<PAGE>
<PAGE> FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 1-11819
-------
HAYWOOD BANCSHARES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1918006
- ----------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 North Main Street, Waynesville, North Carolina 28786
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(828) 456-9092
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-----------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of November 12, 1998, shares of common stock outstanding
were 1,250,356.<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION> September 30, December 31,
1998 1997
------------ ------------
Assets (Unaudited)
------
<S> <C> <C>
Cash on hand and in banks $ 1,799,442 1,736,787
Interest-bearing balances in other banks 436,105 418,967
Federal funds sold 350,574 2,039,247
Investment securities:
Held to maturity (fair value of $11,137,890
and $11,303,051, at September 30, 1998 and
December 31, 1997, respectively) 11,068,066 11,242,929
Available for sale (cost of $18,725,927
and $15,719,503 at September 30, 1998 and
December 31, 1997, respectively) 18,632,440 15,805,611
Loans receivable (net of allowance for loan
losses of $753,547 and $738,547, at September
30, 1998 and December 31, 1997, respectively) 110,810,893 114,150,356
Real estate acquired in settlement of loans 7,192 246,078
Federal Home Loan Bank stock, at cost 1,427,300 1,427,300
Premises and equipment 1,515,810 1,551,510
Investment in mortgage servicing rights 751,138 3,027,116
Goodwill 688,355 727,530
Other assets 2,054,355 1,106,143
------------ -----------
$149,541,670 153,479,574
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposit accounts:
Noninterest-bearing $ 362,540 199,170
Interest-bearing, including $13,959,121
and $13,973,839, respectively, of time
deposits for $100,000 or more 114,982,578 118,471,286
------------ -----------
115,345,118 118,670,456
Advances from Federal Home Loan Bank 10,500,000 10,500,000
Accrued expenses and other liabilities 2,324,938 2,135,586
------------ -----------
Total liabilities 128,170,056 131,306,042
------------ -----------
Stockholders' equity:
Serial preferred stock, $1.00 par value,
5,000,000 shares authorized; no
shares issued or outstanding -- --
Common stock, $1.00 par value, 10,000,000
shares authorized; 1,250,356 shares issued
and outstanding, respectively 1,250,356 1,250,356
Additional paid-in capital 3,515,948 3,437,275
Retained income, substantially restricted 16,677,988 17,487,686
Accumulated other comprehensive income (61,312) 56,831
Less obligation in connection with funds
used to acquire common shares by ESOP (11,366) (58,616)
------------ -----------
Total stockholders' equity 21,371,614 22,173,532
------------ -----------
$149,541,670 153,479,574
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION> Nine Months Ended September 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 6,859,929 6,761,795
Investment securities 1,330,937 1,057,526
Interest-bearing balances in other banks 19,960 16,882
Federal funds sold 49,486 50,007
Other 79,186 77,397
----------- ----------
Total interest income 8,339,498 7,963,607
----------- ----------
Interest expense:
Deposits, including $431,839 in 1998 and
$435,904 in 1997, on time deposits for
$100,000 or more 4,140,012 4,140,251
Other borrowed money 453,633 354,838
----------- ----------
Total interest expense 4,593,645 4,495,089
----------- ----------
Net interest income 3,745,853 3,468,518
Provision for loan losses 15,000 15,000
----------- -----------
Net interest income after provision
for loan losses 3,730,853 3,453,518
----------- -----------
Other income:
Insurance income, net 136,356 135,605
Service charges on deposits 44,994 56,699
Rental income 37,598 41,760
Gain on sale of real estate acquired
in settlement of loans 426,872 679,349
Real estate operations, net 3,390 256,079
Gain on sale of investment securities
available for sale 6,418 --
Income (loss) on investment in mortgage
servicing rights (2,384,653) 86,390
Other income 65,913 40,331
----------- -----------
Total other income (expense), net (1,663,112) 1,296,213
----------- -----------
General and administrative expenses:
Salaries and employee benefits 1,387,253 1,400,697
Occupancy and equipment 235,938 261,083
Federal and other insurance premiums 61,209 63,443
Amortization of goodwill 39,175 39,375
Other expenses 628,458 608,048
----------- -----------
Total general and administrative
expenses 2,352,033 2,372,646
----------- -----------
Income before income taxes (294,292) 2,377,085
Income taxes (benefit) (77,000) 824,500
----------- -----------
Net income (loss) $ (207,292) 1,552,585
=========== ===========
Per share amounts:
Net income (loss) - basic $ (0.17) $ 1.26
=========== ===========
Net income (loss) - diluted $ (0.17) $ 1.26
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION> Three Months Ended September 30,
-------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 2,277,385 2,294,109
Investment securities 415,550 400,134
Interest-bearing balances in other banks 4,759 8,795
Federal funds sold 19,402 32,543
Other 26,982 26,083
----------- ----------
Total interest income 2,744,078 2,761,664
----------- ----------
Interest expense:
Deposits, including $107,023 in 1998 and
