As filed with the Securities and Exchange Commission on November 7, 2000
Registration No. 333-45014
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 2
to the
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WESTSTAR FINANCIAL SERVICES CORPORATION
(Name of small business issuer in its charter)
North Carolina 6712 56-2181423
(State or Jurisdiction (Primary Standard (IRS Employer
of Organization) Industrial Code) Identification No.)
79 Woodfin Place
Asheville, North Carolina 28801-2426
(828) 252-1735
(Address and telephone number of principal executive offices)
G. Gordon Greenwood, President
79 Woodfin Place
Asheville, North Carolina 28801-2426
(828) 252-1735
(Name, address and telephone number of agent for service)
Copies to:
Anthony Gaeta, Jr., Esq.
Erik Gerhard, Esq.
Gaeta & Glesener, P.A.
808 Salem Woods Drive, Suite 201
Raleigh, NC 27615
(919) 845-2558 Phone
(919) 518-2146 Fax
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an Offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same Offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED ________, 2000
[Prospectus cover page]
Prospectus
________, 2000
WESTSTAR FINANCIAL SERVICES CORPORATION
COMMON STOCK
PURCHASE PRICE $9.50 PER SHARE
410,000 Shares (Maximum)
117,600 Shares (Minimum)
We are the parent company for The Bank of Asheville, a North Carolina community
bank that opened for business in December 1997.
Weststar Financial Services Corporation
The Bank of Asheville
79 Woodfin Place
Asheville, North Carolina 28801-2426
(828) 252-1735
Trading Market
Our common stock is currently traded on the Nasdaq OTC Bulletin Board under the
symbol "WFSC."
The Offering
Weststar Financial Services Corporation is offering a minimum of 117,600 shares
and a maximum of 410,000 shares of its $1.00 par value common stock for sale at
$9.50 per share. The price per share was determined solely on the historical
trading price on the Over the Counter Bulletin Board. We will offer the common
stock primarily in the City of Asheville and Buncombe County, North Carolina to
all shareholders and customers of The Bank of Asheville as of September 2, 2000.
Additionally, Wachovia Securities, Inc., a broker-dealer located in Charlotte,
North Carolina will offer shares of common stock on a "best efforts" basis. This
means that Wachovia will not buy any of the shares for its own account or for
resale to the public but its brokers will solicit sales of the shares to
suitable investors. Funds collected during the offering will be placed in escrow
at First Citizens Bank until the minimum of 117,600 shares is sold. We plan to
use the proceeds from this offering to enhance our capital and liquidity
positions, fund our expansion plans, including the establishment of additional
branch offices in and around Buncombe County, and for general corporate
purposes. If by December 31, 2000, unless sooner terminated upon the sale of all
of the shares offered, or extended to February 28, 2001, we have not received
subscriptions for at least 117,600 shares of our common stock, a prompt refund
of funds paid, with interest, will be returned to subscribers.
Total of Total of
Per Share Minimum Maximum
--------- ---------- ----------
Public Offering Price $9.50 $1,117,200 $3,895,000
Estimated Expenses of the Offering (1) $1.15 $ 135,520 $ 135,520
Proceeds to Weststar $8.35 $ 981,680 $3,759,480
(1) Based on estimated sales commission of $50,000 to Wachovia Securities, Inc.
This investment involves risk. It is not a deposit or an account insured by the
FDIC or any other government agency. Some of the risks of this investment are
described under the caption "RISK FACTORS" beginning on page __.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
[Inside Front Cover of prospectus]
[MAP]
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed business
information and the financial statements and related notes that appear elsewhere
in this prospectus. Market and industry data used in this prospectus are based
on independent industry publications, other publicly available information or
the good faith belief of our management. The material provisions of this
offering have been included in the summary below.
WESTSTAR FINANCIAL SERVICES CORPORATION
AND THE BANK OF ASHEVILLE
Business
Weststar Financial Services Corporation is a bank holding company formed in
April 2000 to own all of the common stock of The Bank of Asheville, a North
Carolina-chartered bank that opened for business as a community bank in
Asheville, Buncombe County, North Carolina in December 1997. At this time,
Weststar does not engage in any business activities on its own. It only owns The
Bank of Asheville which engages in the commercial banking business. At June 30,
2000, Weststar had total assets of $61.2 million, total deposits of $55.0
million and shareholders' equity of $5.9 million.
The Bank of Asheville's Market Area
The Bank of Asheville's market area consists of Asheville, Buncombe County,
North Carolina and surrounding areas. Buncombe County is part of the Asheville
Ranally Metropolitan area. Asheville is the county seat and the industrial
center of Buncombe County with a population of approximately 68,000. In
addition, Asheville is the commercial hub for several other prosperous towns in
Buncombe County, including Arden, Biltmore Forest, Black Mountain, Montreat,
Skyland, Weaverville and Woodfin. The total population of Buncombe County is
190,200. Buncombe County has a diversified economy and an unemployment rate of
only 1.7% as of September 1999.
Executive Offices
Weststar Financial Services Corporation
The Bank of Asheville
79 Woodfin Place
Asheville, North Carolina 28801-2426
(828) 252-1735
1
Management
G. Gordon Greenwood, 52, is our President and Chief Executive Officer. A native
of Black Mountain, North Carolina, he has approximately 31 years of banking
experience. He is a graduate of Western Carolina University and the Banking
School of the South at Louisiana State University. Until January 2000, Mr.
Greenwood was a Regional Market Manager for Centura Bank in Asheville, North
Carolina. Prior thereto, he was senior vice president for commercial loans for
First Commercial Bank, a locally owned community bank in Asheville until its
acquisition by Centura Bank.
Randall C. Hall, 35, Executive Vice President, Secretary and Chief Financial
Officer, has approximately 12 years of banking experience. He is a graduate of
Gardner-Webb University and The BAI Graduate Schools of Banking at University of
Wisconsin. He has been with The Bank of Asheville since its organization in
1997. He was formerly with the Bank of Granite in Granite Falls, North Carolina
as Vice President, Chief Financial Officer and Secretary.
Robert E. Tuck, Jr., 41, Senior Vice President and Chief Credit Officer, is a 15
year banking veteran. He was formerly with First Citizens Bank as Vice President
and Branch Manager in Asheville, North Carolina.
Judy P. Waldroop, 42, Senior Vice President, is a long time resident of
Asheville and a 22 year banking veteran. She formerly was a Branch Sales and
Service Manager with Wachovia Bank in Asheville, North Carolina.
The Offering
Securities Offered for Sale Shares of common stock,
$1.00 par value, of Weststar Financial
Services Corporation.
Number of Shares Being Offered A minimum of 117,600 and a maximum of
410,000.
Offering Price $9.50 per share.
How to Subscribe Shareholders and customers of The Bank
of Asheville as of September 2, 2000 can
use the Subscription Offer Form attached
to this prospectus. Read and complete
the Subscription Offer Form. Together
with a check in the amount of your
subscription, mail the completed
Subscription Offer Form to Weststar.
Revocation of Subscription Once the subscription has been accepted,
a subscriber cannot revoke his
subscription.
Minimum Subscription The minimum number of shares an
individual may purchase is 100 shares.
2
Escrow of Funds All funds will be held in escrow with
First Citizens Bank. If by December 31,
2000 (unless extended to February 28,
2001), we do not receive subscriptions
for at least 117,600 shares, subscribers
will receive a prompt refund of their
funds with interest. If any shares are
purchased by any persons affiliated with
Weststar for the purpose of meeting the
minimum of 117,600 shares sold, those
purchases will be made for investment
purposes only and not with any intention
to redistribute at a later date.
Number of Shares to be Outstanding A minimum of 750,898 and a maximum of
after the Offering 1,043,298 shares.
Dividend Policy We do not intend to pay any cash
dividends in the foreseeable future.
Use of Proceeds We intend to use the net proceeds from
this offering to provide additional
liquidity, fund our expansion plans and
general corporate purposes.
Risk Factors You should read the "Risk Factors"
section beginning on page 5 before
deciding to invest in this offering.
Trading Market/Symbol Nasdaq OTC Bulletin Board/WFSC
Summary Consolidated Financial and Other Data
The summary consolidated financial and other data presented below should be read
in conjunction with, and is qualified in its entirety by reference to, the
audited financial statements of The Bank of Asheville for the years ended
December 31, 1999 and 1998 and related notes, and to the unaudited consolidated
financial statements of Weststar for the six months ended June 30, 2000 and
1999. These financial statements can be found at the end of this prospectus.
3
Weststar Financial Services Corporation
At or for the Six Months At or for the Year Ended
Ended June 30, December 31,
2000 1999 1999 1998
---- ---- ---- ----
(unaudited)
CONSOLIDATED OPERATING DATA:
Interest income $2,191,878 $1,095,967 $2,760,318 $1,061,351
Interest expense 869,707 471,245 1,128,641 424,509
---------- ---------- ---------- ----------
Net interest income 1,322,171 624,722 1,631,677 636,842
Provision for loan losses 157,200 204,285 316,685 269,614
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,164,971 420,437 1,314,992 367,228
Noninterest income 232,985 156,959 414,864 117,044
Noninterest expense 1,189,940 904,025 2,018,808 1,458,899
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of a change in
Accounting principle and income taxes 208,016 (326,629) (288,952) (974,627)
Income tax provision (benefit) (473,676) - (110,625) -
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of a
change in accounting principle 681,692 (326,629) (178,327) (974,627)
Cumulative effect of a change in accounting
principle, net of tax benefit of $44,877 - (71,326) (71,326) -
---------- ---------- ---------- ----------
Net income (loss) $681,692 ($397,955) ($249,653) ($974,627)
========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET DATA:
Total assets $61,221,847 $33,881,817 $43,368,097 $21,892,695
Investments 2,008,293 3,064,535 2,502,411 2,085,000
Loans, net of allowance for loan losses 46,921,215 24,938,952 33,931,916 13,804,546
Deposits 55,030,787 28,928,049 37,920,980 16,446,648
Shareholders' equity 5,851,563 4,761,054 5,168,399 5,162,575
PER SHARE DATA:
Basic and diluted income (loss) before cumulative effect
of a change in accounting principle $1.08 ($.54) ($.29) ($1.60)
Cumulative effect of a change in accounting principle - (.12) (.12) -
---------- ---------- ---------- ----------
Basic and diluted net income (loss) $1.08 ($.66) ($.41) ($1.60)
========== ========== ========== ==========
Book Value $9.24 $7.84 $8.16 $8.50
SELECTED OTHER DATA:
Return on average assets 2.80% (2.74%) (.74%) (6.09%)
Return on average equity 24.69% (13.59%) (5.05%) (17.18%)
Average equity to average assets 11.3% 17.0% 14.6% 35.5%
Net yield on average interest-earning assets 6.0% 4.9% 5.4% 4.6%
Average interest-earning assets to average
interest-bearing liabilities 120.0% 123.5% 121.7% 165.5%
Ratio of non-interest expense to average total 4.9% 6.2% 6.0% 9.1%
assets
Nonperforming loans to total assets .83% .27% .57% 0%
Nonperforming loans to total loans 1.07% .36% .72% 0%
Allowance for loan losses to total loans 1.44% 1.70% 1.53% 1.56%
Number of full service branches in operation 2 2 2 2
4
RISK FACTORS
In connection with this offering, you should consider carefully all of the
information in this prospectus and, in particular, the following factors:
We Do Not Plan to Pay Cash Dividends in the Immediate, Foreseeable Future.
