning after December 15,
1997. The Corporation will present the required
disclosures in its financial statements for the year ended
December 31, 1998.
(Continued)
10<PAGE>
<PAGE>
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement will be adopted by the
Corporation in 1999 without any impact on its consolidated
financial statements as the Corporation does not have any
derivative financial instruments nor is involved in any
hedging activities.
11<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Comparison of Operating Results for the Six Months ended June
30, 1998 and 1997
- --------------------------------------------------------------
Net income for the six months ended June 30, 1998 decreased to
$243,981, or $.20 per basic and diluted share, from $725,876 or
$.59 per basic and diluted share for the same period in 1997.
The decrease in net income was due to a $1,177,000 loss on
investment in mortgage servicing rights. This loss was
partially offset by a $403,000 pre-tax gain on the sale of two
outparcels to the Waynesville Plaza Shopping Center which the
Corporation had been holding as real estate acquired in
settlement of loans. In addition, net interest income increased
by $206,000 and general and administrative expenses decreased
by $43,000.
Total interest income for the six months ended June 30, 1998 was
$5,595,420, a $393,000 increase from the same period in 1997.
The reason for the change was an increase in the average balance
of interest earning assets of approximately $10.9 million due to
the purchase of investment securities. The average yield on
interest earning assets decreased by 4 basis points to 7.71%
for the six months ended June 30, 1998 compared to 7.75% for the
same period in 1997. The decrease in average yield is mainly
due to a decrease in average yield on loans receivable from
8.01% for the six months ended June 30, 1997 to 7.98% for the
same period in 1998 due to competitive pressures in the
marketplace for loans.
Interest expense for the six months ended June 30, 1998
increased from 1997 by $188,000 mainly due to an increase in the
average balance of interest bearing liabilities of $8.0 million,
or 6.6%. The increase is mainly due to the Corporation
borrowing $10.5 million in advances from the Federal Home Loan
Bank of Atlanta ("FHLB") in the first quarter of 1997 The rate
paid on interest bearing liabilities remained fairly constant
between periods.
The overall net effect of these changes was a $206,000 increase
in net interest income and a decrease in the interest rate
spread between interest earning assets and interest bearing
liabilities from 2.93% in 1997 to 2.90% in 1998.
Comparative yields, costs and spreads for the respective periods
are as follows:
<TABLE>
<CAPTION>
Six Months Twelve Months
ended At ended
June 30, June 30, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average yield on interest earning assets 7.71% 7.75% 7.63% 7.80%
Average rate on interest bearing liabilities 4.81% 4.82% 5.04% 4.94%
---- ---- ---- ----
Asset/liability spread 2.90% 2.93% 2.59% 2.86%
==== ==== ==== ====
</TABLE>
Other income decreased $1,015,000 for the six months ended June
30, 1998 compared to the same period in 1997 due to a $1,235,000
impairment valuation adjustment to an equity investment in a
mortgage servicing partnership. The underlying mortgage
servicing rights were written down to their fair value based on
an independent appraisal. The impairment and subsequent
write-down of the mortgage servicing rights is due to
significant prepayments of the underlying mortgage loans due to
a decline in mortgage loan interest rates. Total loss on
mortgage servicing rights was $1,777,000 for the six month
period. The investment in mortgage servicing rights is
evaluated periodically by management for impairment and no
assurance can be given that additional impairment valuation
adjustments will not be required in the future. Also see
footnote (4) to the consolidated financial statements.
12<PAGE>
<PAGE>
This loss was partially offset by the sale of the outparcels to
the Waynesville Plaza Shopping Center for a gain of
approximately $403,000. Total proceeds from the sales were
$682,000 which were invested in loans receivable and other
investments. The gain on the sale of real estate acquired in
settlement of loans was partially offset by a decrease in real
estate operations, net of approximately $204,000. In 1997, the
Corporation sold the Waynesville Plaza Shopping Center and as a
result no longer receives rental and other income associated
with operating the shopping center.