$133,171 in 1997, on time deposits for
$100,000 or more 1,369,307 1,455,912
Other borrowed money 151,636 154,047
----------- ----------
Total interest expense 1,520,943 1,609,959
----------- ----------
Net interest income 1,223,135 1,151,705
Provision for loan losses 5,000 5,000
----------- ----------
Net interest income after provision
for loan losses 1,218,135 1,146,705
----------- ----------
Other income:
Insurance income, net 59,043 44,301
Service charges on deposits 14,649 18,548
Rental income 12,231 12,588
Gain on sale of real estate acquired in
settlement of loans -- 679,349
Real estate operations, net 2,180 51,123
Income (loss) on investment in mortgage
servicing rights (1,207,696) 24,395
Other income 26,042 21,193
----------- ----------
Total other income (expense), net (1,093,191) 851,497
----------- ----------
General and administrative expenses:
Salaries and employee benefits 495,716 466,988
Occupancy and equipment 73,288 85,811
Federal and other insurance premiums 20,992 21,234
Amortization of goodwill 12,925 13,125
Other expenses 199,296 192,835
----------- ----------
Total general and administrative
expenses 802,217 799,993
----------- ----------
Income (loss) before income taxes (677,273) 1,218,209
Income taxes (benefit) (226,000) 391,500
----------- ----------
Net income (loss) $ (451,273) 826,709
=========== ==========
Per share amounts:
Net income (loss) - basic $ (0.36) $ 0.67
=========== ==========
Net income (loss) - diluted $ (0.36) $ 0.67
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Nine Months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Obligation Total
Common Paid-in Retained Comprehensive of the Stockholders'
Stock Capital Income Income ESOP Equity
---------- ----------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $1,250,356 3,437,275 17,487,686 56,831 (58,616) 22,173,532
Net income -- -- (207,292) -- -- (207,292)
Cash dividends declared on
common stock, $.45 per share -- -- (562,659) -- -- (562,659)
Principal repayment of ESOP debt -- -- -- -- 47,250 47,250
Release and allocation of ESOP
shares -- 78,673 (39,747) -- -- 38,926
Net unrealized loss on
securities, net of tax
effect of $61,452 -- -- -- (118,143) -- (118,143)
---------- ---------- ---------- -------- -------- ----------
Balance at September 30, 1998 $1,250,356 3,515,948 16,677,988 (61,312) (11,366) 21,371,614
========== ========== ========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other Obligation Total
Common Paid-in Retained Comprehensive of the Stockholders'
Stock Capital Income Income ESOP Equity
---------- ----------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1,211,856 3,218,006 16,298,440 -- (201,408) 20,526,894
Stock options exercised 44,000 194,750 -- -- -- 238,750
Repurchase of common stock (5,500) (82,157) -- -- -- (87,657)
Net income -- -- 1,552,585 -- -- 1,552,585
Cash dividends declared on
common stock, $.42 per share -- -- (526,131) -- -- (526,131)
Principal repayment of
ESOP debt -- -- -- -- 47,250 47,250
Release and allocation of
ESOP shares -- 61,415 (26,666) -- -- 34,749
Net unrealized loss on securities
net of tax effect of $58,047 -- -- -- (114,740) -- (114,740)
---------- ---------- ---------- -------- -------- ----------
Balance at September 30, 1997 $1,250,356 3,392,014 17,298,228 (114,740) (154,158) 21,671,700
========== ========== ========== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION> Nine Months Ended June 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (207,292) 1,552,585
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 15,000 15,000
Depreciation and amortization 149,970 128,121
Amortization of goodwill 39,175 39,375
Loss (income) from investment in mortgage
servicing rights 2,384,653 (86,390)
Increase in allowance for uncollected
interest 11,854 8,042
Net gain on sale of real estate acquired
in settlement of loans (426,872) (679,349)
Net gain on sale of investment securities
available for sale (6,418) --
Increase in other assets (948,212) (194,854)
Increase in accrued expenses and
other liabilities 298,054 538,852
Increase in deferred loan fees 34,719 41,453
Net noncash expense recorded for ESOP 38,926 34,749
----------- -----------
Net cash provided by operating
activities 1,383,557 1,397,584
----------- -----------
Cash flows from investing activities:
Purchases of investment securities held to
maturity (7,100,000) (3,600,000)
Proceeds from maturities and issuer calls
of investment securities held to maturity 7,000,000 4,957,142
Purchase of investment securities available
for sale (9,062,828) (5,000,925)
Proceeds from maturities and issuer calls
of investment securities available for sale 2,500,000 --
Proceeds from sale of investment securities
available for sale 3,505,962 --
Principal collected on mortgage-backed
securities held to maturity 274,863 201,190
Purchase of mortgage-backed securities
available for sale -- (10,725,345)
Repayment (origination) of loans, net 3,241,454 (5,251,106)
Purchases of premises and equipment (57,410) (50,524)
Purchase of investment in mortgage servicing
rights (108,675) (1,163,250)
Proceeds from sales of real estate acquired
in settlement of loans 702,194 2,251,951
----------- -----------
Net cash provided by (used in)
investing activities 895,560 (18,380,867)
