<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
For the fiscal year ended December 31, 1997
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 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: (828) 456-9092
--------------
Securities registered under Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
COMMON STOCK, PAR VALUE $1.00 PER SHARE 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. [X]
Based on the closing sale price of $22.50 on March 20, 1998 on the American
Stock Exchange, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, at March 20, 1998, was $20,670,840 million
(918,704 shares at $22.50 per share). Solely for purposes of this computation,
it is assumed that directors, officers and 5% stockholders are affiliates.
As of March 20, 1998, there were issued and outstanding 1,250,356 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 1998 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 (828) 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 $727,530 in goodwill on its balance sheet as of December 31, 1997,
which is being amortized over a remaining period of approximately 14 years at a
rate of $52,500 per year.
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.
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.
2
<PAGE>
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, 1997, the Bank's net loan portfolio totaled $114.2 million
representing 74% of its total assets. On that date, 84.06% 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, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------
$ % $ % $ %
------------- ------------ ------------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Conventional real estate loans
Interim construction loans.......... $ 6,953,200 5.87% $ 6,729,300 5.92% $ 5,410,011 5.01%
Loans on existing property(1)....... 107,835,389 91.02 103,312,198 90.87 99,243,092 91.96
Participation loans purchased....... 478,240 0.40 417,329 0.37 334,323 0.31
Loans secured by deposit accounts.... 580,639 0.49 701,428 0.61 609,025 0.57
Home improvement loans............... 164,827 0.14 145,651 0.13 178,818 0.17
Home equity lines of credit.......... 2,467,831 2.08 2,388,470 2.10 2,141,833 1.98
------------ ----------- ------------ ----------- ------------ ------
118,480,126 100.00% 113,694,376 100.00% 107,917,102 100.00%
============ ============ ============
Less:
Loans in process.................... (3,049,214) (3,142,363) (2,663,256)
Allowance for loan losses........... (738,547) (718,547) (703,547)
Allowance for uncollected interest.. (34,537) (37,375) (88,389)
Deferred loan fees.................. (507,472) (451,685) (394,755)
Discounts on loans acquired
through merger..................... -- -- (48,244)
------------ ------------ ------------
Total............................. $114,150,356 $109,344,406 $104,018,911
============ ============ ============
TYPE OF SECURITY:
Residential real estate.............. $ 99,597,227 84.06% $ 97,343,634 85.62% $ 94,485,440 87.55%
Commercial real estate............... 15,669,602 13.23 13,115,193 11.54 10,501,986 9.73
Deposit accounts..................... 580,639 0.49 701,428 0.61 609,025 0.57
Other................................ 2,632,658 2.22 2,534,121 2.23 2,320,651 2.15
------------ ----------- ------------ ----------- ------------ ------
Total............................. 118,480,126 100.00% 113,694,376 100.00% 107,917,102 100.00%
=========== =========== ======
Less:
Loans in process.................... (3,049,214) (3,142,363) (2,663,256)
Allowance for loan losses........... (738,547) (718,547) (703,547)
Allowance for uncollected interest.. (34,537) (37,375) (88,389)
Deferred loan fees.................. (507,472) (451,685) (394,755)
Discounts on loans acquired
through merger..................... -- -- (48,244)
------------ ------------ ------------
Total............................. $114,150,356 $109,344,406 $104,018,911
============ ============ ============
- -------------------------
</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, 1997 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.......... $ 5,420,915 $24,797,021 $65,058,749 $ 95,276,685
Construction loans (1)..... 3,903,986 -- -- 3,093,986
Commercial loans........... 846,200 4,077,300 10,746,102 15,669,602
Loans secured by deposits.. 580,639 -- -- 580,639
----------- ----------- ----------- ------------
$10,751,740 $28,874,321 $75,804,851 $115,430,912
=========== =========== =========== ============
- -------------------------
</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, 1997 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........... $ 71,181,836
Adjustable or floating rates.. 33,497,336
------------
Total........................ $104,679,172
============
</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, 1997, approximately $78 million, or 68%, 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, 1997, the Bank had
$3.9 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, 1997, the Bank's
commercial real estate portfolio totaled $15.7 million, or 13.23%, of the Bank's
gross loan portfolio. At December 31, 1997, the Bank's largest commercial real
estate loan consisted of a $1.0 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, 1997, the largest amount lent by the Bank to one
borrower was $1.8 million, which was approximately 7.9% 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, 1997, consumer loans totaled $3.2 million or
approximately 2.71% of the gross loan portfolio and included $580,639 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, 1997, $2.5 million in home
equity loans were outstanding, which was approximately 2.08% 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 $150,000, 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, 1997, the Bank was servicing
loans for others aggregating $283,000.
A portion of the Bank's loan originations consists of construction loans.
For the years ended December 31, 1995, 1996 and 1997, the Bank originated
construction loans in the amount of $6.0 million, $6.0 million and $9.0 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,
--------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction loans.................. $ 9,054,250 $ 5,986,844 $ 6,004,522
(Increase) decrease in undisbursed
loans in process.................. 93,150 (479,106) 688,272
Loans on existing property.......... 5,809,775 9,946,660 6,631,240
Loans refinanced.................... 7,540,200 5,668,300 4,384,400
Other loans........................... 8,041,350 4,466,200 5,051,400
----------- ----------- -----------
Total loans originated (net)...... $30,538,725 $25,588,898 $22,759,834
=========== =========== ===========
</TABLE>
Loan originations increased by $4.9 million, or 19.3%, during 1997 as a
result of increased originations of construction loans, refinancings and other
loans. These increases offset declines in loans on existing properties.
Overall, the loan portfolio increased by approximately $4.8 million, or 4.40%.
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,
------------------------
1997 1996 1995
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans....................... $ 583 $ 814 $1,285
Accruing loans which are contractually
past due 90 days or more............... -- -- --
----- ------ ------
Total non-accruing loans and accruing
loans past due 90 days or more......... $ 583 $ 814 $1,285
===== ====== ======
Percentage of total loans............... 0.51% 0.74% 1.24%
===== ====== ======
Other non-performing assets (1)......... $ 246 $1,790 $1,835
===== ====== ======
- -------------------------
</TABLE>
(1) Other non-performing assets represent property acquired through foreclosure
or repossession. See Note 4 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 by $231,000, or 28%, in 1997. Management
attributes this decrease to the improving economy. Other non-performing assets
declined during 1997 primarily due to the sale of the Waynesville Plaza Shopping
Center which the Bank had been holding as real estate acquired in the settlement
of loans since 1993 and which had a book value of $1,573,000 at the time of
sale. The Company recognized a $679,000 gain on the sale of this asset for
which the Bank provided financing. The remaining other non-performing assets at
December 31, 1997 consists of $210,000 of commercial real estate and $36,000 of
single-family residences. The commercial property consists of outparcels to the
Waynesville Plaza Shopping Center and were sold during the first quarter of
1998.
The Bank had non-accrual loans of approximately $583,000 at December 31,
1997. Had these loans performed in accordance with their contractual terms,
approximately $37,000 in additional interest income would been recorded during
1997. Interest income of $22,000 was recognized in connection with nonaccrual
loans during 1997.
At December 31, 1997, 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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year............... $718,547 $703,547 $683,547
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......... 20,000 15,000 20,000
-------- -------- --------
Balance at end of year..................... $738,547 $718,547 $703,547
======== ======== ========
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,
------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- --------------------------
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....................... $385,522 78.19% $375,082 79.70% $367,252 82.54%
Non-residential................... 184,637 13.23 179,637 11.54 175,887 9.73
Construction...................... 131,461 5.87 127,901 5.92 125,231 5.01
Equity lines of credit............ 36,927 2.08 35,927 2.10 35,177 1.98
Consumer installment and other...... -- 0.63 -- 0.74 -- 0.74
-------- ------ -------- ------ -------- ------
Total allowance for loan losses $738,547 100.00% $718,547 100.00% $703,547 100.00%
======== ====== ======== ====== ======== ======
</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, 1997, the Bank had no loans considered to be impaired under
Statement 114.
INVESTMENT ACTIVITIES
INVESTMENT SECURITIES. 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,
1997, the Bank's investment securities portfolio had a net book value of $27.0
million and a quoted market value of $27.1 million and consisted of United
States Government agency obligations, collateralized mortgage obligations and
mortgage-backed securities. 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, 1997.
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. 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. The
Company has also invested in collateralized mortgage obligations ("CMOs") which
are securities issued by special purpose entities generally collateralized by
pools of mortgage-backed securities. The cash flows from such pools are
segmented and paid in accordance with a predetermined priority to various
classes of securities issued by the entity. 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
11
<PAGE>
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.