General and administrative expenses decreased by approximately
$43,000, or 2.7%, between six month periods. The decrease is
due to a decrease in federal and other insurance premiums,
salaries and employee benefits, and occupancy and equipment
expense.
As a result of these and other factors, income before income
taxes decreased $765,895 for the six months ended June 30,1998
versus 1997. Income tax expense of $149,000 during the period
resulted in an effective income tax rate of 37.9% compared to
37.4% in 1997.
Comparison of Operating Results for the Three Months ended June
30, 1998 and 1997
- ---------------------------------------------------------------
Net loss for the three months ended June 30, 1998 was
($390,802), or ($.31) per basic and diluted share as compared to
net income of $415,812 or $.33 per basic and diluted share for
the same period in 1997. The net loss was due to a $1,216,000
loss on investment in mortgage servicing rights.
Total interest income for the three months ended June 30, 1998
was $2,789,798, a $29,000 increase from the same period in 1997.
Average interest earning assets increased approximately $5.6
million between periods while the average yield on interest
earning assets decreased from 7.90% for the three months
ended June 30, 1997 to 7.66% for the three months ended June 30,
1998.
Interest expense for the three months ended June 30, 1998
decreased from the same period in 1997 by $10,000 due to an
increase in the average balance of interest bearing liabilities
of $2.2 million and a decrease in the rate paid on interest
bearing liabilities of 12 basis points.
The overall net effect of these changes was a $39,000 increase
in net interest income and a decrease in the interest rate
spread between interest earning assets and interest bearing
liabilities from 2.96% in 1997 to 2.84% in 1998.
Other income decreased $1,329,000 for the three months ended
June 30, 1998 compared to the same period in 1997 due to a
$1,235,000 impairment valuation adjustment to an equity
investment in a mortgage servicing partnership as discussed
above. Total loss on mortgage servicing rights was $1,216,000
for the three month period. Also contributing to the change in
other income is a decrease in income from real estate operations
of approximately $108,000. In 1997, the Corporation sold the
Waynesville Plaza Shopping Center and as a result no longer
receives rental and other income associated with operating
the shopping center.
General and administrative expenses increased by approximately
$14,000, or 1.8%, between three month periods. The increase is
due to an increase in federal and other insurance premiums.
13<PAGE>
<PAGE>
As a result of these and other factors, income before income
taxes decreased $1,303,614 for the three months ended June
30,1998 versus 1997. Income tax benefit of $258,000 during the
period resulted in an effective income tax rate of 39.8%
compared to 36.5% in 1997.
Comparison of Financial Condition at June 30, 1998 and December
31, 1997
- ---------------------------------------------------------------
Total assets decreased by $1.8 million or 1.15% from $153.5
million at December 31, 1997 to $151.7 million at June 30, 1998.
The Corporation experienced little loan growth during the
quarter with the loan portfolio decreasing by approximately $1.0
million. Loan originations for the period were approximately
$14.1 million. The Corporation also had deposit run-off
of approximately $1.7 million.
In addition, the investment in mortgage servicing rights
decreased by approximately $1.1 million due to the impairment of
the asset. As discussed above, the impairment resulted from the
significant prepayment of the underlying mortgage loans during
1998.
Total liabilities decreased by $1.7 million to $129.6 million at
June 30, 1998. The decrease is due to a decrease in
interest-bearing deposits of approximately $1.7 million. The
decrease is mainly in certificates of deposit and is
attributable to competitive pressures in the marketplace for
deposits.
Stockholders' equity decreased by $73,000 from $22.2 million at
December 31, 1997 to $22.1 million at June 30, 1998. This
decrease is due to quarterly dividends of $.15 per share or
$375,000 offset by net income for the six months of $244,000.