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in certificates
of deposit (4,453,631) 10,695,725
Net increase in other deposits 1,128,293 255,639
Advances from FHLB -- 10,500,000
Repayment of note payable -- (1,200,000)
Repurchase of common stock -- (87,657)
Cash dividends paid (562,659) (519,761)
Proceeds from issuance of common stock upon
exercise of stock options -- 238,750
----------- -----------
<PAGE>
Net cash provided by (used in)
financing activities (3,887,997) 19,882,696
----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,608,880) 2,899,413
Cash and cash equivalents at beginning of
period 4,195,001 1,326,503
----------- -----------
Cash and cash equivalents at end of period $2,586,121 4,225,916
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION> Nine Months Ended September 30,
-------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $4,646,239 4,499,869
========== =========
Income taxes $ 694,000 601,000
========== =========
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to real estate acquired in
settlement of loans $ 36,436 --
========== =========
Dividends payable $ 187,553 175,050
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
7<PAGE>
<PAGE>
HAYWOOD BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) Presentation of Financial Statements
------------------------------------
The consolidated financial statements include the accounts
of Haywood Bancshares, Inc. (the Corporation) and its
wholly-owned subsidiary, Haywood Savings Bank, SSB (Haywood
Savings). All intercompany transactions and balances are
eliminated in consolidation.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities at the
date of the financial statements, as well as the amounts of
income and expenses during the reporting period. Actual
results could differ from those estimates.
All adjustments considered necessary for a fair
presentation of the results for the interim periods
presented have been included (such adjustments are
normal and recurring in nature). Operating results for the
three and nine month periods ended September 30, 1998, are
not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The
Consolidated Statement of Financial Condition as of
December 31, 1997 was derived from the Corporation's
audited Consolidated Statement of Financial Condition as of
December 31, 1997, included in the Corporation's 1997
Annual Report on Form 10-K.
(2) Summary of Significant Accounting Policies
------------------------------------------
For a description of the significant accounting and
reporting policies, see note (1) in the notes to
the December 31, 1997 consolidated financial statements of
the 1997 annual report. Also see note (4) to the
consolidated financial statements for accounting policies
related to the investment in mortgage servicing rights.
On January 1, 1998 the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and displaying
comprehensive income and its components (revenues, expense,
gains and losses) in a full set of general-purpose
financial statements. This Statement requires that an
enterprise (a) classify items of other comprehensive income
by their nature in the financial statement and (b) display
the accumulated balance of other comprehensive income
separately from retained earnings and additional
paid-in-capital in the equity section of a statement of
financial position. In accordance with the provisions of
SFAS No. 130, comparative financial statements
presented for earlier periods have been reclassified to
reflect the provisions of the statement.
Comprehensive income is the change in equity of a
Corporation during the period from transactions and other
events and circumstances from nonowner sources.
Comprehensive income is divided into net income and other
comprehensive income. The Corporation's other
comprehensive income (loss) for the three and nine months
ended September 30, 1998 and 1997 consists of unrealized
gains and losses on certain investments in debt and equity
securities. Comprehensive income (loss) for the three
months ended September 30, 1998 and 1997 is ($566,440) and
$856,060, respectively. Comprehensive income (loss) for the
nine months ended September 30, 1998 and 1997 is ($325,435)
and $1,437,845, respectively.
8<PAGE>
<PAGE>
(3) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand and in
banks, interest-bearing balances in other banks, and
federal funds sold. Generally, cash and cash equivalents
are considered to have maturities of three months or less.
(4) Investment in Mortgage Servicing Rights
---------------------------------------
During 1996, the Corporation made a $3,000,000 commitment
to be a limited partner in Dovenmuehle Mortgage Company
L.P. ("DMCLP") Tranche VIII Servicing Division of
Dovenmuehle Mortgage Inc. ("DMI"). DMI provides mortgage
servicing for a national portfolio of residential,
multi-family and commercial mortgage loans. These loans
are owned or securitized by national mortgage agencies, and
by a variety of private banks, thrifts, insurance
companiesand other loan investors. DMI formed DMCLP as a
funding vehicle to purchase portfolios of the Federal
National Mortgage Association and the Federal Home Loan
Mortgage Corporation nonrecourse residential servicing.
DMI provides the mortgage servicing for these portfolios.