The following table sets forth the carrying value of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS
<S> <C> <C> <C>
)Investment securities available for sale:
U.S. government and agency securities.............. $ 5,012 $ -- $ --
Collateralized mortgage obligations:
FHLMC certificates............................... 10,794 -- --
------- ------- -------
Total investment securities available for sale.. 15,806 -- --
------- ------- -------
Investment securities held-to-maturity:
U.S. government and agency securities.............. 10,437 10,894 17,100
Mortgage-backed securities:
FHLMC certificates................................ 520 674 801
GNMA certificates................................. 286 $ 395 $ 619
------- ------- -------
Total investment securities held to maturity.... 11,243 $11,963 $18,520
------- ------- -------
Total investment securities..................... $27,049 $11,963 $18,520
======= ======= =======
</TABLE>
12
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio at December
31, 1997.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS OVER TEN YEARS TOTAL INVESTMENTS
------------------ ------------------ ----------------- ---------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- -------- -------- -------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale:
U.S. government and
agency
securities......................... $ -- --% $ 5,012 6.67% $ -- --% $ 5,012 $ 5,012 6.67%
Collateralized mortgage
obligations:
FHLMC certificates............... -- -- -- -- 10,794 6.64 10,794 10,794 6.64
-------- -------- -------- -------- -------- ------- -------- ------- --------
Total investment
securities
available for
sale........................ -- -- 5,012 6.67 10,794 6.64 15,806 15,806 6.65
-------- -------- -------- -------- -------- ------- -------- ------- --------
Investment securities
held-to-maturity:
U.S. government and
agency
securities......................... 2,200 5.41 8,237 7.31 -- -- 10,437 10,449 6.91
Mortgage-backed
securities:
FHLMC certificates............... -- -- -- -- 461 8.50 520 545 8.50
GNMA certificates................ -- -- -- -- 286 8.73 286 309 8.73
-------- -------- -------- -------- -------- ------- -------- ------- --------
Total investment
securities
held to maturity............ 2,200 5.41 8,237 7.31 747 8.59 11,243 11,303 7.03
-------- -------- -------- -------- -------- ------- -------- ------- --------
Total investment
securities................... $ 2,200 5.41% $ 13,249 7.07% $ 11,541 6.77% $ 27,049 $27,109 6.81%
======== ======== ======== ======== ======== ======= ======== ======= ========
</TABLE>
13
<PAGE>
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.
The classification of investment securities as held-to-maturity, trading or
available for sale is determined at the date of purchase.
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 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, 1997, the Company had funded $2.9 million of its $3.0
million commitment. The investment is accounted for under the equity method and
equity earnings of $135,791 have been recorded in 1997.
14
<PAGE>
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.
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 1997, the Bank
experienced an increase in certificate accounts (other than jumbo certificates)
and money market deposit accounts. Management attributes the inflow in the
accounts to paying above market rates in order to attract deposits to meet the
loan demand.
15
<PAGE>
Deposits in the Bank at December 31, 1997 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
- --------- ----------- -------------------------------- ------------ ------------ ---------------
<C> <S> <C> <C> <C> <C>
--% none Commercial checking none $ 199,170 0.17%
2.11 none NOW accounts none 9,715,128 8.19
2.36 none Super NOW accounts none 1,318,304 1.11
3.00 none Optional savings accounts none 12,030,087 10.14
5.25 none Full-paid savings accounts none 7,000 0.01
3.25 none 90-day savings accounts none 892,263 0.75
3.02 none Money market deposit accounts $ 2,500 6,476,378 5.46
3.50 none Optional public funds none 37,682 0.03
CERTIFICATES OF DEPOSIT
--------------------------------
4.89 91 day 91-day certificate 500 3,060,915 2.58
5.09 6 months 6-month money market certificate 500 21,422,556 18.05
5.67 1 year 1-year certificate 500 26,264,482 22.13
5.80 18 months 18-month certificate 500 4,693,117 3.95
5.97 30 months 30-month certificate 500 8,253,441 6.95
5.64 18 months IRA certificates 500 4,803,377 4.05
6.50 2 years 6-1/2% certificates 500 495 --
6.75 30 months 6-3/4% certificates 500 15,245 0.01
7.50 4 years 7-1/2% certificates 500 228,603 0.19
7.75 6 years 7-3/4% certificates 500 23,541 0.02
8.00 8 years 8% certificates 500 190,711 0.16
5.42 6 months 6-month Mini-Jumbo certificates 50,000 103,246 0.09
5.26 12 months 12-month Mini-Jumbo certificates 50,000 23,451 0.02
5.72 90 days Jumbo certificates 100,000 13,973,839 11.78
5.97 various Public Funds various 97,262 0.08
6.42 various Negotiated CDs various 3,123,104 2.63
6.30 24 months Negotiated CDs various 1,717,059 1.45
----------- ------
$118,670,456 100.00%
============ ======
</TABLE>
16
<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, %
1997 DEPOSITS 1996 1996 DEPOSITS 1995 1995 DEPOSITS
------------ --------- ------------- ------------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial checking........ $ 199,170 0.17% $ 2,644 $ 196,526 0.18% $ 74,099 $ 122,427 0.11%
NOW checking accounts...... 9,715,128 8.19 499,990 9,215,138 8.58 165,520 9,049,618 8.32
Super NOW checking accounts 1,318,304 1.11 394,177 924,127 0.86 (32,010) 956,137 0.88
Passbook and regular
savings................... 12,967,032 10.93 (578,110) 13,545,142 12.62 158,685 13,386,457 12.31
Money market deposit
accounts.................. 6,476,378 5.46 (3,514) 6,479,892 6.04 (1,392,240) 7,872,132 7.24
Fixed-rate certificate
accounts.................. 458,595 0.39 7,946 450,649 0.41 (28,590) 479,239 0.44
Money market certificates.. 21,422,556 18.05 (2,951,725) 24,374,281 22.71 (75,417) 24,449,698 22.48
Jumbo certificates......... 13,973,839 11.77 2,844,474 11,129,365 10.37 374,436 10,754,929 9.89
Other certificates......... 52,139,454 43.93 11,111,195 41,028,259 38.23 (664,359) 41,692,618 38.33%
------------ ------ ----------- ------------ ------ ----------- ------------ ------
$118,670,456 100.00% $11,327,077 $107,343,379 100.00% $(1,419,876) $108,763,255 100.00%
============ ====== =========== ============ ====== =========== ============ ======
</TABLE>
17
<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,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
4.01 - 6.00%.................................. $82,695,686 $74,849,368 $76,897,245
6.01 - 8.00%.................................. 5,298,758 2,133,186 479,239
----------- ----------- -----------
Total...................................... $87,994,444 $76,982,554 $77,376,484
=========== =========== ===========
</TABLE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
<TABLE>
<CAPTION>
AMOUNT DUE
--------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-3 YEARS 3 YEARS TOTAL
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
4.01-6.00%.......................... $63,281,000 $ 9,228,000 $10,187,000 $82,696,000
6.01-8.00%.......................... -- 4,855,000 443,000 5,298,000
----------- ----------- ----------- -----------
Total............................. $63,281,000 $14,083,000 $10,630,000 $87,994,000
=========== =========== =========== ===========
</TABLE>
The following table sets forth the deposit account activities of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Deposits............................................ $ 141,756,284 $ 120,887,730 $ 125,409,908
Withdrawals......................................... (134,947,031) (125,756,781) (130,871,005)
------------- ------------- -------------
Net increase (decrease) before interest credited.. 6,809,253 (4,869,051) (5,461,097)
Interest credited................................... 4,517,824 3,449,175 4,019,750
------------- ------------- -------------
Net increase (decrease) in deposits............... $ 11,327,077 $ (1,419,876) $ (1,441,347)
============= ============= =============
</TABLE>
The increase in the Bank's deposits during fiscal year 1997 occurred
primarily in twelve-month, 18-month, negotiated certificates and jumbo
certificates. Management attributes the increase to paying above market rates
to attract deposits to meet loan demand.
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 $2.0 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, 1997,
the Bank had no borrowings outstanding under this line of credit.
18
<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 1997, Great Smokies
Insurance Agency earned approximately $180,000 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.
19
<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.
The federal banking agencies are 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 has opted out of the
Riegle-Neal Act by adopting a law which applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches are permitted only if the law of the state
in which the branch is located permits such acquisitions. Interstate mergers
and branch acquisitions are also subject to the nationwide and statewide insured
deposit concentration amounts described above.
20
<PAGE>
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 required
the appropriate federal banking agencies to prescribe regulations which
prohibited any out-of-state bank from using the interstate branching authority
primarily for the purpose of deposit production. These regulations 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 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.