Asset Quality
- -------------
At June 30, 1998, the Corporation had approximately $902,000 of
loans in nonaccrual status as compared to $583,000 at December
31, 1997. At June 30, 1998 and December 31, 1997, the
Corporation had no loans that were considered to be impaired
under Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan". There were
no loans contractually past due 90 days or more and still
accruing at June 30, 1998 and December 31, 1997. 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 Corporation's
allowance for loan losses was $748,547 or .66% of outstanding
loans at June 30, 1998. This compares to .64% at December 31,
1997.
The allowance for loan losses represents management's estimate
of an amount adequate to provide for potential losses inherent
in the loan portfolio. The adequacy of the allowance for loan
losses and the related provision are based upon management's
evaluation of the risk characteristics of the loan portfolio
under current economic conditions with consideration to such
factors as financial condition of the borrower, collateral
values, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding
loans, and delinquency trends. Management believes the
allowance for loan losses is adequate. While management uses
all available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. Various regulatory agencies, as an
integral part of their examination 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.
14<PAGE>
<PAGE>
Real estate acquired in settlement of loans decreased from
approximately $246,000 at December 31, 1997 to $7,192 at June
30, 1998 due primarily to the sale of two outparcels to the
Waynesville Plaza Shopping Center.
Year 2000 Planning
- ------------------
The Corporation has been assessing possible effects of the Year
2000 problem in connection with its technology investments and
operations. Management believes that the Corporation has
limited exposure and expects the cost of addressing the Year
2000 issues to be approximately $140,000. A Year 2000 plan
has been approved by the board of directors.
A part of the Corporation's plan in addressing the Year 2000
Issue was to contact all third party vendors, request
documentation regarding their Year 2000 compliance efforts, and
analyze the responses. This was a significant phase because the
Corporation does not perform in-house programming, and thus
is dependent on external vendors to ensure and modify, if
necessary, the hardware, or service it provides to the
Corporation to be Year 2000 complaint. This phase is now
virtually complete and the Corporation is currently
following up on any issues or concerns identified in the
responses received, as necessary.
The Corporation is installing a new mainframe computer system
and teller terminals in October 1998 that will be Year 2000
compliant. Both systems will be tested prior to December 31,
1998.
The Corporation is also in the process of developing a
contingency plan. The Corporation's efforts to date have been
concentrated on remediation efforts as discussed above.
The Year 2000 problem creates risk for the Corporation from
unforeseen problems in its own computer systems and from third
parties. Such failures of the Corporation and/or third parties'
computer systems could have a material impact on the
Corporation's ability to conduct business.
Liquidity
- ---------
The Corporation'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 primarily provided by the ability to attract
deposits, maturities in the investment portfolio, loan
repayments, and current earnings.
At June 30, 1998, Haywood Bancshares had approximately $31
million in cash, interest bearing balances in other banks,
federal funds sold and investment securities. Management
believes that the level of liquidity at June 30, 1998,
is adequate and in compliance with regulatory requirements.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and accompanying footnotes
have been prepared in accordance with generally accepted
accounting principles, which require the measurement of
financial position and operating results in terms of historical
dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The
assets and liabilities of the Corporation are primarily monetary
in nature and changes in interest rates have a greater impact on
the Corporation's performance than the effect of inflation.
15<PAGE>
<PAGE>
Capital Resources
- -----------------
As a North Carolina-charted 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 June 30, 1998, Haywood Savings was in compliance
with all of the aforementioned capital requirements and is
deemed to be "well capitalized". The Corporation must comply
with FRB capital requirements which are substantially the same.
Regulatory Matters and Contingencies
- ------------------------------------
Management is not presently aware of any current recommendations
to the Corporation or to Haywood Savings by regulatory
authorities which, if they were to be implemented, would have a
material effect on the Corporation's liquidity, capital
resources, or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.
16<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On April 28, 1998, the Company held its Annual Meeting
of Stockholders at which the following matters were
voted:
Proposal I - Election of Directors
NOMINEE FOR WITHHELD
Philip S. Dooly 993,485 10,714
C. Jeff Reece, Jr. 996,285 7,914
R. Bruce Norman 993,485 10,714
There were no abstentions or broker non-votes.