Under this structure investors in DMCLP invest in separate
tranches, each of which has its own identified servicing
rights and each of which may be owned by one or a group of
investors. The equity investors in each tranche benefit
from a financial return based solely on the performance of
the mortgage servicing rights purchased for the tranche.
The Corporation has funded all of its $3,000,000
commitment.
The investment is accounted for under the equity method.
Management periodically evaluates the fair value of the
mortgage servicing rights owned by DMCLP using appraisals
prepared by a third party and adjusts the carrying value of
their investment when there is impairment.
During the three months and nine months ended September 30,
1998, the Corporation recognized impairment valuation
adjustments totaling approximately $1,078,000 and
$2,316,000, respectively. The impairment and write-down of
the mortgage servicing rights is due to significant
prepayments of the underlying mortgage loans due to a
decline in mortgage loan interest rates. Total earnings
(loss) of DMCLP recognized by the Corporation on the equity
method of accounting were($1,207,696) and $24,395 for the
three months ended September 30, 1998 and 1997,
respectively, and ($2,384,653) and $86,390 for the nine
months ended September 30, 1998 and 1997, respectively.
(5) Allowance for Loan Losses
-------------------------
The following is a reconciliation of the allowance for loan
losses for the three and nine months ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 748,547 713,547 738,547 703,547
Provision for loan losses 5,000 5,000 15,000 15,000
--------- ------- ------- -------
Balance at end of period $ 753,547 718,547 753,547 718,547
========= ======= ======= =======
</TABLE>
(6) Borrowings
----------
The Corporation has $10,500,000 in advances from the
Federal Home Loan Bank of Atlanta. These advances bear
interest at a floating rate equal to one month LIBOR and
mature on February 24, 1999.
9 (Continued)
<PAGE>
(7) Earnings per Share
------------------
The Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share", (SFAS No. 128) during
1997. The statement establishes standards for computing and presenting
earnings per share (EPS). In accordance with SFAS No. 128, all prior
period EPS has been restated.
Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if the Corporation's dilutive
stock options were exercised. The numerator of the basic net income per
share computation is the same as the numerator of the diluted net income
per share computation for all periods presented. A reconciliation of the
denominator of the basic net income EPS computation is as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Basic EPS denominator: weighted average
number of common shares outstanding 1,248,692 1,240,957 1,247,612 1,229,802
Dilutive effect arising from assumed
exercise of stock options -- -- -- 952
--------- --------- --------- ----------
Diluted EPS denominator 1,248,692 1,240,957 1,247,612 1,230,754
========= ========= ========= ==========
</TABLE>
(8) Other Accounting Changes
------------------------
In September 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS 131 establishes
standards for the way that public businesses report
information about operating segments in annual financial
statements and requires that those 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 will adopt SFAS No. 131 in 1998 without any
significant impact on its consolidated financial statements
as the Corporation operates as one segment.
In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132,
"Employer's Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
standardizes the disclosure requirements of pensions
and other postretirement benefits. It does not change any
measurement or recognition provisions, and thus will not
materially impact the Corporation. SFAS No. 132 is
effective for fiscal years beginning after December 15,
1997. The Corporation will present the required
disclosures in its financial statements for the year ending
December 31, 1998.
10
(Continued)<PAGE>
<PAGE>
In September 1998, the Financial Accounting Standards Board
issued Statement of Financial accounting Standards No. 133,
"Accounting for Derivative Financial Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for
derivative financial instruments and for hedging
activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after September 15,
1999. This statement will be adopted by the Corporation in
1999 without any impact on its consolidated financial
statements as the Corporation does not have any derivative
financial instruments nor is involved in any hedging
activities.
11<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Comparison of Operating Results for the Nine months ended
- ---------------------------------------------------------
September 30, 1998 and 1997
- ----------------------------
Net income (loss) for the nine months ended September 30, 1998
decreased to ($207,292), or ($.17) per basic and diluted share,
from $1,552,585 or $1.26 per basic and diluted share for the
same period in 1997. The decrease in net income was due to a
($2,384,653) loss on investment in mortgage servicing rights.
This loss was partially offset by a $403,000 pre-tax gain on the
sale of two outparcels to the Waynesville Plaza Shopping
Center which the Corporation had been holding as real estate
acquired in settlement of loans. In addition, net
interest income increased by $277,000 and general and
administrative expenses decreased by $21,000.
Total interest income for the nine months ended September 30,
1998 was $8,339,498, a $376,000 increase from the same period in
1997. The reason for the change was an increase in the average
balance of interest earning assets of approximately $7.4 million
due to the purchase of investment securities. The average yield
on interest earning assets decreased by 5 basis points to 7.69%
for the nine months ended September 30, 1998 compared to 7.74%
for the same period in 1997. The decrease in average yield is
mainly due to a decrease in average yield on loans receivable
from 8.05% for the nine months ended September 30, 1997 to 8.01%
for the same period in 1998 due to competitive pressures in the
marketplace for loans.