21
<PAGE>
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.
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-
22
<PAGE>
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, 1997, 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, 1997.
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 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
23
<PAGE>
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 CAMELS 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 CAMELS 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 CAMELS 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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<PAGE>
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 adopted 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,
25
<PAGE>
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 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. The guidelines adopted by the
FDIC 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.
26
<PAGE>
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, 1997, 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 $47.8
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, 1997, 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 enacted in 1996 repealed the percentage of taxable income
method of calculating the bad debt reserve. Savings associations, like the
Bank, which had 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.
27
<PAGE>
The Bank's income tax returns for 1994 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, 1997, the Bank had 33 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, 1997, the executive officers of the Company were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry R. Ammons 53 President and Managing Officer
Jack T. Nichols 57 Treasurer and Chief Financial Officer
</TABLE>
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.
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<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, 1997. All such properties are owned
by the Bank.
<TABLE>
<CAPTION>
YEAR NET BOOK
OFFICE LOCATION CONSTRUCTED VALUE
--------------- ----------- --------
<S> <C> <C>
Main Office................ 1974 $834,105
370 North Main Street
Waynesville, NC 28786
Sylva Branch............... 1981 175,717
6 Grindstaff Cover Road
Sylva, NC 28779
Murphy Branch.............. 1984 308,991
King and Hiwassee Street
Murphy, NC 28906
Andrews Branch............. 1986 199,856
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, 1997 was $1.6 million. For further information, see Note 5 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, 1997, 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, 1997.
29
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
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>
1997
----
First Quarter $18.25 $16.68 $0.14
Second Quarter 17.13 15.75 0.14
Third Quarter 21.68 17.06 0.14
Fourth Quarter 22.50 20.50 0.15
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
</TABLE>
At December 31, 1997 there were 1,250,356 shares of common stock
outstanding and 412 stockholders of record.
30
<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,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
- -----------------------------------------------
Cash and cash equivalents (1).................. $ 4,195 $ 1,327 $ 2,725 $ 1,708 $ 13,876
Investment securities - available for sale..... 15,806 -- -- -- --
Investment securities - held-to-maturity....... 11,243 11,963 18,520 23,998 19,419
Loans, net..................................... 114,150 109,344 104,019 99,879 99,980
Goodwill....................................... 728 780 832 885 937
Investment in mortgage servicing rights........ 3,027 1,728 -- -- --
All other assets............................... 4,331 5,759 5,973 5,961 6,045
-------- -------- -------- -------- --------
Total assets................................. $153,480 $130,901 $132,069 $132,431 $140,257
======== ======== ======== ======== ========
Deposits....................................... $118,670 $107,343 $108,763 $110,205 $119,312
Borrowings..................................... 10,500 1,200 -- -- --
All other liabilities.......................... 2,136 1,831 1,900 1,818 1,336
Stockholders' equity........................... 22,174 20,527 21,406 20,408 19,609
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity... $153,480 $130,901 $132,069 $132,431 $140,257
======== ======== ======== ======== ========
SUMMARY OF OPERATIONS
- -----------------------------------------------
Interest income................................ $ 10,846 $ 9,867 $ 10,043 $ 9,479 $ 10,186
Interest expense............................... (6,152) (5,036) (5,217) (4,156) (4,703)
-------- -------- -------- -------- --------
Net interest income.......................... 4,694 4,831 4,826 5,323 5,483
Provision for loan losses...................... (20) (15) (20) (60) (60)
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses................................ 4,674 4,816 4,806 5,263 5,423
Total other income, net (3).................... 1,426 661 512 421 295
Total general and administrative expenses (2).. (3,058) (3,812) (3,144) (2,975) (2,783)
-------- -------- -------- -------- --------
Income before income taxes..................... 3,042 1,665 2,174 2,709 2,935
Income taxes................................... (1,166) (571) (813) (1,004) (978)
-------- -------- -------- -------- --------
Net income..................................... $ 1,876 $ 1,094 $ 1,361 $ 1,705 $ 1,957
======== ======== ======== ======== ========
Per share data (4):
Net income - basic........................... $1.52 $0.89 $ 1.11 $ 1.34 $ 1.55
Net income - diluted......................... 1.52 0.87 1.08 1.30 1.52
-------- -------- -------- -------- --------
Cash dividends declared...................... $0.57 $0.53 $ 0.49 $ 0.45 $ 0.43
======== ======== ======== ======== ========
Book value................................... $17.73 $16.94 $ 16.63 $ 15.93 $ 15.54
======== ======== ======== ======== ========
- -------------------------
</TABLE>
(1) Includes cash on hand and in banks, interest-bearing balances in other
banks, and federal funds sold.
(2) For the year ending December 31, 1997, includes a special assessment paid
to the FDIC in the amount of $720,000.
(3) Includes a gain on the sale of real estate acquired in settlement of loans
of $679,000 in 1997.
(4) Per share data has been restated to reflect the 2 for 1 stock split
distributed in 1993 and the adoption of Statement of Financial Accounting
Standards No. 128 in 1997.
31
<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,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided
by average total assets).................... 1.26% 0.83% 1.02% 1.25% 1.41% (1)
Return on average equity (net income divided
by average equity).......................... 9.12 5.43 6.49 8.50 10.38 (1)
Equity to assets ratio (average equity
divided by average total assets)............ 13.78 15.24 15.72 14.75 13.52
Dividend payout ratio (dividends declared
per share divided by net income per share).. 37.50 59.55 44.14 33.58 27.74 (1)
</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.
32
<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, 1997
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)...... $ 3,058 $ 1,600 $ 737 $ 12,512 $ 59 $ 747 $10,794 $ 29,507
Fixed-rate residential loans.. 843 73 128 411 3,907 29,348 -- 34,710
Adjustable-rate loans......... 50,578 30,143 -- -- -- -- -- 80,721
------- ------- -------- -------- -------- ------- ------- --------
Total....................... 54,479 31,816 865 12,923 3,966 30,095 10,794 144,938
------- ------- -------- -------- -------- ------- ------- --------
Interest-bearing liabilities:
Deposits...................... 55,869 37,889 14,083 10,187 443 -- -- 118,471
Borrowings.................... -- -- 10,500 -- -- -- -- 10,500
------- ------- -------- -------- -------- ------- ------- --------
Total....................... $55,869 $37,889 $ 24,583 $ 10,187 $ 443 $ -- $ -- $128,971
======= ======= ======== ======== ======== ======= ======= ========
Interest sensitivity gap....... (1,390) (6,073) (23,718) 2,736 3,523 30,095 10,794 15,967
Cumulative difference between
interest-earning assets and
interest-bearing liabilities.. $(1,390) $(7,463) $(31,181) $(28,445) $(24,922) $(5,173) $15,967 $ 15,967
======= ======= ======== ======== ======== ======= ======= ========
Cumulative difference between
interest-earning assets and
interest-bearing liabilities
as a percent of total assets.. (0.91)% (4.86)% (20.32)% (18.53)% (16.24)% 3.37% 10.40% 10.40%
======= ======= ======== ======== ======== ======= ======= ========
- -------------------------
</TABLE>
(1) Includes U.S. agency obligations, interest bearing balances in other banks,
federal funds sold and other investments.