We do not expect to pay dividends on our common stock in the immediate,
foreseeable future. You should not buy shares in this offering if you need
dividend income from this investment. Currently and in the immediate future,
Weststar will have no significant assets other than its ownership of The Bank of
Asheville, and the only source of funds for paying dividends to shareholders
will be dividends Weststar receives from The Bank of Asheville. The Bank of
Asheville is prohibited from paying cash dividends until December 2000 unless
special permission is received from the North Carolina Commissioner of Banks.
This is a common prohibition for new banks chartered under North Carolina law.
Also, The Bank of Asheville may not generate sufficient earnings to enable it to
continue to grow and also pay dividends to Weststar. Even if it does, Weststar's
board of directors would not be required to pay dividends to shareholders. Also,
there are other regulatory requirements which may limit our ability to pay cash
dividends.
If The Bank of Asheville Experiences Greater Loan Losses Than Anticipated, It
Will Have an Adverse Effect on Our Net Income and Our Ability to Fund Our Growth
Strategy.
The risk of nonpayment of loans is inherent in banking. If we experience greater
nonpayment levels than anticipated, our earnings and overall financial
condition, as well as the value of our common stock, could be adversely
affected.
We continuously strive to manage our credit risk, and we also maintain an
allowance for loan losses to provide for loan defaults and nonperformance.
However, we cannot assure you that our monitoring, procedures and policies will
reduce certain lending risks or that our allowance for loan losses will be
adequate to cover actual losses. In addition, as a result of the recent rapid
growth in our loan portfolio, loan losses may be greater than management's
estimates of the appropriate level for the allowance. Loan losses can cause
insolvency and failure of a financial institution and, in such an event, our
shareholders could lose their entire investment. In addition, future provisions
for loan losses could materially and adversely affect our results of operations.
Our Operations and Profitability Will be Negatively Affected by a Downturn in
the Local Economy.
We operate primarily in the western area of North Carolina, principally in the
City of Asheville and Buncombe County. While the economy in this area generally
has been healthy in recent years, an economic downturn in the area would
probably have a significant negative impact on us.
5
In Order to be Profitable, We Must Compete Successfully With Other Financial
Institutions Which Have Greater Resources and Capabilities Than We Do.
The banking business is extremely competitive. Most of our competitors are
larger and have greater resources than we do and have been in existence a longer
period of time. We will have to overcome historical bank-customer relationships
to attract customers away from our competition. We compete with the following
types of institutions:
- other commercial banks - securities brokerage firms
- savings banks - mortgage brokers
- thrifts - insurance companies
- credit unions - mutual funds
- consumer finance companies - trust companies
Some of our competitors are not regulated as extensively as we are and,
therefore, may have greater flexibility in competing for business. Some of these
competitors are subject to similar regulation but have the advantages of larger
established customer bases, higher lending limits, extensive branch networks,
numerous automated teller machines, a greater advertising-marketing budget or
other factors.
Our legal lending limit is determined by applicable law. The size of the loans
which we offer to our customers may be less than the size of the loans that most
of our competitors are able to offer. This limit may affect to some degree our
ability to seek relationships with the larger businesses in our market. We
satisfy loan requests in excess of our lending limit of $1,627,000 through the
sale of participations in such loans to other banks. However, we cannot assure
you that we will be successful in attracting or maintaining customers seeking
larger loans or that we will be able to engage in the sale of participations in
such loans on terms we consider favorable.
The Loss of One or More Key Executives Could Seriously Impair Our Ability to
Implement Our Strategy.
For the foreseeable future, we will depend upon the services of G. Gordon
Greenwood, our President and Chief Executive Officer, as well as other senior
management we employ. The loss of services of Mr. Greenwood may have a material
adverse effect on our operations. To protect against such a loss, we have
acquired a key-man life insurance policy covering Mr. Greenwood in the amount of
$700,000, payable to The Bank of Asheville. We cannot assure you that we will be
able to maintain it on satisfactory terms. In an effort to maintain Mr.
Greenwood's employment, we entered into a five-year employment agreement with
Mr. Greenwood in February 2000. If Mr. Greenwood or any other key employee were
no longer employed by us, it could impair our ability to implement our growth
strategy. In addition, if we were unable to hire qualified and experienced
personnel to adequately staff our anticipated growth, our operating results
would be adversely affected. To protect The Bank of Asheville, Mr. Greenwood and
Randall C. Hall, our Executive Vice President and Chief Financial Officer, have
entered into employment agreements with The Bank of Asheville that would, in
most circumstances, prohibit the executives from competing with The Bank of
Asheville in our market areas should they leave The Bank of Asheville's employ.
6
Changes in Interest Rates Could Have an Adverse Effect on Our Net Income.
Our profitability is based in part on the difference or "spread" between the
interest rates we earn on investments and loans and the interest rates we pay on
deposits and other interest-bearing liabilities. Like most banking institutions,
our net interest spread and margin is affected by general economic conditions
and other factors that influence market interest rates and by our ability to
respond to changes in interest rates. At any given time, our assets and
liabilities are affected differently by a given change in interest rates,
principally because it is impossible to match the maturities of our loans and
investments precisely with our deposits and other funding sources. As a result,
an increase or decrease in interest rates could have a material adverse effect
on our net income, capital and liquidity. As of June 30, 2000, we had a negative
interest rate gap of $4.2 million or 90.9% of interest-earning assets to
interest-bearing liabilities in the one-year time frame. In theory this means
our earnings could be adversely affected by periods of rising interest rates
because during such periods the interest expense paid on deposits and borrowings
will generally increase more rapidly than the interest income earned on loans
and investments. For information regarding our interest rate risk sensitivity
and our negative interest rate gap at June 30, 2000 as computed on various
future time horizons, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - ASSET/LIABILITY MANAGEMENT." While
management intends to take measures to mitigate interest rate risk, we cannot
assure you that such measures will be effective in minimizing our exposure to
interest rate risk.
In addition to affecting interest income and expense, changes in interest rates
also can affect the value of a financial institution's interest-earning assets,
which consist of fixed- and adjustable-rate instruments (such as loans and
investments). Generally, the value of fixed-rate instruments fluctuates
inversely with changes in interest rates. Changes in interest rates also can
affect the average life of, and demand for, loans and mortgage-related
securities. In a declining interest rate environment, for example, a financial
institution is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates on the
paid-off loans.
Anti-Takeover Provisions in Our Articles of Incorporation Could Reduce the
Likelihood That You Will Receive a Takeover Premium.
Certain provisions of state and federal law and our articles of incorporation
and by-laws will make it more difficult for anyone to acquire control of us
without our board of directors' approval. In many cases, shareholders receive a
premium for their shares in a change in control, and these provisions could make
it somewhat less likely that a change in control will occur or that you will
receive a premium for your shares if a change in control does occur.
7
The Bank of Asheville Has Had Only a Limited Operating History and a History of
Losses.
The Bank of Asheville has only been operating since December 1997 and only began
becoming profitable on a quarterly basis since September 30, 1999. Prior to that
date, The Bank of Asheville experienced losses. There is no assurance that
profitability will continue.
OFFICE LOCATIONS
Main Office Candler Office Leicester Highway Office
79 Woodfin Place 6 Dogwood Road 557 New Leicester Highway
Asheville, North Carolina Candler, North Carolina Asheville, North Carolina
(Opened in October 2000)
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any exhibits to
our registration statement incorporated by reference in this prospectus. If you
want more information, write or call us at:
Weststar Financial Services Corporation
The Bank of Asheville
79 Woodfin Place
Asheville, North Carolina 28801-2426
(828) 252-1735
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended, and as required by the 1934 Act, we file reports, proxy
statements, and other information with the SEC. Reports, proxy statements and
other information filed by us may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, DC 20549 and at the SEC's regional offices located
at 7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Our SEC filings are also
available to the public on the SEC Internet site at http://www.sec.gov.
Prior to our formation as the holding company for The Bank of Asheville in April
2000, The Bank of Asheville was subject to the informational requirements of the
1934 Act and filed reports, proxy statements and other information with the
FDIC. The Bank of Asheville's filings with the FDIC may be inspected and copied,
after paying a prescribed fee, at the FDIC's public reference facilities at the
Registration, Disclosure and Securities Operations Unit, 550 17th Street, NW,
Room 6043, Washington, DC 20429.
8
FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus discuss future expectations, contain
projections of results of operations or financial condition or state other
"forward-looking" information. Those statements are subject to known and unknown
risks, uncertainties and other factors that could cause the actual results to
differ materially from those contemplated by the statements. We based the
forward-looking information on various factors and using numerous assumptions.