Interest expense for the nine months ended September 30, 1998
increased from 1997 by $99,000 mainly due to an increase in the
average balance of interest bearing liabilities of $4.6 million,
or 3.7%. The increase is mainly due to the Corporation
borrowing $10.5 million in advances from the Federal Home Loan
Bank of Atlanta ("FHLB") in the first quarter of 1997. The rate
paid on interest bearing liabilities remained fairly constant
between periods.
The overall net effect of these changes was a $277,000 increase
in net interest income and an increase in the interest rate
spread between interest earning assets and interest bearing
liabilities from 2.86% in 1997 to 2.88% in 1998.
Comparative yields, costs and spreads for the respective periods
are as follows:
<TABLE>
<CAPTION> Nine months Twelve Months
ended At ended
September 30, September 30, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average yield on interest earning assets 7.69% 7.74% 7.47% 7.80%
Average rate on interest bearing liabilities 4.81% 4.88% 4.04% 4.94%
---- ---- ---- ----
Asset/liability spread 2.88% 2.86% 3.43% 2.86%
==== ==== ==== ====
Net interest margin 3.45% 3.37% 3.91% 3.38%
==== ==== ==== ====
</TABLE>
Other income decreased $2,959,000 for the nine months ended
September 30, 1998 compared to the same period in 1997 due to an
approximately $2,316,000 impairment valuation adjustment to an
equity investment in a mortgage servicing partnership. The
underlying mortgage servicing rights were written down to their
fair value based on an independent appraisal. The impairment
and subsequent write-down of the mortgage servicing rights
is due to significant prepayments of the underlying mortgage
loans due to a decline in mortgage loan interest rates. Total
loss on mortgage servicing rights was $2,384,653 for the nine
month period. The investment in mortgage servicing rights is
evaluated periodically by management for impairment and no
assurance can be given that additional impairment valuation
adjustments will not be required in the future. Also see
footnote (4) to the consolidated financial statements.
12 (Continued)<PAGE>
<PAGE>
This loss was partially offset by the sale of the outparcels to
the Waynesville Plaza Shopping Center for a gain of
approximately $403,000. Total proceeds from the sales were
$682,000 which were invested in loans receivable and other
investments. The gain on the sale of real estate acquired in
settlement of loans was offset in part by a decrease in real
estate operations, net, of approximately $253,000. In 1997, the
Corporation sold the Waynesville Plaza Shopping Center and as a
result no longer receives rental and other income associated
with operating the shopping center. A pre-tax gain of
approximately $679,000 was recognized on the sale of the
Waynesville Plaza Shopping Center in 1997.
General and administrative expenses decreased by approximately
$21,000, or .87%, between nine month periods. The decrease is
due to a decrease in federal and other insurance premiums,
salaries and employee benefits, and occupancy and equipment
expense.
As a result of these and other factors, income (loss) before
income taxes decreased $2,661,377 for the nine months ended
September 30, 1998 versus 1997. Income tax expense (benefit) of
($77,000) during the period resulted in an effective income tax
rate of 27.1% compared to 34.7% in 1997.
Comparison of Operating Results for the Three Months ended
- ----------------------------------------------------------
September 30, 1998 and 1997
- ---------------------------
Net income (loss) for the three months ended September 30, 1998
was ($451,273), or ($.36) per basic and diluted share as
compared to net income of $826,709 or $.67 per basic and
diluted share for the same period in 1997. The net loss was due
to a ($1,207,696) loss on investment in mortgage servicing
rights.
Total interest income for the three months ended September 30,
1998 was $2,744,078, a $17,600 decrease from the same period in
1997. Average interest earning assets increased approximately
$491,000 between periods while the average yield on interest
earning assets decreased from 7.72% for the three months ended
September 30, 1997 to 7.64% for the three months ended September
30, 1998.
Interest expense for the three months ended September 30, 1998
decreased from the same period in 1997 by $89,000 due to a
decrease in the average balance of interest bearing liabilities
of $2.1 million and a decrease in the rate paid on interest
bearing liabilities of 20 basis points.
The overall net effect of these changes was a $71,000 increase
in net interest income and an increase in the interest rate
spread between interest earning assets and interest bearing
liabilities from 2.72% in 1997 to 2.84% in 1998.
Other income decreased $1,945,000 for the three months ended
September 30, 1998 compared to the same period in 1997 due to an
approximately $1,078,000 impairment valuation adjustment to an
equity investment in a mortgage servicing partnership as
discussed above. Total loss on mortgage servicing rights was
$1,207,696 for the three month period. Also attributing to the
change in other income is a decrease in gain on sale of real
estate acquired in settlement of loans and real estate
operations, net, of approximately $679,000 and $49,000,
respectively. In 1997, the Corporation sold the Waynesville
Plaza Shopping Center for a pre-tax gain of approximately
$679,000, and as a result, no longer receives rental and other
income associated with operating the shopping center.