33
<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,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ---------------------------------- -------------------------------
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, net...............$112,728,628 $ 9,101,733 8.07% $107,296,135 $8,760,804 8.17% $103,045,260 $ 8,637,329 8.38%
Investment securities.... 23,089,913 1,541,134 6.67 16,142,777 940,568 5.73 22,092,107 1,217,932 5.51
Interest-bearing
balances in
other banks............. 426,423 20,736 4.86 337,926 19,876 5.88 883,741 43,498 4.92
Other interest-earning
assets.................. 2,743,162 182,657 6.66 2,228,336 145,549 6.53 2,440,440 143,986 5.90
------------ ----------- ------------ ---------- ------------ -----------
Total
interest-earning
assets............... 138,988,126 10,846,260 7.80 126,275,174 9,866,797 7.81 128,461,548 10,042,745 7.82
----------- ---------- -----------
Noninterest-earning assets. 10,189,874 5,839,576 4,972,233
------------ ------------ ------------
Total assets..........$149,178,000 $132,114,750 $133,433,781
============ ============ ============
Interest-bearing
liabilities:
Deposits.................$115,581,893 $ 5,633,453 4.87% $110,111,811 5,018,715 4.56% $110,238,538 $ 5,217,208 4.73%
Other borrowed money..... 8,873,650 519,101 5.85 209,685 17,299 8.25 -- -- --
------------ ----------- ------------ ---------- ------------ -----------
Total
interest-bearing
liabilities.......... 124,455,543 6,152,554 4.94 110,321,496 5,036,014 4.56 110,238,538 5,217,208 4.73
----------- ---------- -----------
Noninterest-bearing
liabilities............... 4,160,109 1,661,097 2,222,593
------------ ------------ ------------
Total liabilities..... 128,615,652 111,982,593 112,461,131
Stockholders' equity....... 20,562,348 20,132,157 20,972,650
------------ ------------ ------------
Total liabilities and
stockholders'
equity..............$149,178,000 $132,114,750 $133,433,781
============ ============ ============
Net interest income........ $ 4,693,706 $4,830,783 $ 4,825,537
=========== ========== ===========
Interest rate spread....... 2.86 3.25% 3.09%
==== ==== ====
Net interest margin........ 3.38% 3.83% 3.76%
==== ==== ====
</TABLE>
34
<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,
---------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
--------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------------- ----------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
---------- -------- ----------- ---------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans.......................... $(100,166) $441,095 $ 340,929 $(229,452) $ 325,175 $ 95,723
Investment securities.......... 186,411 414,155 600,566 39,631 (289,243) (249,612)
Interest-bearing balances in
other banks.................. (3,894) 4,754 860 5,862 (29,484) (23,622)
Other interest-earning assets.. 3,154 33,954 37,108 14,747 (13,184) 1,563
--------- -------- ---------- --------- --------- ---------
Total interest income....... 85,505 893,958 979,463 (169,212) (6,736) (175,948)
Interest expense:
Deposits....................... 356,773 257,965 614,738 (192,607) (5,886) (198,493)
Borrowings..................... (112,337) 614,139 501,802 8,649 8,650 17,299
--------- -------- ---------- --------- --------- ---------
Total interest expense........ 244,436 872,104 1,116,540 (183,958) 2,764 (181,194)
--------- -------- ---------- --------- --------- ---------
Net interest income............. $(158,931) $ 21,854 $ (137,077) $ 14,746 $ (9,500) $ 5,246
========= ======== ========== ========= ========= =========
</TABLE>
GENERAL
The Company realized net earnings in 1997 of $1,875,518, or $1.52 basic net
income per share, resulting in a return of 1.26% on average assets and 9.12% on
average equity. Net income for 1996 was $1,093,796, or $0.89 basic net income
per share, which resulted in a return of 0.83% on average assets and 5.43% on
average equity.
During 1997, 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 1997 VERSUS 1996
SUMMARY. Net income for the year ended December 31, 1997 increased to
$1,875,518, or $1.52 basic net income per share, from $1,093,796, or $0.89 basic
net income per share, in 1996. The Company's net income was affected by certain
non-recurring items in both 1997 and 1996. In 1997, the Company recognized a
$679,000 pre-tax gain on the sale of the Waynesville Plaza Shopping Center which
the Company has been holding as real estate acquired in settlement of loans. By
contrast in 1996, the Company recognized a one-time $720,000 pre-tax expense for
its portion of a special assessment imposed by the Federal Deposit Insurance
Corporation ("FDIC") to recapitalize the Savings Association Insurance Fund
("SAIF"). Factoring out these non-recurring items, the Company's net income
would have declined between the periods as improvements in other income and
expense were not sufficient to offset
35
<PAGE>
a decline in net interest income. The Company's net interest income has
narrowed during the current fiscal year as interest expense has grown faster
than interest income.
NET INTEREST INCOME. Total interest income in 1997 was $10,846,260, a
$979,463, or 9.9%, increase from 1996. The primary reason for the change was an
increase in the balance of average interest-earning assets of approximately
$12.7 million. This was due to the purchase of approximately $14.7 million in
investment securities available for sale comprised of U.S. government and agency
securities and collateralized mortgage obligations during the first quarter of
1997. The average yield on interest-earning assets decreased slightly from
7.81% in 1996 to 7.80% in 1997. The average yield on loans receivable decreased
10 basis points to 8.07% in 1997 from 8.17% in 1996. This decline was partially
offset by an increase in the average yield on investment securities from 5.73%
in 1996 to 6.67% in 1997 due to the investment purchases described above.
Total interest expense increased $1,116,540, or 22.2%, in 1997 due to
increases in both the average balance of interest-bearing liabilities and the
cost of funds. The average balance of interest-bearing liabilities increased
from $110.3 million in 1996 to $124.4 million in 1997 and the cost of funds
increased from 4.56% in 1996 to 4.94% in 1997. The increase in the average
balance is mainly due to the Company borrowing $10.5 million in advances from
the Federal Home Loan Bank of Atlanta ("FHLB") during the first quarter of 1997.
In addition, average deposits increased approximately $5.5 million. The
increased in the cost of funds is due to the rates paid on FHLB advances and an
increase in rates on certificate of deposit accounts due to competitive
pressures in the marketplace.
The overall net effect of these changes was a $137,077, or 2.84%, decrease
in net interest income in 1997 compared to 1996. The interest rate spread
decreased to 2.86% in 1997 from 3.25% in 1996. Net interest income as a
percentage of average interest-earning assets was 3.38% in 1997 compared to
3.83% in 1996.
PROVISION FOR LOAN LOSSES. During 1997 and 1996, management recorded
provisions for loan losses of $20,000 and $15,000, respectively. The increase
in the provision for loan losses in 1997 was due to the growth in the Company's
loan portfolio.
OTHER INCOME. Other income increased $765,555, or 115.9%, in 1997 compared
to the same period in 1996 primarily as a result of the sale of the Waynesville
Plaza Shopping Center for a gain of approximately $679,000. As a result of the
sale, the Company will no longer receive rental and other income attributable to
its operation of the shopping center. In addition, the Company recognized
equity earnings of $136,000 on its limited partnership investment in mortgage
servicing rights compared to no such earnings during 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $753,744, or 19.8%. The decrease is primarily due to a one-time cost
of approximately $720,000 pre-tax pertaining to a special assessment by the FDIC
on all SAIF-insured financial institutions to recapitalize the SAIF, which was
recorded in 1996. Federal and other insurance premiums decreased $844,421 to
$85,876 in 1997 as a result of this special assessment in the prior year. As a
result of the recapitalization of the SAIF, the FDIC reduced Haywood's 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 in 1996 of
a previously paid deposit insurance premium of approximately $63,000. Until
December 31, 1999, however, Haywood Savings and all other SAIF insured
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.
INCOME TAXES. The Company's effective income tax rate was 38.3% in 1997
compared to 34.3% in 1996. The increase in the effective tax rate is due in
part to an increase in state income taxes due to a decrease in the level of
investment securities that are exempt for state tax purposes.
COMPARISON OF OPERATING RESULTS 1996 VERSUS 1995
Net income was $1,093,796, or $.89 basic net income per share, in 1996
compared to net income of $1,361,098, or $1.11 basic net income per share, in
1995 which represents a 19.6% decrease. The decline in net income
36
<PAGE>
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 a pre-tax reduction in earnings of
$720,000.
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 $277,364, which is
attributable to a decrease in average volume of approximately $6 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 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 $4.3
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, Waynesville Plaza Shopping
Center.
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 in December
1996.
The Company's effective income tax rate was 34.3% in 1996 compared to 37.4%
in 1995.
ASSET QUALITY
At December 31, 1997, the Company had approximately $583,000 of loans in
nonaccrual status as compared to $814,000 at December 31, 1996. At December 31,
1997 and 1996, the Bank 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 December 31, 1997 and 1996. 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 $738,547, or 0.64%, of
outstanding loans. This compares to 0.65% and 0.67% for 1996 and 1995,
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.
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
37
<PAGE>
loan portfolio, the relationship of the allowance for loan losses to outstanding
loans, and delinquency trends. Management believes that 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 Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
As December 31, 1997, the Company had real estate acquired in settlement of
loans of approximately $246,000 as compared to $1,790,000 at December 31, 1996.
During 1997, the Company sold the Waynesville Plaza Shopping Center, with a book
value of approximately $1,573,000 for a gain of approximately $679,000. Real
estate acquired in settlement of loans consists of commercial real estate and
single-family residences of approximately $210,000 and $36,000, respectively, at
December 31, 1997. The remaining commercial real estate consists of outparcels
to the Waynesville Plaza Shopping Center, which were sold during the first
quarter of 1998.
YEAR 2000 PLANNING
The Company has been assessing possible effects of the Year 2000 problem in
connection with its technology investments and operations. Management believes
that the Company has limited exposure and expects the cost of addressing the
Year 2000 issues to be approximately $80,000. As part of its assessment, the
Company has contacted its primary vendors to evaluate Year 2000 compliance. The
Year 2000 problem creates risk for the Company from unforeseen problems in its
own computer systems and from third parties. Such failures of the Company
and/or third parties' computer systems could have a material impact on the
Company's ability to conduct business.