Important factors that may cause actual results to differ from those
contemplated by forward-looking statements include, for example:
- the success or failure of our efforts to implement our business
strategy;
- the effect of changing economic conditions;
- changes in government regulations, tax rates and similar matters;
- our ability to attract and retain quality employees; and
- other risks which may be described in our future filings with the SEC.
We do not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements other than material changes to such information.
USE OF PROCEEDS
We estimate the net proceeds from the sale of the minimum of 117,600 shares and
maximum of 410,000 shares of common stock we are offering will be a minimum of
approximately $981,000 and a maximum of approximately $3.75 million, assuming an
offering price of $9.50 per share and after deducting estimated sales
commissions and offering expenses.
We intend to use these net proceeds to: (i) enhance The Bank of Asheville's
liquidity position; (ii) provide funding or capital to The Bank of Asheville to
support additional branch locations; and (iii) general corporate purposes.
Maximum Minimum
Net Proceeds Net Proceeds
------------ ------------
Held at Weststar Financial Services Corporation (1) $ 375,948 $ 98,168
Invested in The Bank of Asheville (2) $3,383,532 $883,512
---------- ---------
$3,759,480 $981,680
========== ========
(1) Some or all may be loaned to The Bank of Asheville which will use the funds
for lending and investment purposes.
(2) Added to the capital accounts of The Bank of Asheville. Approximately
$60,000 to be used to fund equipment purchases and leasehold improvements
for its Leicester Highway Office opened in October 2000. The increased
capital will permit an increase in loans and support, from a regulatory
standpoint, increased deposits.
The net proceeds will initially be invested in short-term investment grade
securities until such time as management can deploy the proceeds as described
above.
9
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market Information
Weststar's common stock is currently being traded on the Nasdaq OTC Bulletin
Board under the symbol "WFSC." The prices reflected below are for Weststar since
April 28, 2000, the date of its organization. For dates prior thereto, the
prices reflect the shares of common stock of The Bank of Asheville. The
following table gives the high and low sales prices for the calendar quarters
indicated:
Sale Price
High Low
---- ---
1998
----
First Quarter $ n/a $ n/a
Second Quarter 11.50 11.00
Third Quarter 14.50 12.00
Fourth Quarter 12.00 10.0625
1999
----
First Quarter $ 11.00 $ 9.50
Second Quarter 10.50 9.50
Third Quarter 11.00 9.00
Fourth Quarter 10.50 6.375
2000
----
First Quarter $ 9.50 $ 7.00
Second Quarter 9.375 7.00
Third Quarter 9.00 5.375
Fourth Quarter 9.00 5.125
(thru November 6, 2000)
The over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
10
Holders
There are approximately 800 holders of our common stock.
DIVIDEND POLICY
We initially expect that our earnings will be retained to finance our growth and
that we will pay no cash dividends for the foreseeable future. As a condition to
receipt of its charter from the North Carolina Banking Commission, The Bank of
Asheville is prohibited from paying dividends until December 2000. This is a
standard and common condition which may be waived by the North Carolina
Commissioner of Banks. We may consider payment of dividends after December 2000.
However, the declaration of dividends is at the discretion of the board of
directors, and we cannot assure you that dividends will be declared at any time.
If and when dividends are declared, they will be largely dependent upon the
earnings of The Bank of Asheville.
As a banking corporation organized under North Carolina law, The Bank of
Asheville is restricted as to the maximum amount of dividends it may pay to
Weststar. North Carolina law prohibits The Bank of Asheville from declaring or
paying dividends unless The Bank of Asheville's capital surplus is at least 50%
of its paid-in capital. In addition, regulatory authorities may limit payment of
dividends by any bank when it is determined that such a limitation is in the
public interest and is necessary to ensure financial soundness of The Bank of
Asheville. The North Carolina Commissioner of Banks and the FDIC are also
authorized to prohibit the payment of dividends by The Bank of Asheville under
certain circumstances. See "Supervision and Regulation - Regulation of The Bank
of Asheville -- Miscellaneous." Such requirements and policies may limit
Weststar's ability to obtain dividends from The Bank of Asheville for its cash
needs, including payment of dividends to our shareholders and the payment of
operating expenses.
Weststar is organized under the North Carolina Business Corporation Act, which
prohibits the payment of a dividend if, after giving its effect, the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if the corporation were
to be dissolved, to satisfy the preferential rights upon dissolution of any
preferred shareholders. In addition, the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") may impose restrictions on
dividends paid by Weststar.
11
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on an
actual basis and on a pro forma basis as adjusted to give effect to this
offering, assuming an offering price of $9.50 per share. You should read this
information together with our consolidated financial statements and related
notes, which are included elsewhere in this prospectus.
At June 30, 2000
Proforma Proforma
Actual Minimum Maximum
========== ========== ==========
Shareholders' Equity:
Preferred Stock, no par value, 1,000,000 shares authorized, - - -
none issued.
Common Stock, $1.00 par value, 9,000,000 shares authorized,
633,298, 750,898 and 1,043,298 shares issued and outstanding. $633,298 $750,898 $1,043,298
Additional paid-in capital 6,129,636 6,993,716 9,479,116
Accumulated deficit (909,204) (909,204) (909,204)
Accumulated other comprehensive loss (2,167) (2,167) (2,167)
========== ========== ==========
Total Shareholders' Equity $5,851,563 $6,833,243 $9,611,043
========== ========== ==========
Capital Ratios:
Leverage 11.17% 12.97% 17.78%
Tier 1 Risk-Based 13.17% 15.28% 20.94%
Total Risk-Based 14.42% 16.54% 22.19%
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our selected
financial statements and the related notes presented elsewhere in this
prospectus, as well as our historical financial statements which appear at the
end of this prospectus.
Certain statements in this section constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of Weststar to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
OVERVIEW
From our opening, The Bank of Asheville has focused on developing products and
services that will enable both sustained growth and the attainment of
profitability over the long term. The Bank of Asheville opened on December 1,
1997 in its permanent headquarters office at 79 Woodfin Place in Asheville.
As is typical of de novo institutions, The Bank of Asheville incurred net losses
during its initial periods of operations, with total net losses aggregating to
an accumulated deficit of approximately $909,000 at June 30, 2000. Within that
same period, provisions for additions to The Bank of Asheville's allowance for
loan losses have approximated $686,000.
CHANGES IN FINANCIAL CONDITION
JUNE 30, 2000 COMPARED TO DECEMBER 31, 1999
During the period from December 31, 1999 to June 30, 2000 total assets increased
$17,853,750 or 41%. This increase, reflected primarily in the cash and loan
portfolios, was funded primarily by deposit growth.
Securities, federal funds sold, and interest-bearing balances with other
financial institutions at June 30, 2000 totaled $4,223,368 compared to
$4,615,195 at December 31, 1999. Securities available for sale remained
relatively flat when compared to December 31, 1999 as funds were allocated to
the loan portfolio. During 1999, The Bank of Asheville gained access to the
Federal Home Loan Bank system. This access grants us additional sources of funds
for lending and liquidity. An initial equity investment of $58,100 was required
to gain access to the Federal Home Loan Bank's resources. During the period
ended June 20, 2000, an additional investment of $87,500 was required by the
Federal Home Loan Bank. Federal funds sold totaled $2,210,000. These funds are
temporary investments, which provide liquidity and funding for longer-term
investments and loans.
13
The loan portfolio constituted 78% of Weststar's total assets. Loans increased
$13,146,499 from December 31, 1999 to June 30, 2000. The increase in loan demand
resulted from market penetration into the small business, professional and
consumer bases within our market. Management places a strong emphasis on loan
quality. At June 30, 2000, there were no loans that (i) represented or resulted
from trends or uncertainties which management reasonably expects to materially
impact future operating results, liquidity, or capital resources, or (ii)
represented material credits about which management was aware of any information
which caused us to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
Impaired loans of Weststar include real estate, commercial, financial and
agricultural loans designated as non-accrual. Non-accrual loans are those for
which management has discontinued accrual of interest because there exist
uncertainty as to the full and timely collection of either principal or interest
or such loans have become contractually past due 90 days with respect to
principal and interest. When the value of an impaired loan is less than the
recorded investment in the loan, a portion of Weststar's allowance for loan
losses is allocated as an impairment allowance.
The recorded investment in loans that are considered to be impaired in
accordance with criteria set forth in Statement of Financial Accounting
Standards No. 114 of the Financial Accounting Standards Board was $509,299 and
$90,544 at June 30, 2000 and 1999, respectively and none at December 31, 1999.
The average recorded balance of impaired loans during 2000 and 1999 was not
significantly different from the balance at June 30, 2000 and 1999,
respectively. The related allowance for loan losses determined in accordance
with SFAS No. 114 for impaired loans was $65,296 and $51,823 at June 30, 2000
and 1999, respectively. The increase in impaired loans was primarily related to
loans to one individual borrower. The reserve level increased only slightly due
to the value of the underlying loan collateral exceeding current principal
balance of the loans to the individual borrower. For the six month periods ended
June 30, 2000 and 1999, Weststar recognized interest income from impaired loans
of approximately $16,627 and $4,044, respectively.
The allowance for loan losses at June 30, 2000 and December 31, 1999 was 1.44%
and 1.53% or $686,000 and $528,808, respectively, of gross loans outstanding.
The following table contains an analysis of the allowance for loan losses,
including the amount of charge-offs and recoveries by loan type, for the
six-months ended June 30, 2000 and 1999 and for the years ended December 31,
1999 and 1998.