General and administrative expenses increased by approximately
$22,000, or 2.8%, between three month periods. The increase is
due to an increase in salaries and employee benefits.
As a result of these and other factors, income (loss) before
income taxes decreased $1,895,482 for the three months ended
September 30,1998 versus 1997. Income tax benefit of $226,000
during the period resulted in an effective income tax rate of
33.4% compared to 32.1% in 1997.
13 (Continued)
<PAGE>
Comparison of Financial Condition at September 30, 1998 and
- -----------------------------------------------------------
December 31, 1997
- -----------------
Total assets decreased by $3.9 million or 2.57% from $153.5
million at December 31, 1997 to $149.5 million at September 30,
1998. The Corporation experienced negative loan growth during
the period with the loan portfolio decreasing by approximately
$3.3 million. Loan originations for the period were
approximately $20.5 million. The Corporation also had net
deposit run-off of approximately $3.3 million.
In addition, the investment in mortgage servicing rights
decreased by approximately $2.3 million due to the impairment of
the asset. As discussed above, the impairment resulted from the
significant prepayment of the underlying mortgage loans during
1998.
Total liabilities decreased by $3.1 million to $128.2 million at
September 30, 1998. The decrease is due to a decrease in
interest-bearing deposits of approximately $3.5 million. The
decrease is mainly in certificates of deposit and is
attributable to competitive pressures in the marketplace for
deposits.
Stockholders' equity decreased by $802,000 from $22.2 million at
December 31, 1997 to $21.4 million at September 30, 1998. This
decrease is due to quarterly dividends of $.15 per share or
$562,700 combined with net loss for the nine months of $207,000.
Asset Quality
- -------------
At September 30, 1998, the Corporation had approximately
$752,000 of loans in nonaccrual status as compared
to $583,000 at December 31, 1997. At September 30, 1998 and
December 31, 1997, the Corporation had no loans that were
considered to be impaired under Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan". There were no loans contractually past
due 90 days or more and still accruing at September 30, 1998 and
December 31, 1997. In the opinion of management, there
are no other loans which cause management to have serious doubts
as to the ability of such borrowers to comply with the present
repayment terms and thus resulting in such loans becoming
classified as problem assets. The Corporation's allowance for
loan losses was $753,547 or .68% of outstanding loans at
September 30, 1998. This compares to .64% at December 31, 1997.
The allowance for loan losses represents management's estimate
of an amount adequate to provide for potential losses inherent
in the loan portfolio. The adequacy of the allowance for loan
losses and the related provision are based upon management's
evaluation of the risk characteristics of the loan portfolio
under current economic conditions with consideration to such
factors as financial condition of the borrower, collateral
values, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding
loans, and delinquency trends. Management believes the
allowance for loan losses is adequate. While management uses
all available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. Various regulatory agencies, as an
integral part of their examination process, periodically review
the Corporation's allowance for loan losses. Such agencies may
require the Corporation to recognize additions to the allowance
based on their judgments about information available to
them at the time of their examination.
Real estate acquired in settlement of loans decreased from
approximately $246,000 at December 31, 1997 to $7,000 at
September 30, 1998 due primarily to the sale of two outparcels
to the Waynesville Plaza Shopping Center.
14
(Continued)<PAGE>
<PAGE>
Year 2000 Planning
- ------------------
The Corporation recognizes and is addressing the potentially
severe implications of the "Year 2000 Issue." The "Year 2000
Issue" is a general term used to describe the various problems
that may result from the improper processing of dates and
date-sensitive calculations as the Year 2000 approaches. This
issue is caused by the fact that many of the world's existing
computer programs use only two digits to identify the year in
the date field of a program. These programs were designed and
developed without considering the impact of the upcoming
change in the century and could experience serious malfunctions
when the last two digits of the year change to "00" as a result
of identifying a year designated "00" as the year 1900 rather
than the year 2000. This misidentification could prevent the
Corporation from being able to engage in normal business
operations, including, among other things, miscalculating
interest accruals and the inability to process customer
transactions.
The Corporation's Board of Directors has approved a Year 2000
Plan that was developed in accordance with guidelines set forth
by the Federal Financial Institutions Examination Council. This
plan has three primary phases related to internal Year 2000
compliance.
The first phase of the Corporation's efforts to address the Year
2000 Issue was to inventory all known Corporation processes that
could reasonably be expected to be impacted by the Year 2000
Issue and their related vendors, if applicable. This phase is
complete, although it is periodically updated as necessary.