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, 1997, the Company had approximately $31.2 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,
1997 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, 1997, 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, 1997 total rate sensitive liabilities within one
year were $93.8 million compared to rate sensitive assets of $86.3 million for a
cumulative gap of $7.5 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.
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 $6,558,000 outstanding at December 31, 1997. Of this amount,
$3,350,600 represent adjustable rate commitments and $3,207,400 represent fixed
rate commitments. These commitments were primarily for construction and
conventional residential lending and will be funded primarily from loan
principal repayments and other normal sources of liquidity.
38
<PAGE>
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, 1997, 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosures of Information about
Capital Structure" ("SFAS No. 129"). SFAS No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all securities
other than ordinary common stock but expands the number of companies subject to
portions of its requirements. Specifically, SFAS No. 129 requires all entities
to provide the capital structure disclosures previously required by APB Opinion
No. 15. Companies that were exempt from the provisions of APB Opinion No. 15
will now need to make those disclosures. The Corporation adopted SFAS No. 129
in 1997 without any impact on its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued 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.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Corporation plans to adopt SFAS No. 130
in 1998 and will make the required disclosures in its consolidated financial
statements.
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 the annual financial statements and requires that those enterprises
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 plans to adopt
SFAS No. 131 in 1998 without any significant impact on its 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.
39
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
This item is not applicable to the Registrant which qualifies as a "small
business issuer."
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 41
Consolidated Statements of Financial Condition as of December 31, 1997
and 1996 42
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995 43
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 44
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1996 and 1995 45
Notes to Consolidated Financial Statements for the years ended December 31,
1997, 1996 and 1995 47
</TABLE>
40
<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, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1997. These 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Charlotte, North Carolina
February 6, 1998
41
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------------- ------------
<S> <C> <C>
Cash on hand and in banks $ 1,736,787 1,029,850
Interest-bearing balances in other banks 418,967 143,806
Federal funds sold 2,039,247 152,847
Investment securities (note 2):
Available for sale (cost of $15,719,503 at December 31, 1997) 15,805,611 --
Held-to-maturity (market value of $11,303,051 and $11,862,984 at
December 31, 1997 and 1996, respectively) 11,242,929 11,963,422
Loans (net of allowance for loan losses of $738,547 and $718,547
at December 31, 1997 and 1996, respectively) (note 3) 114,150,356 109,344,406
Real estate acquired in settlement of loans (note 4) 246,078 1,790,187
Federal Home Loan Bank stock, at cost 1,427,300 1,427,300
Premises and equipment (note 5) 1,551,510 1,660,387
Investment in mortgage servicing rights (note 6) 3,027,116 1,728,075
Goodwill 727,530 780,030
Other assets (note 7) 1,106,143 881,054
------------ -----------
Total assets $153,479,574 130,901,364
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposit accounts:
Noninterest-bearing $ 199,170 196,526
Interest-bearing, including $13,973,839 in 1997 and $11,129,365
in 1996 of time deposits for $100,000 or more 118,471,286 107,146,853
------------ -----------
Total deposits 118,670,456 107,343,379
Note payable (note 13) -- 1,200,000
FHLB advances (note 14) 10,500,000 --
Accrued expenses and other liabilities (notes 7 and 8) 2,135,586 1,831,091
------------ -----------
Total liabilities 131,306,042 110,374,470
------------ -----------
Stockholders' equity (notes 10, 11 and 12):
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 1,250,356 shares in 1997 and 1,211,856
shares in 1996 1,250,356 1,211,856
Additional paid-in capital 3,437,275 3,218,006
Retained income, substantially restricted 17,487,686 16,298,440
Unrealized gain on investment securities available for sale, net of tax 56,831 --
Less obligation in connection with funds used to acquire common
shares by ESOP (58,616) (201,408)
------------ -----------
Total stockholders' equity 22,173,532 20,526,894
Commitments (note 3)
------------ -----------
$153,479,574 130,901,364
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Interest income:
Loans $ 9,101,733 8,760,804 8,637,329
Investment securities 1,541,134 940,568 1,217,932
Interest-bearing balances in other banks 20,736 19,876 43,498
Federal funds sold 79,178 35,948 34,352
Other 103,479 109,601 109,634
----------- --------- ----------
Total interest income 10,846,260 9,866,797 10,042,745
----------- --------- ----------
Interest expense:
Deposits, including $577,599 in 1997, $434,257 in
1996, and $601,633 in 1995 on time deposits for
$100,000 or more 5,633,453 5,018,715 5,213,993
FHLB advances (note 14) 511,246 -- --
Other (note 13) 7,855 17,299 3,215
----------- --------- ----------
Total interest expense 6,152,554 5,036,014 5,217,208
----------- --------- ----------
Net interest income 4,693,706 4,830,783 4,825,537
Provision for loan losses (note 3) 20,000 15,000 20,000
----------- --------- ----------
Net interest income after provision for loan
losses 4,673,706 4,815,783 4,805,537
----------- --------- ----------
Other income:
Insurance income, net 179,901 168,063 128,696
Rental income 49,132 50,835 55,654
Service charges on deposits 70,818 66,064 55,510
Gain on sale of real estate acquired in settlement
of loans (note 4) 679,349 -- --
Real estate operations, net (note 4) 269,061 348,293 214,662
Income from mortgage servicing rights 135,791 -- --
Other income 42,179 27,421 58,058
----------- --------- ----------
Total other income 1,426,231 660,676 512,580
----------- --------- ----------
General and administrative expenses:
Salaries and employee benefits (notes 8 and 12) 1,733,344 1,673,844 1,684,334
Occupancy and equipment 346,302 369,390 367,033
Federal and other insurance premiums (note 9) 85,876 930,297 266,223
Amortization of goodwill 52,500 52,500 52,500
Other expenses 839,897 785,632 773,842
----------- --------- ----------
Total general and administrative expenses 3,057,919 3,811,663 3,143,932
----------- --------- ----------
Income before income taxes 3,042,018 1,664,796 2,174,185
Income taxes (note 7) 1,166,500 571,000 813,087
----------- --------- ----------
Net income $ 1,875,518 1,093,796 1,361,098
=========== ========= ==========
Per share amounts (note 10):
Net income - basic $1.52 .89 1.11
=========== ========= ==========
Net income - diluted $1.52 .87 1.08
=========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Unrealized
Gain on Investment
Securities
Additional Available for Sale, Total
Common Paid-in Retained Net of Income Obligation Stockholders'
Stock Capital Income Taxes of ESOP Equity
------------------- ----------- ----------- ------------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
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
Stock options exercised 44,000 194,750 -- -- -- 238,750
Repurchase of common stock (5,500) (82,157) -- -- -- (87,657)
Net income -- -- 1,875,518 -- -- 1,875,518
Cash dividends declared on
common stock, $.57 per share -- -- (713,684) -- -- (713,684)
Unrealized gain on securities
available
for sale, net of income taxes -- -- -- 56,831 -- 56,831
Principal repayment of ESOP debt -- -- -- -- 142,792 142,792
Release and allocation of ESOP
shares -- 106,676 (39,052) -- -- 67,624
Tax benefit on stock options -- -- 66,464 -- -- 66,464
---------- ---------- ---------- ----------- ---------- -------------
Balance at December 31, 1997 $1,250,356 3,437,275 17,487,686 56,831 (58,616) 22,173,532
========== ========== ========== ============ ========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,875,518 1,093,796 1,361,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 20,000 15,000 20,000
Depreciation and amortization, net 170,512 142,156 162,481
Amortization of goodwill 52,500 52,500 52,500
Income from mortgage servicing rights (135,791) -- --
Increase (decrease) in allowance for
uncollected interest 2,838 (51,014) (55,794)
Net gain on sale of fixed assets (5,439) -- --
Net gain on sale of real estate acquired
in settlement of loans (679,349) (12,695) (7,849)
Increase in other assets (254,366) (81,637) (98,266)
Increase in accrued expenses and other
liabilities 494,878 139,365 265,171
Increase in deferred loan fees, net 55,790 56,927 62,827
Net noncash expense recorded for ESOP 67,624 40,111 32,565
------------ ---------- ----------
Net cash provided by operating
activities 1,664,715 1,394,509 1,794,733
------------ ---------- ----------
Cash flows from investing activities:
Purchases of investment securities held to
maturity (5,400,000) (4,800,000) (3,700,000)
Purchases of investment securities available
for sale (16,726,273) -- --
Proceeds from maturities/calls of investment
securities available for sale 1,000,000 -- --
Proceeds from maturities/calls of investment
securities held to maturity 5,857,142 11,005,901 8,900,000
Principal collected on investment securities
held to maturity 263,351 350,384 278,463
Origination of loans, net (4,913,071) (5,298,164) (4,182,899)
Proceeds from sales of real estate acquired
in settlement of loans 2,251,951 57,075 44,937
Capital items related to real estate acquired
in settlement of loans -- -- (83,685)
Purchases of premises and equipment (65,426) (23,710) (13,880)
Proceeds from sales of premises and equipment 16,000 -- --
Purchase of mortgage servicing rights (1,163,250) (1,728,075) --
Proceeds from redemption of FHLB stock -- 84,900 --
------------ ---------- ----------
Net cash provided by (used in)
investing activities (18,879,576) (351,689) 1,242,936
------------ ---------- ----------
</TABLE>
45
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in certificates of
deposit $11,011,883 (344,420) 2,271,774
Net increase (decrease) in other deposits 315,194 (1,075,456) (3,713,121)
Cash dividends paid (694,811) (647,900) (616,542)
Proceeds from issuance of common stock
upon exercise of stock options 238,750 87,688 37,406
Proceeds from note payable -- 2,200,000 --
Repayment of note payable (1,200,000) (1,000,000) --
Proceeds from FHLB advances 10,500,000 -- --
Repurchase of common stock (87,657) (1,661,313) --
----------- ---------- ----------
Net cash provided by (used in)
financing activities 20,083,359 (2,441,401) (2,020,483)
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,868,498 (1,398,581) 1,017,186
Cash and cash equivalents, beginning of year 1,326,503 2,725,084 1,707,898
----------- ---------- ----------
Cash and cash equivalents, end of year $ 4,195,001 1,326,503 2,725,084
=========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 6,156,200 5,052,824 5,200,010
Income taxes 1,016,540 597,937 775,427
=========== ========== ==========
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to real estate acquired
in settlement of loans $ 28,493 -- 47,278
Dividends payable 187,553 168,680 167,358
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(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) Principles of Consolidation
---------------------------
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 1996 and 1995
consolidated financial statements have been reclassified to present them
in the format selected for 1997. Such reclassifications have no effect
on the net income or retained income as previously reported.