14
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
For the six months ended For the year ended
------------------------- ------------------
June 30, December 31,
-------- ------------
2000 1999 1999 1998
---- ---- ---- ----
(Dollars in Thousands)
Balance, beginning of period $528,808 $218,719 $218,719 $3,200
Charge-offs:
Loans to individuals - - (2,114) (316)
Commercial and industrial loans - - (16,453) (55,522)
-------- -------- -------- --------
Total charge-offs - - (18,567) (55,838)
Recoveries - 8,008 11,971 1,743
-------- -------- -------- --------
Net (charge-offs) recoveries - 8,008 (6,596) (54,095)
-------- -------- -------- --------
Provision charged to operations 157,200 204,285 316,685 269,614
-------- -------- -------- --------
Balance, end of period $686,008 $431,012 $528,808 $218,719
======== ======== ======== ========
Percentage of net charge-offs to average loans 0% 0% .03% .8%
Percentage of allowance to period-end loans 1.44% 1.70% 1.53% 1.56%
The following table allocates the allowance for loan losses by loan category at
the dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At June 30, 2000 At December 31, 1999 At December 31, 1998
---------------- -------------------- --------------------
Amount of Percent of Amount of Percent of Amount of Percent of
Allowance Total Loans Allowance Total Loans Allowance Total Loans
TYPE OF LOAN:
Real estate $466,485 69% $367,917 70% $140,500 65%
Commercial, financial
and agricultural 198,942 29% 150,445 29% 68,040 33%
Consumer 13,720 2% 8,650 1% 4,340 2%
Unallocated 6,861 1,796 5,839
-------- -------- --------
Total allowance $686,008 100% $528,808 100% $218,719 100%
======== === ======== === ======== ===
The Bank of Asheville does not have any significant loan concentrations. During
the period, loan quality and terms remained relatively unchanged and therefore
had no significant impact on the allowance. Growth in the allowance has been
based upon our formula allowance. Due to the overall consistency of the loan
portfolio, there has been no reallocation of the allowance among different parts
of the portfolio.
During 1997, 1998, 1999 and 2000, there were no changes in estimation methods or
assumptions that affected our methodology for assessing the appropriateness of
the formula and specific allowance for credit losses. Changes in estimates and
assumptions regarding the effects of economic and business conditions on
borrowers affect the assessment of the allowance.
15
Deposits increased $17,109,807 during the six months ended June 30, 2000. The
growth was found in all categories of deposits. Growth stemmed from continued
market penetration, and the addition of new products/services. Transaction and
savings accounts accounted for $13,016,268 or 76% of growth, while time deposits
accounted for $4,093,539 or 24% of growth.
The Bank of Asheville's capital at June 30, 2000 to risk weighted assets totaled
14.42%. Current federal regulations require a minimum ratio of total capital to
risk weighted assets of 8%, with at least 4% being in the form of Tier 1
capital, as defined in the regulations. In addition, Weststar must maintain a
leverage ratio of 4%. As of June 30, 2000, Weststar's capital exceeded the
current regulatory capital requirements. See REGULATORY CAPITAL for details on
capital adequacy.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2000 AND 1999
Net interest income, the principal source of Weststar's earnings, is the amount
of income generated by earning assets (primarily loans and investment
securities) less the total interest cost of the funds obtained to carry them
(primarily deposits and other borrowings). The volume, rate and mix of both
earning assets and related funding sources determine net interest income.
COMPARATIVE THREE MONTHS: JUNE 30, 2000 AND 1999
Net interest income for the quarter ended June 30, 2000 totaled $736,453
compared to $357,448 in 1999. This increase is attributable to growth in net
earning assets and improved net interest margins. Weststar's net interest margin
was approximately 5.7% and 4.4% for the quarters ended June 30, 2000 and 1999,
respectively. The increased net interest margin resulted from variable rate
loans repricing as interest rates increased, and new loan contracts issued
during a higher rate environment than the prior year. On the liability side,
interest rates paid on interest-bearing liabilities remained fairly constant.
Weststar recorded a provision for loan losses of $100,000 and $129,825 for the
quarters ended June 30, 2000 and 1999, respectively. The provision for loan
losses is charged to operations to bring our allowance to a level deemed
appropriate by management based on the factors discussed under "Asset Quality".
The provision for credit losses decreased despite the ratio of non-performing
loans to total loans increasing from 0.36% to 1.07%. The increase in
nonperforming loans in relation to total loans was primarily related to loans to
one individual borrower. A specific reserve was not provided due to the value of
the underlying collateral exceeding current principal balance of the loans to
the individual borrower.
Non-interest income for the June 30, 2000 and 1999 quarters totaled $113,910 and
$101,897, respectively. The growth in service charge income increased
commensurate with growth in transaction related deposit accounts. Non-interest
expense totaled $593,908 compared to $455,797 in 1999. Non-interest expense
increased primarily as a result of wide asset growth and the costs of servicing
a larger loan and deposit base of customers. Additional increased costs related
directly to insurance, supplies, audit, tax and legal fees as well as sundry
other items. Income (loss) before income taxes totaled $156,455 and $(126,277)
for the quarters ended June 30, 2000 and 1999, respectively. Income taxes
totaled $56,936 and none for the quarters ended June 30, 2000 and 1999,
respectively. Net income (loss) was $99,519 and $(126,277) for the quarters
ended June 30, 2000 and 1999, respectively.
16
The other comprehensive income (loss), which is the change in shareholders'
equity excluding transactions with shareholders', totaled $527 and ($2,210) in
2000 and 1999, respectively. Comprehensive income totaled $100,046 compared to a
loss of $128,487 for the quarters ended June 30, 2000 and 1999, respectively.
COMPARATIVE SIX MONTHS: JUNE 30, 2000 AND 1999
Net interest income for the six month periods ended June 30, 2000 totaled
$1,322,171 compared to $624,722 in 1999. This increase is primarily attributable
to growth in earning assets and interest-bearing liabilities. Weststar's net
interest margin was approximately 5.4% and 4.3% for the six months ended June
30, 2000 and 1999, respectively. The increased net interest margin resulted from
variable rate loans repricing as interest rates increased, and new loan
contracts issued during a higher rate environment than the prior year. On the
liability side, interest rates paid on interest-bearing liabilities remained
fairly constant.
The provision for loan losses charged to operations is an amount sufficient to
bring the allowance for loan losses to an estimated balance considered to be
adequate to absorb potential losses in the portfolio. Management's determination
of the adequacy of the allowance is based on an evaluation of the portfolio,
current economic conditions, historical loan loss experience and other risks.
During the six month periods ended June 30, 2000 and 1999, management allocated
$157,200 and $204,285, respectively, to the loan loss reserve.
Non-interest income for the six month periods ended June 30, 2000 and 1999
totaled $232,985 and $156,959, respectively. The growth in service charge income
increased commensurate with growth in transaction related deposit accounts.
Non-interest expense totaled $1,189,940 compared to $904,025 in 1999.
Non-interest expense increased primarily as a result of additional staffing, and
premises and equipment purchases related to growth. Additional increased costs
related directly to insurance, supplies, audit, tax and legal fees as well as
sundry other items. The net operating income (loss) before a cumulative effect
of a change in accounting principle and income tax benefit was $208,016 and
($326,629) for the six month periods ended June 30, 2000 and 1999, respectively.
For the six month period ended June 30, 2000, Weststar recognized an income tax
benefit of $473,676 primarily related to the release of a valuation allowance of
$530,612 previously recorded against deferred tax assets, net of income taxes
related to operations for the period. At December 31, 1999 management believed
the realization of the valuation allowance was not reasonably assured. Based
upon the taxable income being generated in 2000 and management's expectations of
continued profitability, management now believes the realization of the deferred
tax asset is more likely than not. The valuation allowance was reversed in the
first quarter of 2000, thereby providing a deferred tax benefit.
17
The other comprehensive income (loss), which is the change in shareholders'
equity excluding transactions with shareholders, totaled $727 and $(3,676) in
2000 and 1999, respectively. Comprehensive income (loss) totaled $682,419
compared to $(401,631) in 2000 and 1999, respectively.
COMPARATIVE TWELVE MONTHS: DECEMBER 31, 1999 AND 1998
Interest income, the primary source of revenue for The Bank of Asheville, was
derived from interest-earning assets such as loans, investments and federal
funds sold. The rate earned on interest-earning assets and dollar volume of the
interest-earning assets drives interest income. Interest income totaled
$2,760,318 for the year ended December 31, 1999 compared to $1,061,351 in 1998.
Growth in interest income was primarily attributable to growth in
interest-earning assets; the average balance of interest-earning assets
increased from $13,886,850 during 1998 to $30,311,789 during 1999 or 118%.
Interest expense, derived from interest-bearing liabilities such as deposits and
borrowed funds, totaled $1,128,641 for 1999 compared to $424,509 for 1998. The
increase in interest expense was attributable to growth in interest-bearing
liabilities. The average balance of interest-bearing liabilities grew from
$8,390,404 in 1998 to $24,825,935 in 1999 or 196%.
Other operating income totaled $414,864 in 1999 compared to $117,044 in 1998.
Service charge fees on deposit accounts account and other fees and commissions
earned account for the majority of non-interest income. During 1999, The Bank of
Asheville earned $272,911 from service charges on deposit accounts compared to
$83,349 in 1998, an increase of 227%. Other service fees and commissions,
including fees from the origination of mortgage loans, totaled $131,316 in 1999
compared to $29,162 in 1998. Mortgage loan fees accounted for $50,339 or 38% of
other fees and commissions. Miscellaneous income, primarily the fees from the
sales of checks and deposit slips, provided additional income of $10,637 in 1999
compared to $4,533 in 1998. Other expenses totaled $2,018,808 in 1999 compared
to $1,458,899 in 1998. Expenses increased as a result of opening a new banking
office, increased personnel expense and increased supplies expense to process
the banks growth in loans and deposits. Salaries and wages accounted for
$1,049,339 in 1999 or 52% of other expenses compared to $715,661 or 49% in 1998.
Equipment expenses totaled $201,738 in 1999 compared to $132,439 in 1998. Other
non-interest expenses of $688,451 in 1999 compared to $546,671 in 1998 included
sundry items such as marketing, accounting, insurance, and data processing.