The Corporation's second phase in addressing the Year 2000 Issue
was to contact all third party vendors, request documentation
regarding their Year 2000 compliance efforts, and analyze the
responses. This was a significant phase because the Corporation
does not perform in-house programming, and thus is dependent on
external vendors to ensure and modify, if necessary, the
hardware, software, or service it provides to the Corporation to
be Year 2000 compliant. This phase is now virtually complete
and the Corporation is currently following up on any issues or
concerns identified in the responses received, as necessary.
The next phase for the Corporation under the plan is to complete
a comprehensive testing of all known processes. The most
significant phase of testing is the testing of the Corporation's
mainframe computer system, teller terminals and core software
applications. The Corporation installed a new mainframe
computer system and teller terminals in September 1998 that are
Year 2000 compliant. Both systems were tested in September
1998. Upgrades of the core software applications currently used
by the Corporation were received from the software vendor in
September and were represented to be Year 2000 compliant by the
vendor. These applications were successfully loaded onto the
Corporation's hardware system in September and Year 2000
testing was also completed immediately after installation.
Another part of the Corporation's Year 2000 plan is to assess
the Year 2000 readiness of its significant borrowers and
depositers. Through the use of questionnaire's and personal
contacts, the Corporation is in the process of assessing the
Year 2000 readiness of significant borrowers and depositers of
the Corporation. Since the majority of the loans are to
individuals and secured by one to four family residences this
step is not expected to require a significant amount of time or
resources.
The Corporation had previously estimated the total costs to
address the Year 2000 Issue to be $180,000. Approximately
$117,500 of these costs related to the installation of the
mainframe computer system and were capitalized in accordance
with the Corporation's capitalization policy. Year 2000 project
costs incurred and expensed during the three and nine month
periods ended September 30, 1998 were approximately $7,500.
Funding of the Year 2000 project costs will come from normal
operating cash flow, however the expenses associated with the
Year 2000 Issue will directly reduce otherwise reported net
income for the Corporation.
15
(Continued)
<PAGE>
Management of the Corporation believes that the potential
effects on the Corporation's internal operations of the Year
2000 Issue can and will be addressed prior to the Year 2000.
However, if required modifications or conversions are not made
or are not completed on a timely basis prior to the Year 2000,
the Year 2000 Issue could disrupt normal business operations.
The most reasonably likely worst case Year 2000 scenarios
foreseeable at this time would include the Corporation
temporarily not being able to process, in some combination,
various types of customer transactions. This could affect the
ability of the Corporation to, among other things, originate new
loans, post loan payments, accept deposits or allow immediate
withdrawals, and, depending on the amount of time such a
scenario lasted, could have a material adverse effect on the
Corporation. Because of the serious implications of these
scenarios, the primary emphasis of the Corporation's Year 2000
efforts is to correct, with complete replacement if necessary,
any systems or processes whose Year 2000 test results are not
satisfactory prior to the Year 2000. Nevertheless, should one of
the most reasonably likely worst case scenarios occur in the
Year 2000, the Corporation is also in the process of formalizing
a contingency plan that would allow for limited transactions,
including the ability to make certain deposit withdrawals, until
the Year 2000 problems are fixed.
The costs of the Year 2000 project and the date on which the
Corporation plans to complete Year 2000 compliance are based on
management's best estimates, which were derived using numerous
assumptions of future events such as the availability of certain
resources (including internal and external resources), third
party vendor plans and other factors. However, there can be no
guarantee that these estimates will be achieved at the
cost disclosed or within the time frame indicated, and actual
results could differ materially from these plans. Factors that
might affect the timely and efficient completion of the
Corporation's Year 2000 project include, but are not limited to,
vendors' abilities to adequately correct or convert software and
the effect on the Corporation's ability to test its systems, the
availability and cost of personnel trained in the Year 2000
area, the ability to identify and correct all relevant computer
programs and similar uncertainties.
Liquidity
- ---------
The Corporation's asset-liability management policy is to
maintain and enhance the net interest income and provide
adequate liquidity to meet continuing loan demand, withdrawal
requirements, and pay for normal operating expenses. Liquidity
is primarily provided by the ability to attract deposits,
maturities in the investment portfolio, loan repayments, and
current earnings.
At September 30, 1998, Haywood Bancshares had approximately $32
million in cash, interest bearing balances in other banks,
federal funds sold and investment securities. Management
believes that the level of liquidity at September 30, 1998, is
adequate and in compliance with regulatory requirements.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and accompanying footnotes
have been prepared in accordance with generally accepted
accounting principles, which require the measurement of
financial position and operating results in terms of historical
dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The
assets and liabilities of the Corporation are primarily monetary
in nature and changes in interest rates have a greater impact on
the Corporation's performance than the effect of inflation.