(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.
47
<PAGE>
(d) Investment Securities
---------------------
Investment securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held to maturity and
reported at amortized cost. Investment securities held for current
resale are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Investment
securities not classified either as securities held to maturity or
trading securities are classified as available for sale and reported at
fair value, with unrealized gains and losses (net of the related tax
effect) excluded from earnings and reported as a separate component of
stockholders' equity. The classification of investment securities as
held to maturity, trading, or available for sale is determined at the
date of purchase.
Realized gains and losses from sales of securities are determined based
upon the specific identification method. Premiums and discounts are
amortized as an adjustment to yield over the remaining lives of the
securities using the level-yield method.
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, 1997.
(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 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
48
<PAGE>
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 approximately 14 years at December 31, 1997 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." 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. The adoption of SFAS No. 114
required no increase to the allowance for loan losses and has had no
impact on net income.
49
<PAGE>
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.
(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
--------------------
The Corporation adopted the provisions for SFAS No. 128, "Earnings per
Share," during 1997. The Statement establishes standards for computing
and presenting earnings per share (EPS). SFAS No. 128 simplifies the
standards for computing EPS previously found in APB Opinion No. 15,
"Earnings Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a basic EPS.
It also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. In accordance with SFAS No. 128, all prior period EPS
data has been restated.
(m) Stock Options
-------------
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires either the (i) fair value
of employee stock-based compensation plans be recorded as a component of
compensation
50
<PAGE>
expense in the statement of income as of the date of grant of awards
related to such plans, or (ii) the impact of such fair value on net
income and earnings per share be disclosed on a pro forma basis on a
footnote to financial statements for awards granted after December 15,
1994, if the accounting for such awards continues to be in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion 25"). The Corporation has elected to
continue to apply the provisions of APB Opinion 25.
(2) Investment Securities
---------------------
The following is a summary of the investment securities portfolios by major
classification:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Book Value Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government and agency securities $ 5,000,574 11,458 (234) 5,011,798
Collateralized mortgage obligations:
FHLMC certificates, at variable rates,
maturing from 2023 to 2024 10,718,929 75,013 (129) 10,793,813
----------- ------ -------- ----------
Total investment securities available
for sale $15,719,503 86,471 (363) 15,805,611
=========== ====== ======== ==========
Investment securities held-to-maturity:
U.S. government and agency securities $10,436,957 25,263 (13,010) 10,449,210
Mortgage-backed securities:
FHLMC certificates, 8.50%, maturity
from 2005 to 2009 520,098 24,699 -- 544,797
GNMA certificates, 8.50% to 9.00%,
maturing from 2009 to 2017 285,874 23,170 -- 309,044
----------- ------ -------- ----------
Total investment securities held
to maturity $11,242,929 73,132 (13,010) 11,303,051
=========== ====== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Book Value Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity:
U.S. government and agency securities $10,894,099 17,335 (166,473) 10,744,961
Mortgage-backed securities:
FHLMC certificates, 8.50%, maturity
from 2005 to 2009 674,184 31,451 -- 705,635
GNMA certificates, 8.50% to 9.00%,
maturing from 2009 to 2017 395,139 17,249 -- 412,388
----------- ------ -------- ----------
Total investment securities held
to maturity $11,963,422 66,035 (166,473) 11,862,984
=========== ====== ======== ==========
</TABLE>
There were no sales of investment securities available for sale or held-to-
maturity during 1997, 1996 and 1995.
51
<PAGE>
The aggregate amortized cost and approximate market value of the available
for sale and held-to-maturity securities portfolios at December 31, 1997, by
remaining contractual maturity are as follows:
<TABLE>
<CAPTION>
Available for Sale Held-to-Maturity
------------------------ ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. government and agency securities:
Due in one year or less $ -- -- $ 2,200,000 2,194,630
Due after one year through five years 5,000,574 5,011,798 8,236,957 8,254,580
Mortgage-backed securities -- -- 805,972 853,841
Collateralized mortgage obligations 10,718,929 10,793,813 -- --
----------- ----------- ----------- -----------
Total $15,719,503 15,805,611 $11,242,929 11,303,051
=========== =========== ============ ===========
</TABLE>
(3) Loans
-----
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Loans secured by first mortgages on real estate:
Conventional, primarily one to four family $ 92,165,787 90,197,005
Commercial 15,669,602 13,115,193
Construction 6,953,200 6,729,300
Participation loans purchased 478,240 417,329
------------ -----------
115,266,829 110,458,827
Home equity lines of credit 2,467,831 2,388,470
Loans secured by deposit accounts 580,639 701,428
Home improvement loans 164,827 145,651
------------ -----------
118,480,126 113,694,376
Undisbursed proceeds on loans in process (3,049,214) (3,142,363)
Deferred loan fees (507,472) (451,685)
Allowance for loan losses (738,547) (718,547)
Allowance for uncollected interest (34,537) (37,375)
------------ -----------
$114,150,356 109,344,406
============ ===========
</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, 1997,
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.
52
<PAGE>
The following summarizes the activity in the allowance for loan losses for
the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $718,547 703,547 683,547
Provision for loan losses 20,000 15,000 20,000
Less loan chargeoffs -- -- --
-------- ------- -------
Balance at end of year $738,547 718,547 703,547
======== ======= =======
</TABLE>
The Corporation had nonaccrual loans of approximately $583,000 and $814,000
at December 31, 1997 and 1996, respectively. Had these loans performed in
accordance with their contractual terms, approximately $37,000 and $57,000 of
interest income would have been recorded during the years ended December 31,
1997 and 1996, respectively. Interest income of approximately $22,000 and
$30,000 was recorded in connection with loans classified as nonaccrual in
1997 and 1996, respectively.
At December 31, 1997 and 1996, the Corporation has no loans considered to be
impaired under SFAS No. 114.
At December 31, 1997, the Corporation had adjustable rate loan commitments
outstanding aggregating $1,984,600, and fixed rate loan commitments
outstanding aggregating $2,462,400. In addition, the Corporation has
committed to participate in 52 "affordable housing" fixed rate construction
projects in the aggregate sum of $745,000. Also, preapproved but unused
variable rate lines of credit for home equity loans approximate $1,366,000 at
December 31, 1997. 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 $283,000, $401,000, and $604,000 at
December 31, 1997, 1996, and 1995, respectively.
The following is a reconciliation of aggregate loans outstanding to executive
officers, directors, and their immediate families for the year ended
December 31, 1997, for such loan amounts aggregating in excess of $60,000.