During the fourth quarter of 1999, a tax benefit amounting to $110,625 was
recorded. The net operating loss, before cumulative effect of a change in income
taxes, totaled $178,327 or $.29 per share in 1999 compared to $974,627 or $1.60
per share in 1998. The cumulative effect of a change in accounting principle
during 1999 totaled $71,326, net of taxes, or $.12 per share. The net operating
loss after the cumulative effect of a change in accounting principle totaled
$249,653 in 1999 compared to $974,627 in 1998. The return on average assets and
equity were (.74%) and (5.05%) for 1999 compared to (6.09%) and (17.18%) in
1998. The comprehensive loss, which is the change in equity during a period
excluding changes resulting from investments by shareholders and distributions
to shareholders, totaled $251,596 in 1999 compared to $982,897 in 1998.
18
FOR THE YEAR ENDED DECEMBER 31, 1997
The Bank of Asheville began operations on December 1, 1997. The opening balance
sheet reflected $6,572,712 in total assets. Assets were comprised primarily of
$4,990,000 in federal funds sold; $751,416 in interest-bearing balances due from
financial institutions, $148,345 in organizational costs and $398,423 in
premises and equipment. Liabilities totaled $290,517 of which $184,016
represented accounts payable for services and products acquired. Total equity
was $6,282,196. Equity was comprised of 607,557 shares of $5.00 par value common
stock, which sold for $11.00 per share. Total capital raised was $6,505,514, net
of $177,614 broker fees. Net pre-opening expenses totaled $204,690. Pre-opening
expenses, which are not capitalized as in the case of organizational costs,
consisted of costs such as salaries and benefits, rent, utilities,
printing/postage, advertising and supplies.
From December 1, 1997 to December 31, 1997 assets had grown $1,607,853 or 24.5%
to $8,180,565. The increase was attributable to the $1,772,920 growth in
deposits during the month of operations. Approximately 34% or $1,334,476 of The
Bank of Asheville's deposits were in the form of demand deposits, including NOW
and Money market accounts. At December 31, 1997, the aggregate amount of
certificates of deposit and other time deposits of The Bank of Asheville, in
amounts greater than or equal to $100,000 was $200,000.
An allowance for loan losses in the amount of $3,200 was established at December
31, 1997. The allowance was general in nature and not allocated to any
particular class of loans.
Net premises and equipment were $550,220 or 6.7% of total assets. Liabilities
consisted primarily of deposits and a note payable. During the month of
operation, 216 deposit accounts were opened which reflected balances of
$1,772,920 at December 31, 1997. A note payable in the amount of $150,000 was
incurred to finance the upfitting of the banking facility. The note bears an
interest rate of prime plus 1% and is repayable over a 3 year period.
Shareholders' equity was $6,145,472 including an operating loss of $366,616 or
$.60 per share, and an unrealized gain on securities available for sale (net of
deferred income taxes) of $6,574. The Bank of Asheville's capital to assets was
75.1% at December 31, 1997. In connection with the initial public offering of
common stock in 1997, The Bank of Asheville issued 60,360 warrants to purchase
stock to certain shareholders. Each warrant was convertible into one share of
The Bank of Asheville's common stock at an exercise price of $11.00 per share.
The warrants were exercisable one year from issuance and expired four years from
issuance. During 1999, 25,741 warrants were exercised, and the remaining
warrants were canceled by The Bank of Asheville.
The net operating loss, before other comprehensive income, incurred from October
29, 1997 (date of incorporation) to December 31, 1997 totaled $161,926. During
the period, interest income totaled $100,855. The net operating loss adjusted
for comprehensive income totaled $155,352. Interest expense on interest-bearing
liabilities was $3,552. The Bank of Asheville contributed $3,200 to the loan
loss reserve for a reserve of 1.5% to gross loans outstanding. Non-interest
income amounted to $1,103. Other expenses totaled $232,939. The net loss before
provision for income taxes totaled $137,823. As a result of net deferred income
tax credits, a provision for income taxes was incurred in the amount of $24,103.
The accumulated deficit (the accumulation of pre-opening and post opening
losses) totaled $366,616.
19
ASSET/LIABILITY MANAGEMENT
The Bank of Asheville's asset/liability management, or interest rate risk
management, program is focused primarily on evaluating and managing the
composition of its assets and liabilities in view of various interest rate
scenarios. Factors beyond The Bank of Asheville's control, such as market
interest rates and competition, may also have an impact on The Bank of
Asheville's interest income and interest expense.
In the absence of other factors, the yield or return associated with The Bank of
Asheville's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time and, conversely, interest
income will decrease when interest rates decline. In general, interest expense
will increase when interest rates rise over an extended period of time and,
conversely, interest expense will decrease when interest rates decline.
Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, The Bank of Asheville calculates an interest rate "gap." Interest rate
"gap" analysis is a common, though imperfect, measure of interest rate risk,
which measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. A
"positive" gap for a given period means that the amount of interest-earning
assets maturing or otherwise repricing within that period exceeds the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. Accordingly, in a declining interest rate environment, an institution
with a positive gap would generally be expected, absent the effects of other
factors, to experience a decrease in the yield on its assets greater than the
decrease in the cost of its liabilities and its income should be negatively
affected. Conversely, the cost of funds for an institution with a positive gap
would generally be expected to increase more slowly than the yield on its assets
in a rising interest rate environment, and such institution's net interest
income generally would be expected to be positively affected by rising interest
rates. Changes in interest rates generally have the opposite effect on an
institution with a "negative gap."
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2000, which are projected
to reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. In addition, the
table reflects scheduled principal payments, which will be received throughout
the lives of the loans. The interest rate sensitivity of The Bank of Asheville's
assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
20
TERMS TO REPRICING AT JUNE 30, 2000
1-90 Days 91-180 Days 181-365 Days Total One Total
Year Non-Sensitive
Interest-earning assets:
Interest bearing deposits $ 5,075 - - $ 5,075 - $ 5,075
Federal funds sold 2,210,000 - - 2,210,000 - 2,210,000
Investment securities 498,291 $ 767,250 $ 742,752 2,008,293 - 2,008,293
Federal Home Loan Bank stock - - - - $ 145,600 145,600
Loans 30,261,683 5,367,081 1,904,224 37,532,988 10,074,235 47,607,223
Total interest-earning assets 32,975,049 6,134,331 2,646,976 41,756,356 10,219,835 51,976,191
Interest-bearing liabilities
Time deposits 7,586,665 12,705,462 2,569,042 22,861,169 11,071 22,872,240
All other deposits 23,099,514 - - 23,099,514 - 23,099,514
Total interest-bearing liabilities 30,686,179 12,705,462 2,569,042 45,960,683 11,071 45,971,754
Interest sensitivity gap $ 2,288,870 ($6,571,131) $ 77,934 ($4,204,327) $10,208,764 $6,004,437
Cumulative interest sensitivity
Gap $ 2,288,870 ($4,282,261) ($4,204,327)
Interest-earning assets as a
Percent of interest sensitive
liabilities 107.5% 48.3% 103.0% 90.9%
Weststar has established an acceptable range of 80% to 120% for interest-earning
assets as a percent of interest sensitive liabilities.
NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
interest-earning balance"). The following tables set forth information relating
to average balances of The Bank of Asheville's assets and liabilities for the
six months ended June 30, 2000 and 1999 and for the years ended December 31,
1999 and 1998. The table reflects the average yield on interest-earning assets
and the average cost of interest-bearing liabilities (derived by dividing income
or expense by the daily average balance of interest-earning assets or
interest-bearing liabilities, respectively) as well as the net yield on
interest-earning assets (which reflects the impact of the net interest-earning
balance).
21
Six Months Ended June 30,
2000 1999
---- ----
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- ---------- ------- ---------- ---------- -------
Assets:
Interest earnings assets:
Interest earning deposits with banks $ 4,280 $ 116 5.4% $ 49,081 $ 1,158 4.7%
Investments 2,382,598 69,478 5.8% 2,393,851 57,496 4.8%
Federal funds sold 1,256,121 40,782 6.5% 3,948,771 98,067 5.0%
Loans(1) 40,218,327 2,081,502 10.4% 19,241,425 939,246 9.8%
---------- --------- ----- ---------- --------- ----
Total interest-earning assets 43,861,326 2,191,878 10.0% 25,633,128 1,095,967 8.6%
---------- --------- ----- ---------- --------- ----
Other assets 4,815,155 3,389,626
---------- ----------
Total assets $48,756,481 $29,022,754
=========== ===========
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
NOW accounts $3,999,640 $16,902 .9% 2,228,286 9,940 .9%
Money market demand accounts 11,493,287 256,825 4.5% 7,928,578 182,289 4.6%
Savings accounts 831,893 6,834 1.6% 394,674 3,455 1.8%
Time deposits greater than $100,000 5,632,950 166,995 5.9% 2,796,175 76,895 5.5%
Other time deposits 14,522,302 418,783 5.8% 7,414,698 198,666 5.4%
---------- ------- ---- ---------- ------- ----
Total interest-bearing deposits 36,480,072 866,339 4.8% 20,762,411 471,245 4.5%
Borrowings 72,177 3,368 9.3% - - -
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities 36,552,249 869,707 4.8% 20,762,411 471,245 4.5%
---------- ------- ---- ---------- ------- ----
Other liabilities 6,684,113 3,333,832
Shareholders' equity 5,520,119 4,926,511
---------- ----------
Total liabilities and shareholders'
equity $48,756,481 $29,022,754
=========== ===========
Net yield on earning assets and $1,322,171 6.0% 6.0% $624,722 4.9%
net interest income (2) ========== ========
Interest rate spread (3) 5.2% 5.2% 4.1%
(1) Non-accrual loans have been included.
(2) Net yield on earning assets is computed by dividing net interest earned by
average earning assets.