The term of office of Directors Larry R. Ammons, Glenn
W. Brown, William P. Burgin, R. Neal Ensley, Joseph E.
Taylor, Jr., C. Leon Turner and G. D. Stovall, Jr.
continued after the Annual Meeting.
Proposal II - Ratification of Appointment of Auditors
FOR AGAINST ABSTAIN
--- ------- -------
996,685 50 7,464
In addition, there were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are being filed with
the report.
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule (EDGAR only)
27.2 Restated Financial Data Schedule
(EDGAR only)
(b) Reports on Form 8-K. During the quarter ended June 30,
1998, the Registrant did not file any reports on Form
8-K.
17<PAGE>
<PAGE>
SIGNATURES
----------
Under the requirements 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.
(Registrant)
Date: August 13, 1998 By: /s/Larry R. Ammons
----------------------
Larry R. Ammons
(President and Principal
Executive Officer)
(Duly Authorized Representative)
Date: August 13, 1998 By: /s/Jack T. Nichols
----------------------
Jack T. Nichols
(Principal Financial Officer
and Principal Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,014,838
<INT-BEARING-DEPOSITS> 2,028,029
<FED-FUNDS-SOLD> 725,294
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,773,911
<INVESTMENTS-CARRYING> 10,742,708
<INVESTMENTS-MARKET> 10,784,635
<LOANS> 113,917,661
<ALLOWANCE> 748,547
<TOTAL-ASSETS> 151,718,200
<DEPOSITS> 116,963,201
<SHORT-TERM> 10,500,000
<LIABILITIES-OTHER> 2,154,317
<LONG-TERM> 0
0
0
<COMMON> 1,250,356
<OTHER-SE> 20,850,326
<TOTAL-LIABILITIES-AND-EQUITY> 151,718,200
<INTEREST-LOAN> 4,582,544
<INTEREST-INVEST> 915,387
<INTEREST-OTHER> 97,489
<INTEREST-TOTAL> 5,595,420
<INTEREST-DEPOSIT> 2,770,705
<INTEREST-EXPENSE> 3,072,702
<INTEREST-INCOME-NET> 2,522,718
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 6,418
<EXPENSE-OTHER> 1,549,816
<INCOME-PRETAX> 392,981
<INCOME-PRE-EXTRAORDINARY> 243,981
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,981
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 3.20
<LOANS-NON> 902,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 738,547
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 748,547
<ALLOWANCE-DOMESTIC> 748,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,705,316
<INT-BEARING-DEPOSITS> 479,997
<FED-FUNDS-SOLD> 2,100,627
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,506,391
<INVESTMENTS-CARRYING> 10,494,659
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<LOANS> 112,342,658
<ALLOWANCE> 728,547
<TOTAL-ASSETS> 150,416,378
<DEPOSITS> 116,799,929
<SHORT-TERM> 10,500,000
<LIABILITIES-OTHER> 2,156,952
<LONG-TERM> 0
0
0
<COMMON> 1,250,356
<OTHER-SE> 19,709,141
<TOTAL-LIABILITIES-AND-EQUITY> 150,416,378
<INTEREST-LOAN> 4,467,686
<INTEREST-INVEST> 657,392
<INTEREST-OTHER> 76,865
<INTEREST-TOTAL> 5,201,943
<INTEREST-DEPOSIT> 2,684,339
<INTEREST-EXPENSE> 2,885,130
<INTEREST-INCOME-NET> 2,316,813
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,592,653
<INCOME-PRETAX> 1,158,876
<INCOME-PRE-EXTRAORDINARY> 1,158,876
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 725,876
<EPS-PRIMARY> 0.59 <F1>
<EPS-DILUTED> 0.59 <F1>
<YIELD-ACTUAL> 3.04
<LOANS-NON> 1,170,511
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 718,547
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 728,547
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<FN>
<F1> Restated for adoption of SFAS 128.
</FN>
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