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $1,350,826
New loans 231,754
Principal repayments (390,737)
----------
Balance at end of year $1,191,843
==========
</TABLE>
53
<PAGE>
(4) 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,
-------------------
1997 1996
-------- ---------
<S> <C> <C>
Commercial real estate $210,393 1,782,995
Other, primarily single family residences 35,685 7,192
-------- ---------
$246,078 1,790,187
======== =========
</TABLE>
The Corporation sold commercial real estate (Waynesville Plaza Shopping
Center) with a book value of approximately $1,573,000 during 1997 and
recognized a gain of approximately $679,000 on the sale. The remaining
commercial property consists of outparcels to the Waynesville Shopping
Center.
Net rental income related to the operations of real estate acquired in
settlement of loans was approximately $269,000, $348,000 and $215,000 in
1997, 1996 and 1995, respectively.
(5) Premises and Equipment
----------------------
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Depreciation Value
---------- ------------ ---------
<S> <C> <C> <C>
December 31, 1997:
Land and land improvements $ 368,064 -- 368,064
Office buildings and improvements 2,517,311 1,509,233 1,008,078
Furniture, fixtures, and equipment 1,421,605 1,279,078 142,527
Automobiles 35,188 2,347 32,841
---------- --------- ---------
$4,342,168 2,790,658 1,551,510
========== ========= =========
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
========== ========= =========
</TABLE>
(6) 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
54
<PAGE>
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.
In December 1997 and 1996, the Corporation funded $1,163,250 and $1,728,075,
respectively, of its $3,000,000 commitment. The investment is accounted for
under the equity method and earnings of approximately $136,000 were recorded
in 1997.
(7) Income Taxes
------------
Income tax expense consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- -------
<S> <C> <C> <C>
Current expense:
Federal $ 848,658 596,781 730,842
State 115,842 54,219 90,245
---------- ------- -------
964,500 651,000 821,087
---------- ------- -------
Deferred expense (benefit):
Federal 163,829 (65,781) (6,314)
State 38,171 (14,219) (1,686)
---------- ------- -------
202,000 (80,000) (8,000)
---------- ------- -------
$1,166,500 571,000 813,087
========== ======= =======
</TABLE>
The statutory income tax amounts are reconciled with the effective income tax
amounts as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- -------
<S> <C> <C> <C>
Tax at federal rate (34%) $1,034,286 566,031 739,223
Differences:
State income taxes, net of federal
income tax benefit 101,649 26,400 58,449
Other, net 30,565 (21,431) 15,415
---------- ------- -------
$1,166,500 571,000 813,087
========== ======= =======
Effective tax rate 38.3% 34.3% 37.4%
========== ======= =======
</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,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 286,445 281,060
Deferred compensation 362,786 295,997
Net loan fees, deferred for financial reporting 73,565 92,738
Accrued pension liability 139,528 121,817
Other 29,729 22,440
----------- --------
Total gross deferred tax assets 892,053 814,052
Less valuation allowance -- --
----------- --------
Net deferred tax assets 892,053 814,052
----------- --------
Deferred tax liabilities:
Unrealized gain on available-for sale securities $ (29,277) --
Tax bad debt reserve (605,554) (343,845)
Depreciable basis of fixed assets (132,568) (141,807)
Mortgage-backed securities, book basis in excess
of tax (44,535) (58,225)
FHLB stock, book basis in excess of tax (232,200) (234,175)
Other (43,196) --
----------- --------
Total gross deferred tax liabilities (1,087,330) (778,052)
----------- --------
Net deferred tax asset (liability) $ (195,277) 36,000
=========== ========
</TABLE>
A portion of the change in the net deferred tax asset (liability) relates to
unrealized gain (loss) on available-for-sale securities. The related current
period deferred tax expense of $29,277 has been recorded directly to
shareholders' equity. The balance of the change in the net deferred tax
(liability) results from the current period deferred tax expense of $202,000.
There was no valuation allowance during 1997 or 1996. 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 historically 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 was 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 tax legislation enacted in 1996.
Beginning in 1996, the 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, 1997.
56
<PAGE>
The Corporation's income tax returns for 1994 and subsequent years are
subject to final determination by the taxing authorities.
(8) 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, 1997 and
1996, the plan's funded status and amounts recognized in the Corporation's
consolidated statements of financial condition at December 31, 1997 and 1996,
are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$452,385 in 1997 and $502,659 in 1996 $ 464,922 511,298
========= ========
Projected benefit obligation for service rendered
to date (984,582) (972,627)
Plan assets at fair value, primarily deposits at
Haywood Savings and an insurance company 582,060 509,630
--------- --------
Plan assets less than projected benefit obligation (402,522) (462,997)
Unrecognized prior service costs 87,159 93,384
Unrecognized net obligation being amortized over
19 years 40,970 45,522
Unrecognized net (gain) loss (61,060) 12,657
--------- --------
Accrued pension cost included in other liabilities $(335,453) (311,434)
========= ========
</TABLE>
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Service cost - benefits earned during the
period $ 63,799 69,243 142,602
Interest cost on projected benefit obligation 67,040 71,801 70,367
Actual return on plan assets (45,700) (44,541) (45,894)
Net amortization and deferral 18,175 12,811 12,181
-------- --------- --------
Net periodic pension cost included in
salaries and employee benefits $103,314 109,314 179,256
======== ========= ========
</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 1997, 1996 and 1995 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.
57
<PAGE>
The Corporation's contributions to the plan are based on computations by
independent actuarial consultants.
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 expense of $51,048 in 1997, 1996 and 1995
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 1997, 1996, and 1995 was
$52,584, $49,212, $46,097, 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
1997, 1996 and 1995 was $34,476, $23,904 and $23,904, respectively. The
assumed weighted average discount rate used to measure the projected benefit
obligation is 8%.
(9) 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 $71,000, $908,000 and $255,000 for the years ended December 31,
1997, 1996 and 1995, 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.
(10) Stockholders' Equity
--------------------
Earnings per Share
------------------
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted net
income per share 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
58
<PAGE>
periods presented. A reconciliation of the denominator of the basic net
income EPS computation is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic EPS denominator: weighted average
number of common shares outstanding 1,233,408 1,226,850 1,220,951
Dilutive effect arising from assumed
exercise of stock options -- 32,745 33,765
--------- --------- ---------
Diluted EPS denominator 1,233,408 1,259,595 1,254,716
========= ========= =========
</TABLE>
Regulatory Matters
------------------
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.
The Corporation repurchased 5,500 shares of common stock at $15.94 per
share in May 1997 in connection with the stock repurchase program announced
on August 8, 1995, which permits repurchases of up to 10% of the 1,287,372
shares outstanding at the program's inception. The Corporation retires all
repurchased shares under this program. The Corporation repurchased 86,516
shares of common stock under such plan 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.
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.
59
<PAGE>
At December 31, 1997 and 1996, Haywood Savings was in compliance with all of
the aforementioned capital requirements as summarized below.
<TABLE>
<CAPTION>
At December 31,
----------------
1997 1996
-------- ------
<S> <C> <C>
Risk-based capital ratios:
Tier I capital as a percent of risk-weighted assets 26.76% 26.50
Minimum required Tier I capital 4.00 4.00
Total capital as a percent of risk-weighted assets 27.68 27.47
Minimum required total capital 8.00 8.00
Leverage capital ratios:
Tier I capital as a percent of fourth quarter average assets 13.91 15.06
Minimum required Tier I leverage capital 3.00 3.00
North Carolina regulatory capital:
Total capital as a percent of fourth quarter average assets 14.39 15.60
Minimum required North Carolina capital 5.00 5.00
</TABLE>
(11) 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 Savings' 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. At December 31, 1996, 30,000 incentive stock options were
outstanding at an option price of $5.63 per share and 14,000 non-incentive
options were outstanding at an option price of $5.00 per share. During 1997,
the remaining 30,000 incentive stock options were exercised at an option
price of $5.63 per share and the remaining 14,000 non-incentive stock options
were exercised at $5.00 per share. 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, 1997.
60
<PAGE>
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, 1997, 1996 or 1995, and therefore
no pro forma disclosures have been made as prescribed by SFAS No. 123.
(12) 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
Savings' 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.
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 $58,616 as of December 31, 1997.
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, 1997 there were 4,382 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, 1997, the Corporation recorded ESOP related expenses of
$100,089, $121,262 and $152,417, respectively.
(13) Line of Credit
--------------
The Corporation has established a $2,000,000 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, 1997, the
Corporation had no outstanding borrowings against this line. Interest
expense associated with borrowings during 1997 totaled $7,855. At December
31, 1996, the Corporation had outstanding borrowings against this line of
$1,200,000, with interest expense of $17,299 in 1996.