(3) The interest rate spread is the interest-earning assets rate less the
interest-bearing liabilities rate
Years Ended December 31,
1999 1998
---- ----
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Assets:
Interest earnings assets:
Interest earning deposits with banks $ 25,640 $ 1,211 4.7% $ 92,041 $ 4,560 5.0%
Investments 2,548,495 123,944 4.7% 3,773,274 208,750 5.5%
Federal funds sold 2,780,640 142,955 5.1% 3,425,331 186,602 5.4%
Loans (1) 24,857,014 2,492,208 10.0% 6,596,204 661,439 10.0%
---------- --------- ----- ---------- --------- -----
Total interest-earning assets 30,211,789 2,760,318 9.1% 13,886,850 1,061,351 7.6%
---------- --------- ----- ---------- --------- -----
Other assets 3,617,418 2,110,422
---------- ----------
Total assets $33,829,207 $15,997,272
=========== ===========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $2,493,602 $22,393 .9% $881,899 $ 15,503 1.8%
Money market demand accounts 9,624,597 429,407 4.5% 1,881,178 88,940 4.7%
Savings accounts 458,028 7,982 1.7% 276,929 6,077 2.2%
Time deposits greater than $100,000 3,419,763 191,537 5.6% 1,880,033 109,687 5.8%
Other time deposits 8,800,671 475,703 5.4% 3,157,919 176,380 5.6%
---------- --------- ----- ---------- --------- -----
Deposits 24,796,661 1,127,022 4.6% 8,077,958 396,587 4.9%
Borrowings 29,274 1,619 5.5% 312,446 27,922 8.9%
---------- --------- ----- ---------- --------- -----
Total interest-bearing liabilities 24,825,935 1,128,641 4.6% 8,390,404 424,509 5.1%
---------- --------- ----- ---------- --------- -----
Other liabilities 4,067,281 1,934,554
Shareholders' equity 4,935,991 5,672,314
---------- ----------
Total liabilities and $33,829,207 $15,997,272
=========== ===========
shareholders' equity
Net yield on earning assets and $1,631,677 5.4% $ 636,842 4.6%
========== =========
net interest income (2)
Interest rate spread (3) 4.5% 2.5%
(1) Non-accrual loans have been included.
(2) Net yield on earning assets is computed by dividing net interest earned by
average earning assets.
(3) The interest rate spread is the interest-earning assets rate less the
interest-bearing liabilities rate.
22
VOLUME/RATE VARIANCE ANALYSIS
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), (iii) the change attributable to both rate and volume
(changes in rate multiplied by changes in volume), and (iv) total change (the
sum of the previous columns).
Six Months Ended June 30, 2000 vs. 1999
Increase (Decrease) Due to
Volume Rate Total
--------- -------- ----------
Interest income:
Interest-earning deposits in other banks $ (1,136) $ 94 $ (1,042)
Investment securities (299) 12,281 11,982
Federal funds sold (77,146) 19,861 (57,285)
Loans 1,054,811 87,445 1,142,256
--------- -------- ----------
Total interest-earning assets $ 976,230 $119,681 $1,095,911
========= ======== ==========
Interest expense:
Interest-bearing deposits $80,035 $ 15,059 $ 395,094
Borrowings 1,684 1,684 3,368
--------- -------- ----------
Total interest-bearing liabilities $ 381,719 $ 16,743 $ 398,462
========= ======== ==========
Twelve Months Ended December 31,
1999 vs. 1998
Increase (Decrease) Due to
Volume Rate Total
--------- -------- ----------
Interest income:
Interest-earning deposits in other banks $ (3,213) $ (136) $ (3,349)
Investment securities (63,662) (21,144) (84,806)
Federal funds sold (34,132) (9,515) (43,647)
Loans 1,830,988 (219) 1,830,769
---------- --------- ----------
Total interest-earning assets $1,729,981 $(31,014) $1,698,967
========== ========= ==========
Interest expense:
Interest-bearing deposits $ 754,770 $(24,335) $ 730,435
Borrowings (20,483) (5,820) (26,303)
---------- --------- ----------
Total interest-bearing liabilities $ 734,287 $(30,155) $ 704,132
========== ========= ==========
>
The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variance.
23
ASSET QUALITY
Management considers Weststar's asset quality to be of primary importance. We
maintain an allowance for loan losses, to absorb losses inherent in the loan
portfolio. The loan portfolio is analyzed monthly in an effort to identify
potential problems before they actually occur. The allowance for loan losses is
evaluated on a regular basis by management using a methodology that segments the
loan portfolio by types. Weststar's methodology for assessing the
appropriateness of the allowance for loan losses consists of two key elements
which are the formula allowance and specific allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, pools of loans and commitments. Changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors are based in part on limited experience and may be
adjusted for significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
developed in the following way.
- Problem graded loan loss factors are derived from a methodology that
utilizes published experience of peer community banks and the historical
experiences encountered by Weststar's management and senior lending officers.
- Pass graded loan loss factors are based on the average annual net
charge-off rate over a period we believe is reflective of a business cycle.
- Pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs for one year. Pooled loans are loans that are
homogeneous in nature, such as consumer installment loans.
- Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss has been incurred in
excess of the formula allowance. This amount is determined either by a
discounted cash flow method or the fair value of the collateral.
The Bank of Asheville has incurred limited charge-off experience. Actual
charge-offs are compared to the allowance and adjustments are made accordingly.
Also, by basing the pass graded loan loss factors over a period of reflective of
a business cycle, the methodology is designed to take our recent loss experience
into account. Pooled loan loss factors are adjusted monthly based upon the level
of net charge-offs expected by management in the next twelve months.
Furthermore, our methodology permits adjustments to any loss factor used in the
computation of the formula allowance in the event that, in management's
judgement, significant factors, which affect the collectibility of the portfolio
as of the evaluation date, are not reflected in the loss factors. By assessing
the probable estimated losses inherent in the loan portfolio on a monthly basis,
we are able to adjust specific and inherent loss estimates based upon the most
recent information that has become available.
24
CAPITAL RESOURCES
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The FDIC and the Federal Reserve, the primary regulators of
The Bank of Asheville and Weststar, respectively, have adopted minimum capital
regulations or guidelines that categorize components and the level of risk
associated with various types of assets. Financial institutions are expected to
maintain a level of capital commensurate with the risk profile assigned to its
assets in accordance with these guidelines. As shown in the following table,
Weststar and The Bank of Asheville both maintained capital levels exceeding the
minimum levels for "well capitalized" banks and bank holding companies.
REGULATORY CAPITAL
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of June 30, 2000
Total Capital (to Risk Weighted Assets)
Consolidated $6,376 14.42% $3,537 8.00% $4,421 10.00%
Bank $6,376 14.42% $3,537 8.00% $4,421 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $5,822 13.17% $1,768 4.00% $2,653 6.00%
Bank $5,822 13.17% $1,768 4.00% $2,653 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $5,822 11.17% $2,085 4.00% $2,607 5.00%
Bank $5,822 11.17% $2,085 4.00% $2,607 5.00%
25
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of December 31, 1999
Total Capital (to Risk Weighted Assets)
Consolidated $5,580 17.13% $2,605 8.00% $3,256 10.00%
Bank $5,580 17.13% $2,605 8.00% $3,256 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $5,171 15.88% $1,303 4.00% $1,954 6.00%
Bank $5,171 15.88% $1,303 4.00% $1,954 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $5,171 12.63% $1,638 4.00% $2,078 5.00%
Bank $5,171 12.63% $1,638 4.00% $2,078 5.00%
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of December 31, 1998
Total Capital (to Risk Weighted Assets)
Consolidated $5,257 31.60% $1,331 8.00% $1,664 10.00%
Bank $5,257 31.60% $1,331 8.00% $1,664 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $5,049 30.35% $665 4.00% $998 6.00%
Bank $5,049 30.35% $665 4.00% $998 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $5,049 25.25% $800 4.00% $1,000 5.00%
Bank $5,049 25.25% $800 4.00% $1,000 5.00%
26
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of December 31, 1997
Total Capital (to Risk Weighted Assets)
Consolidated $6,145 78.23% $169 8.00% $211 10.00%
Bank $6,145 78.23% $169 8.00% $211 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $6,366 302.21% $84 4.00% $126 6.00%
Bank $6,366 302.21% $84 4.00% $126 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $6,366 291.73% $321 4.00% $402 5.00%
Bank $6,366 291.73% $321 4.00% $402 5.00%
LIQUIDITY
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of The Bank of Asheville's asset and liability management strategy.
Liquidity is the ability to fund the needs of The Bank of Asheville's borrowers
and depositors, pay operating expenses, and meet regulatory liquidity
requirements. Loan repayments, deposit growth, federal funds purchased and
borrowings from the Federal Home Loan Bank are presently the main sources of The
Bank of Asheville's liquidity. The Bank of Asheville's primary uses of liquidity
are to fund loans and to make investments.
As of June 30, 2000, liquid assets (cash due from banks, interest-earning bank
deposits and federal funds sold) were approximately $8.7 million, which
represents 14.2% of total assets and 15.7% of total deposits and borrowings.
Supplementing this liquidity, The Bank of Asheville has available lines of
credit from correspondent banks of approximately $4.5 million. At June 30, 2000,
outstanding commitments to extend credit were $9.8 million and available line of
credit balances totaled $9.8 million. Management believes that the combined
aggregate liquidity position of The Bank of Asheville is sufficient to meet the
funding requirements of loan demand and deposit maturities and withdrawals in
the near term.
Certificates of deposit represented approximately 41.6% of The Bank of
Asheville's total deposits at June 30, 2000. The Bank of Asheville's growth
strategy will include efforts focused on increasing the relative volume of
transaction deposit accounts, as the branch network is expanded, making it more
convenient for our banking customers. Certificates of deposit of $100,000 or
more represented 10% of The Bank of Asheville's total deposits at year-end.
These deposits are generally considered rate sensitive, but management believes
most of them are relationship-oriented. While The Bank of Asheville will need to
pay competitive rates to retain these deposits at maturity, there are other
subjective factors that will determine The Bank of Asheville's continued
retention of those deposits.