16
(Continued)<PAGE>
<PAGE>
Capital Resources
- -----------------
As a North Carolina-charted savings bank, Haywood Savings is
subject to the capital requirements of the FDIC
and the N.C. Administrator of Savings Institutions ("the
Administrator"). The FDIC requires Haywood Savings
to maintain minimum ratios of Tier I capital to total
risk-weighted assets and total capital to risk-weighted assets
of 4% and 8%, respectively. To be well-capitalized, the FDIC
requires ratios of Tier I capital to total risk-
weighted assets and total capital to risk-weighted assets of 6%
and 10%, respectively. Tier I capital consists of total
stockholders' equity calculated in accordance with generally
accepted accounting principles less intangible assets, and total
capital is comprised of Tier I capital plus certain adjustments,
the only one of which is applicable to Haywood Savings is the
allowance for loan losses. Risk-weighted assets reflect Haywood
Savings' on- and off-balance sheet exposures after such
exposures have been adjusted for their relative risk levels
using formulas set forth in FDIC regulations. Haywood Savings
is also subject to a leverage capital requirement, which calls
for a minimum ratio of Tier I capital (as defined above) to
quarterly average total assets of 3%, and a ratio of 5% to be
"well capitalized." The Administrator requires a net worth
equal to at least 5% of assets. At September 30, 1998, Haywood
Savings was in compliance with all of the aforementioned capital
requirements and is deemed to be "well capitalized". The
Corporation must comply with FRB capital requirements which are
substantially the same.
Regulatory Matters and Contingencies
- ------------------------------------
Management is not presently aware of any current recommendations
to the Corporation or to Haywood Savings by regulatory
authorities which, if they were to be implemented, would have a
material effect on the Corporation's liquidity, capital
resources, or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.
17<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are being filed with
the report.
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule (EDGAR only)
27.2 Restated Financial Data Schedule
(EDGAR only)
(b) Reports on Form 8-K. During the quarter ended
September 30, 1998, the Registrant did not file any
reports on Form 8-K.
18<PAGE>
<PAGE>
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HAYWOOD BANCSHARES, INC.
(Registrant)
Date: November 12, 1998 By: /s/Larry R. Ammons
----------------------
Larry R. Ammons
(President and Principal
Executive Officer)
(Duly Authorized Representative)
Date: November 12, 1998 By: /s/Jack T. Nichols
----------------------
Jack T. Nichols
(Principal Financial Officer
and Principal Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,799,442
<INT-BEARING-DEPOSITS> 436,105
<FED-FUNDS-SOLD> 350,574
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,632,440
<INVESTMENTS-CARRYING> 11,068,066
<INVESTMENTS-MARKET> 11,137,890
<LOANS> 110,810,893
<ALLOWANCE> 753,547
<TOTAL-ASSETS> 149,541,670
<DEPOSITS> 115,345,118
<SHORT-TERM> 10,500,000
<LIABILITIES-OTHER> 2,324,938
<LONG-TERM> 0
0
0
<COMMON> 1,250,356
<OTHER-SE> 20,121,258
<TOTAL-LIABILITIES-AND-EQUITY> 149,541,670
<INTEREST-LOAN> 6,859,929
<INTEREST-INVEST> 1,330,937
<INTEREST-OTHER> 148,632
<INTEREST-TOTAL> 8,339,498
<INTEREST-DEPOSIT> 4,140,012
<INTEREST-EXPENSE> 4,593,645
<INTEREST-INCOME-NET> 3,745,853
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 6,418
<EXPENSE-OTHER> 2,352,033
<INCOME-PRETAX> (294,292)
<INCOME-PRE-EXTRAORDINARY> (284,292)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (207,292)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
<YIELD-ACTUAL> 3.45
<LOANS-NON> 752,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 748,547
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 753,547
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,387,056
<INT-BEARING-DEPOSITS> 629,532
<FED-FUNDS-SOLD> 2,209,328
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,548,743
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<ALLOWANCE> 733,547
<TOTAL-ASSETS> 152,795,506
<DEPOSITS> 118,294,743
<SHORT-TERM> 10,500,000
<LIABILITIES-OTHER> 2,329,063
<LONG-TERM> 0
0
0
<COMMON> 1,250,356
<OTHER-SE> 20,421,344
<TOTAL-LIABILITIES-AND-EQUITY> 152,795,506
<INTEREST-LOAN> 6,761,795
<INTEREST-INVEST> 1,057,526
<INTEREST-OTHER> 144,286
<INTEREST-TOTAL> 7,963,607
<INTEREST-DEPOSIT> 4,140,251
<INTEREST-EXPENSE> 4,495,089
<INTEREST-INCOME-NET> 3,468,518
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,372,646
<INCOME-PRETAX> 2,377,085
<INCOME-PRE-EXTRAORDINARY> 1,552,585
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,552,585
<EPS-PRIMARY> 1.26 <F1>
<EPS-DILUTED> 1.26 <F1>
<YIELD-ACTUAL> 3.37
<LOANS-NON> 813,000
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 718,547
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<FN>
<F1> Restated for adoption of SFAS 128.
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