61
<PAGE>
(14) FHLB Advances
-------------
At December 31 1997, the Corporation had advances of $10,500,000 from the
FHLB. These advances bear interest at 5.94% and mature on February 24, 1999.
The Corporation has entered into a blanket floating lien agreement with the
FHLB as collateral for these advances. According to this agreement, the
Corporation maintains, free of other encumbrances, its residential first
mortgage loan portfolio with unpaid principal balances at least equal to,
when discounted at 75% of the unpaid principal balances, 100% of the total
FHLB advances.
(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.
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.
62
<PAGE>
. Investment 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.
. Borrowings - the fair value approximates the carrying value due to the
variable nature of such borrowings.
. 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.
Based on the limitations, methods, and assumptions noted above, the
estimated fair values of the Corporation's financial instruments at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
-------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash on hand and in banks $ 1,736,787 1,736,787
Interest-bearing balances in other banks 418,967 418,967
Federal funds sold 2,039,247 2,039,247
Investment securities - available for sale 15,805,611 15,805,611
Investment securities - held-to-maturity 11,242,929 11,303,051
Loans 114,150,356 114,774,000
Federal Home Loan Bank stock 1,427,300 1,427,300
Accrued interest receivable 288,037 288,037
============ ===========
Financial liabilities:
Deposit accounts $118,670,456 118,834,000
Accrued interest payable 292,064 292,064
Borrowings 10,500,000 10,500,000
============ ===========
</TABLE>
63
<PAGE>
<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 held-to-maturity 11,963,422 11,862,984
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
Borrowings 1,200,000 1,200,000
============ ===========
</TABLE>
(16) Selected Quarterly Financial Information (unaudited)
---------------------------------------------------
Selected quarterly financial information for the years ended December 31,
1997 and 1996 is as follows: 1997
<TABLE>
<CAPTION>
1997
-------------------------------------------
(in thousands, except net income per share)
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest income $2,441 2,761 2,762 2,882
Interest expense 1,339 1,546 1,610 1,657
------ ----- ----- -----
Net interest income 1,102 1,215 1,152 1,225
Provision for loan losses 5 5 5 5
------ ----- ----- -----
Net interest income
after provision
for loan losses 1,097 1,210 1,147 1,220
Other income 219 226 851 130
General and
administrative expenses 812 781 780 685
------ ----- ----- -----
Income before income
taxes 504 655 1,218 665
Income taxes 194 239 391 342
------ ----- ----- -----
Net income $ 310 416 827 323
====== ===== ===== =====
Net income per share -
basic $ .26 .33 .67 .26
====== ===== ===== =====
Net income per share -
diluted $ .26 .33 .67 .26
====== ===== ===== =====
</TABLE>
64
<PAGE>
<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 - basic $ .30 .30 (.02) .31
====== ===== ===== =====
Net income per share - diluted $ .29 .29 (.02) .31
====== ===== ===== =====
</TABLE>
(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, 1997, 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, 1997 and 1996
and related income and cash flow statement data for the three years ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in subsidiaries $22,173,532 20,526,894
Receivable from subsidiaries 187,554 168,680
----------- ----------
$22,361,086 20,695,574
=========== ==========
Accrued liabilities 187,554 168,680
Shareholders' equity 22,173,532 20,526,894
----------- ----------
$22,361,086 20,695,574
=========== ==========
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Dividends from subsidiaries $ 694,811 647,900 321,843
Equity in undistributed net income
of subsidiaries 1,180,707 445,896 1,039,255
----------- ---------- ----------
Net income $ 1,875,518 1,093,796 1,361,098
=========== ========== ==========
1997 1996 1995
----------- ---------- ----------
CASH FLOW STATEMENT DATA:
Cash flows from operating activities:
Net income $ 1,875,518 1,093,796 1,361,098
Increase in receivable from
subsidiaries (18,873) (1,322) (167,358)
Increase in accrued liabilities 18,873 1,322 167,358
Increase in investment in subsidiaries (1,180,707) (445,896) (1,039,255)
----------- ---------- ----------
Net cash provided by operating
activities 694,811 647,900 321,843
----------- ---------- ----------
Cash flows from financing activities:
Cash dividends paid (694,811) (647,900) (321,843)
----------- ---------- ----------
Net cash used by financing
activities (694,811) (647,900) (321,843)
----------- ---------- ----------
Net increase (decrease) in cash -- -- --
----------- ---------- ----------
Cash at beginning of year __ __ __
----------- ---------- ----------
Cash at end of year $ -- -- --
=========== ========== ==========
</TABLE>
66
<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 is incorporated herein by reference
to the section captioned "Certain Transactions" in the Proxy Statement.
67
<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, 1997
and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995
(2) Financial Statement 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 on Form 10-K and is also the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
- ----- -----------
<S> <C>
* 3.1 Articles of Incorporation of Haywood Bancshares, Inc.
* 3.2 Bylaws of Haywood Bancshares, Inc.++***
++*** 10.1 Employment Agreement of Larry R. Ammons++***
++*** 10.2 Employment Agreement of Jack T. Nichols++**
+** 10.3 Haywood Bancshares, Inc., 1988 Stock Option and Incentive Plan++*
++* 10.4 Retirement Payment Agreement between Larry R. Ammons and the Bank++*
++* 10.5 Supplemental Income Agreement between Larry R. Ammons and the Bank,
dated October 1, 1989++*
++* 10.6 Supplemental Income Agreement between Jack T. Nichols and the Bank, dated
October 1, 1989++*
++* 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)
</TABLE>
- -------------------------
* Incorporated by reference to similarly numbered exhibits to the Company's
Registration Statement on Form S-4 (File No. 33-90186).
** Statement on Form S-4 (File No. 33-90186). Incorporated by reference to
Exhibit 99.1 to the Company's Post-Effective Amendment No. 1 on Form S-8 to
Registration
*** Incorporated by reference to similarly numbered exhibits to the Company's
Annual Report on Form 10-K ended December 31, 1995. for the year
++ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
68
<PAGE>
(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, 1997.
(C) EXHIBITS. The exhibits required 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.
69
<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 24, 1998 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 24, 1998 Date: March 24, 1998
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 24, 1998 Date: March 24, 1998
By: /s/ Glenn W. Brown By: /s/ G. D. Stovall, Jr.
------------------ ----------------------
Glenn W. Brown G. D. Stovall, Jr.
Director Director
Date: March 24, 1998 Date: March 24, 1998
By: /s/ William P. Burgin By: /s/ Joseph E. Taylor, Jr.
--------------------- -------------------------
William P. Burgin Joseph E. Taylor, Jr.
Director Director
Date: March 24, 1998 Date: March 24, 1998
By: /s/ Philip S. Dooly By: /s/ C. Leon Turner
------------------- ------------------
Philip S. Dooly C. Leon Turner
Director Director
Date: March 24, 1998 Date: March 24, 1998
By: /s/ R. Neal Ensley
------------------
R. Neal Ensley
Director
Date: March 24, 1998
70
<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 6, 1998, relating
to the consolidated statements of financial condition of Haywood Bancshares,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1997, included in the
December 31, 1997 annual report on Form 10-K of Haywood Bancshares, Inc.
KPMG Peat Marwick LLP
Charlotte, North Carolina
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,736,787
<INT-BEARING-DEPOSITS> 418,967
<FED-FUNDS-SOLD> 2,039,247
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,805,611
<INVESTMENTS-CARRYING> 11,242,929
<INVESTMENTS-MARKET> 11,303,051
<LOANS> 114,888,903
<ALLOWANCE> 738,547
<TOTAL-ASSETS> 153,479,574
<DEPOSITS> 118,670,456
<SHORT-TERM> 10,500,000
<LIABILITIES-OTHER> 2,135,586
<LONG-TERM> 0
0
0
<COMMON> 1,250,356
<OTHER-SE> 20,923,176
<TOTAL-LIABILITIES-AND-EQUITY> 153,479,574
<INTEREST-LOAN> 9,101,733
<INTEREST-INVEST> 1,541,134
<INTEREST-OTHER> 203,393
<INTEREST-TOTAL> 10,846,260
<INTEREST-DEPOSIT> 5,633,453
<INTEREST-EXPENSE> 6,152,554
<INTEREST-INCOME-NET> 4,693,706
<LOAN-LOSSES> 20,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,057,919
<INCOME-PRETAX> 3,042,018
<INCOME-PRE-EXTRAORDINARY> 3,042,018
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,875,518
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 3.24
<LOANS-NON> 583,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 718,547
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 738,547
<ALLOWANCE-DOMESTIC> 738,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