27
INVESTMENT ACTIVITIES
At June 30, 2000, Weststar's investments consisted of a U.S. Government agency
security and Treasury note and Federal Home Loan Bank stock. The agency security
and treasury note, with aggregate amortized cost of $2 million, are classified
as available for sale and are presented in the financial statements at their
market value of $2 million at June 30, 2000. These securities have a yield of
6.4% and 6.2% with an aggregate duration of approximately 7.4 months. The Bank
of Asheville's investment in stock of the Federal Home Loan Bank, which is
required of every member and is redeemable only by the Federal Home Loan Bank,
was $145,600 with a yield of 7.8% at June 30, 2000.
ACCOUNTING AND REGULATORY MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that Weststar recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Weststar will adopt SFAS No. 133 on
January 1, 2001, as required. Given that Weststar has no investments in
derivative instruments, management of Weststar believes that adoption of SFAS
No. 133 will not have a material impact on Weststar's balance sheet or the
related statements of income and changes in shareholders' equity.
IMPACT OF INFLATION AND CHANGING PRICES
A financial institution has assets and liabilities that are distinctly different
from those of a company with substantial investments in plant and inventory
because the major portion of its assets is monetary in nature. As a result, a
bank's performance may be significantly influenced by changes in interest rates.
Although the banking industry is more affected by changes in interest rates than
by inflation in the prices of goods and services, inflation is a factor which
may influence interest rates. However, the frequency and magnitude of interest
rate fluctuations do not necessarily coincide with changes in the general
inflation rate. Inflation does affect operating expenses in that personnel
expenses, cost of supplies and outside services tend to increase more during
periods of high inflation.
28
BUSINESS
General
Weststar is a bank holding company that owns all of the common stock of The Bank
of Asheville, a North Carolina-chartered bank with deposit accounts insured by
the Bank Insurance Fund of the FDIC. Weststar was incorporated at the direction
of the Board of Directors of The Bank of Asheville as a North Carolina-chartered
corporation and became the holding company for The Bank of Asheville on April
28, 2000. To become The Bank of Asheville's holding company, Weststar received
approval of the Federal Reserve Board as well as The Bank of Asheville's
shareholders. Upon receiving such approvals, each share of the common stock of
The Bank of Asheville was exchanged on a one-for-one basis for shares of the
common stock of Weststar.
The Bank of Asheville was incorporated in October 1997 as a North
Carolina-chartered commercial bank. The Bank of Asheville opened for business on
December 1, 1997 at its current home office located at 79 Woodfin Place,
Asheville, North Carolina. On February 1, 1999, The Bank of Asheville opened a
full service branch in Candler, North Carolina which is located southwest of
Asheville in Buncombe County. The Bank of Asheville has received approvals from
the FDIC and the North Carolina Commissioner of Banks to open a third full
service office in Leicester, North Carolina, a town also located in Buncombe
County. That office is expected to open in October 2000.
The Bank of Asheville operates for the primary purpose of serving the banking
needs of individuals, and small to medium-sized businesses in its market area.
While numerous banks in our market have chosen to focus on the affluent and high
net worth individuals, we have chosen to focus on small businesses in our market
area. The Bank of Asheville offers a range of banking services typically found
in a community bank. These services include checking, money market, NOW and
savings accounts, commercial, consumer and personal loans, mortgage lending
services and other associated financial services. The Bank of Asheville's main
office is located in the downtown section of Asheville and borders areas
designated as low to moderate income. This location has facilitated The Bank of
Asheville's ability to serve such income groups as well as to be conveniently
located off of the Interstate 240 bypass for commercial customers.
Our market area is highly diverse. Situated in the Blue Ridge Mountains of North
Carolina, Asheville is a favorite for tourists, featuring a variety of outdoor
activities on a year round basis. It is also the home of the Biltmore House, the
largest residential home in the country built by the Vanderbilt family. The
market area is becoming a popular retirement community and houses a significant
medical community and major hospital system. Further, the area has attracted a
diverse manufacturing base with facilities of Square D, Volvo and Magnavox among
some of the major industries situated here.
The banking industry is subject to extensive regulation by state and federal
banking authorities. Many of these regulations are intended to protect
depositors, the public or the FDIC insurance funds, not shareholders. Regulatory
requirements will affect our lending practices, capital structure, investment
practices, dividend policy and many other aspects of our business. These
requirements may constrain our rate of growth. Regulations affecting financial
institutions are undergoing continuous change, and such changes could adversely
affect us. Sometimes, these changes are applied retroactively. In addition, the
burden imposed by these federal and state regulations may place banks in
general, and us specifically, at a competitive disadvantage compared to less
regulated competitors.
29
In addition, various aspects of the banking industry and our operations will be
affected by federal economic and monetary policies, which are outside our
control. Changes in federal economic and monetary policies may adversely affect
our ability to attract deposits, make loans and achieve satisfactory interest
spreads.
Weststar intends to expand its business through selective de novo Bank of
Asheville branch openings and possible acquisitions. There can be no assurance
that we will be able to consummate, or if consummated, successfully integrate,
any future de novo branch openings or acquisitions, and there can be no
assurance that we will not incur disruption and unexpected expenses in
integrating any such transactions. Although we currently have no such agreements
or understandings, either written or oral, in the normal course of business we
evaluate potential transactions that would compliment or expand our banking
business. In doing so, we compete with other potential bidders, many of which
have greater financial and operational resources. There can be no assurance that
we will be able to successfully negotiate, finance or integrate any such
transactions. Furthermore, the process of evaluating, negotiating and
integrating transactions may divert our time and attention as well as our
resources. There can be no assurance that any given de novo branch or whole
business opening or acquisition, when and if consummated, will have a material
favorable effect on our business, results of operations or financial condition.
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend in part on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations.
In addition, many of our competitors have substantially greater resources to
invest in technological improvements. Such technology may permit competitors to
perform certain functions at a lower cost than we can perform them. We cannot
assure you that we will be able to implement new technology-driven products and
services effectively or be successful in marketing such products and services to
our customers.
Lending Activities
General. The Bank of Asheville offers a broad array of lending services,
including real estate, commercial and consumer loans and equity lines of credit
to individuals and small-to-medium size businesses and other organizations that
are located in or conduct a substantial portion of their business in The Bank of
Asheville's market area. The Bank of Asheville's total loans at June 30, 2000
were $47.6 million or 81% of total earning assets. At June 30, 2000, The Bank of
Asheville had no large loan concentrations (exceeding 10% of its portfolio) in
any particular industry. The Bank of Asheville originates both fixed rate and
variable rate loans. Approximately 60% of The Bank of Asheville's loan portfolio
is comprised of variable rate loans and 40% fixed rate. Approximately 69% of The
Bank of Asheville's loan portfolio is categorized as loans secured by real
estate, all of which is situated in The Bank of Asheville's market area. These
real estate secured loans consist of a wide variety of loan types. The Bank of
Asheville obtains real estate in its market area as collateral since it believes
it is one of the most conservative means of securing a loan. A portion of its
real estate secured portfolio consists of short-term construction loans for 1-4
family residential construction. Some such loans are to builders who have
demonstrated to The Bank of Asheville a record of successful development.
Because of the mountainous terrain in The Bank of Asheville's market area, no
large development tracts are developed or financed with a typical development
consisting of 10 or fewer building sites. The Bank of Asheville does not
concentrate such lending with a small number of builders but finances a large
number of local builders. The Bank of Asheville does not finance the permanent
loan on such dwellings and will only finance the project during the construction
period and upon completion The Bank of Asheville will refer the borrower to
various mortgage brokers for financing. The Bank of Asheville receives a fee for
these referrals.
30
Another portion of its real estate secured portfolio consists of
commercial-business loans such as to finance commercial construction, working
capital term loans and business lines of credit. Also included are equity lines
of credit which normally consist of second mortgage liens on residential
property.
The Bank of Asheville also finances some small business loans without obtaining
real estate as collateral. Such loans may consist of working capital lines of
credit and equipment financing. Often personal guarantees are required and
security is taken in the equipment, inventory or accounts receivable that are
financed. These non-real estate secured loans typically have a maturity of 18
months or less and carry interest rates subject to the floating prime rate for
commercial customers.
The Bank of Asheville's legal lending limit at June 30, 2000 equaled $1,627,000
and the few loans made in excess of the legal lending limit are sold as
participations to other financial institutions.
31
Loan Composition. The following table sets forth, at the dates indicated, the
composition of The Bank of Asheville's loan portfolio and the related percentage
composition.
December 31,
------------
June 30, 2000 1999 1998
------------- ---- ----
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
TYPE OF LOAN
Real Estate:
Construction $8,853,209 18.5% $7,152,238 20.7% $1,780,563 12.7%
1-4 Family (1) 21,059,667 44.0% 13,759,403 39.8% 2,414,650 17.2%
Other (2) 3,140,082 6.6% 3,204,191 9.2% 4,999,568 35.5%
Commercial, financial and agricultural 13,831,650 28.9% 9,926,255 28.7% 4,594,259 32.6%
Consumer 922,609 2.0% 562,765 1.6% 299,105 2.1%
----------- ---- ----------- ---- ----------- ----
Subtotal 47,807,217 34,604,852 14,088,145
----------- ----------- -----------
Net deferred loan origination fees (199,994) (144,128) (64,880)
----------- ----------- -----------
Total loans, net of deferral fees $47,607,223 100% $34,460,724 100% $14,023,265 100%
=========== === =========== === =========== ===
(1) Lines of credit and other non-purchase money loans secured by 1-4 family
real estate.
(2) Lines of credit and other loans secured by commercial real estate.
December 31, 1997
-----------------
Percentage
Amount of Total
------ ----------
TYPE OF LOAN
Commercial, financial and agricultural $ 19,630 9.1%
Consumer 194,928 90.9%
-------- -----
Subtotal 214,558
--------
Net deferred loan origination fees (432)
--------
Total loans, net of deferral fees $214,126 100%
======== =====
32
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
As of June 30, 2000
Within One One to Five Years
Year Five Years or More
---------------------------------------------
Real estate:
Construction $ 8,276,867 $ 390,815 $185,527
Mortgage 15,819,508 7,989,415 390,826
Predetermined rate, maturity greater than one year $8,349,171 $576,353
Variable rate or maturing within one year $24,096,375 31,059 -
As of December 31, 1999
Within One One to Five Years
Year Five Years or More
---------------------------------------------
Real estate:
Construction $ 6,808,752 $ 343,486 $ -
Mortgage 9,966,789 6,151,858 844,947
Predetermined rate, maturity greater than one year $6,445,521 $844,947
Variable rate or maturing within one year $ 16,775,541 49,823 -
As of December 31, 1998
Within One One to Five Years
Year Five Years or More
---------------------------------------------
Real estate:
Construction $ 1,364,450 $ 341,113 $ 75,000
Mortgage 5,560,664 1,112,133 741,421
Predetermined rate, maturity greater than one year $ 435,974 $ 244,926
Variable rate or maturing within one year $ 6,925,114 1,017,272 571,495
LOANS AND NONPERFORMING ASSETS
December 31,
June 30, 2000 1999 1998 1997
Nonperforming assets $509,299 $247,559 $ - $ -
No loans were past due 90 days or more and still accruing interest nor were
there any foreclosed properties at June 30, 2000 or December 31, 1999, 1998, and
1997, respectively. If interest from non-accrual loans had been recognized in
accordance with the original terms of the loans, net income for the periods
would not have been materially different from the amounts reported.
33
The Bank of Asheville monitors all loans on a regular basis and mails a
delinquent notice to any borrower who is 10 days past due. Personal contact is
made after a loan becomes 15 days past due with formal action taken after 30
days. Depending on the particular circumstances that action could include
submission of the matter to an attorney for collection. Any loans that are 90
days or more past due are placed on a non-accrual status. The Bank of Asheville
does not have a separate collection department and requires the loan officer who
initially made the loan to institute collection action as necessary.
The Bank of Asheville offers a credit card on an agency basis as an
accommodation to its customers. At such time as The Bank of Asheville believes
there will be sufficient volume, it intends to review this product and may offer
credit cards as a principal, thereby underwriting the credit risks associated
with card holders. The Bank of Asheville has two ATM facilities attached to its
existing banking offices and intends to install an ATM at its new Leicester
Highway office when opened. The Bank of Asheville's ATM cards are linked to the
nationwide Cirrus(R), Plus(R) and Pulse(R) systems, allowing The Bank of
Asheville's customers to withdraw funds from any ATM machine honoring these
systems.
Internet and Tele-Banking
The Bank of Asheville has a web site at "www.bankofasheville.com". The Bank of
Asheville is considering the introduction of on-line banking and will implement
it when it feels its customer base has expanded to a level that would justify
the initial start-up and on-going maintenance costs.
The Bank of Asheville provides a 7 days a week, 24 hour per day automated
tele-banking service where customers can check account balances, transfer funds
between accounts, determine loan balances, make loan payments and obtain
information on cleared checks.
Deposits
The Bank of Asheville offers a variety of deposit programs to individuals and to
small-to-medium size businesses and other organizations at interest rates
generally competitive with local market conditions. The Bank of Asheville's
demand deposit accounts are truncated meaning that canceled checks are not
returned to the customers, but for a fee, a customer may obtain a check image.
Imaging of demand deposit accounts for commercial customers is free.
34
The following table sets forth the mix of depository accounts at The Bank of
Asheville as a percentage of total deposits at the dates indicated:
At December 31,
----------------------------------------------------------------
June 30, 2000 1999 1998
------------------------------ ---- ----
Weighted Percent Weighted Percent Weighted Percent
Average Total Average Total Average Total
Amount Cost Deposits Amount Cost Deposits Amount Cost Deposits
----------- ---- -------- ----------- ---- -------- ----------- ---- --------
DEMAND DEPOSITS
Demand, NOW,
Money market $31,245,397 2.5% 56.8% $18,558,482 2.8% 49.0% $8,659,120 2.3% 52.6%
Savings 913,150 1.6% 1.6% 583,797 1.7% 1.5% 328,820 2.2% 2.0%
----------- ---- ------ ----------- ---- ------- ----------- ---- ------
Total demand
deposits 32,158,547 2.5% 58.4% 19,142,279 2.8% 50.5% 8,987,940 2.5% 54.6%
----------- ---- ------ ----------- ---- ------- ----------- ---- ------
CERTIFICATE
ACCOUNTS WITH
ORIGINAL TIME
DEPOSITS
Over $100,000 5,506,095 6.0% 10.0% 5,620,684 5.7% 14.8% 3,206,120 5.8% 19.5%
Other 17,366,145 5.8% 31.6% 13,158,017 5.4% 34.7% 4,252,588 5.6% 25.9%
----------- ---- ------ ----------- ---- ------- ----------- ---- ------
Total time deposits 22,872,240 5.8% 41.6% 18,778,701 5.5% 49.5% 7,458,708 5.7% 45.4%
----------- ---- ------ ----------- ---- ------- ----------- ---- ------
Total deposits $55,030,787 4.0% 100.0% $37,920,980 3.9% 100.00% $16,466,648 4.0% 100.0%
=========== ==== ====== =========== ==== ======= =========== ==== ======
The following table indicates the amount of The Bank of Asheville's certificates
of deposit by interest rate and by time remaining until maturity as of June 30,
2000.
Greater
Within 3 Months 3 to 6 months 6 to 12 months than 1 year
--------------- ------------- -------------- -----------
Time deposits of $100,000 or more $2,393,545 $1,857,461 $1,255,089 -0-
The Bank of Asheville does not purchase brokered deposits but has been
successful in attracting certificates of deposits over the Internet by bidding
for deposits with set maturities. The Bank of Asheville does not pay a fee for
such deposits and has predetermined its own limit so as not to exceed $3 million
in total Internet deposits. The Bank of Asheville's experience has been that
such deposits can be obtained at interest rates that are lower than rates in its
market area.
Competition
Commercial banking in North Carolina is extremely competitive in large part due
to statewide branching. We compete in our market areas with some of the largest
banking organizations in the state and the country and other financial
institutions, such as federally and state-chartered savings and loan
institutions and credit unions, as well as consumer finance companies, mortgage
companies and other lenders engaged in the business of extending credit or
taking investment monies, such as mutual funds and brokerage firms. Many of our
competitors have broader geographic markets and higher lending limits than us
and are also able to provide more services and make greater use of media
advertising. In Buncombe County, there are currently 45 offices of 9 different
commercial banks (including the largest banks in North Carolina) and 28 offices
of 16 savings institutions and credit unions, as well as offices of various
other entities engaged in the extension of credit. Our primary competitors in
the area of loans are two of North Carolina's major mid-tier banks. In the area
of deposits, a local savings bank is our primary competition. There also are a
number of small community banks in the City of Asheville and Buncombe County
which have some competitive effect.
35
The enactment of legislation authorizing interstate banking has caused great
increases in the size and financial resources of some of our competitors. In
addition, as a result of interstate banking, out-of-state commercial banks have
acquired North Carolina banks and heightened the competition among banks in
North Carolina.
Despite the competition in our market areas, we believe that we have certain
competitive advantages that distinguish us from our competition. We offer
customers modern, high-tech banking without forsaking community values such as
prompt, personal service and friendliness. We attract customers by being
responsive and sensitive to their individualized needs. We also rely on existing
relationships of our banking officers, goodwill and referrals from shareholders
and satisfied customers. We make limited use of traditional marketing such as TV
and newspaper ads but have recently increased such marketing/advertising to
establish our image and presence in the community.
As a community bank, we have a commitment to the people of Buncombe County. Our
service has been recognized through a number of awards and high honors bestowed
upon us. In September 1999, we received the Local Bank Minority Lender of the
Year for our efforts in promoting minority business development. In 2000, the
readers of the Asheville Citizen-Times, a newspaper with a circulation of
approximately 150,000, voted The Bank of Asheville as the Best Community Bank in
Western North Carolina. For the past two years, Robert Tuck, The Bank of
Asheville's Chief Lending Officer, has been nominated for the Athena Award,
which recognizes support of women owned businesses. Also for the 1999-2000 year,
The Bank of Asheville received recognition by the Asheville Area Chamber of
Commerce as a Small Business Advocate. We intend to continue our commitment to
the local community and local business development.
Properties
The following table sets forth the location of our main office and branch
offices, as well as certain information relating to these offices to date.
Approximate
Office Location Year Opened Square Footage Owned or Leased
- --------------- ----------- -------------- ---------------
Main Office 1997 10,000 Own
79 Woodfin Place
Asheville, North Carolina
Candler Office 1999 1,900 Own Building, Lease
6 Dogwood Road Land
Candler, North Carolina
Leicester Highway Office Opening 800 Leasing
Leicester Highway October 2000
Asheville, North Carolina
36
The Bank of Asheville entered into a lease with Max O. Cogburn, Sr., a director
of Weststar and The Bank of Asheville, and his spouse to lease the location of
the Candler office. The lease is for four years with options to extend for two
additional three year terms. See "Certain RELATIONSHIPS AND RELATED
TRANSACTIONS".
Employees
As of June 30, 2000, we had approximately 23 full-time employees and
approximately 3 part-time employees. None of these employees are covered by a
collective bargaining agreement. We consider relations with our employees to be
good.
Litigation
There are no pending legal proceedings to which The Bank of Asheville or
Weststar is a party, or of which any of their property is the subject.
37
MANAGEMENT
Directors
Weststar's Board of Directors consists of 10 directors. The Bylaws of the
Corporation provide that its Board of Directors shall consist of between 8 and
12 members, as determined by the Board of Directors or the shareholders and if
nine or more members, they shall be staggered into terms of one, two and three
years in as equal a number as possible. Certain information regarding the
current directors who serve as both directors of Weststar and The Bank of
Asheville is set forth below:
Director Term
Name and Age Since Expires Principal Occupation and Business Experience During Past Five Years
- ------------ ----- ------- -------------------------------------------------------------------
William E. Anderson 1997 2001 Director, Hasco Mold Bases, Asheville, North Carolina.
(60)
Max O. Cogburn, Sr. 1997 2002 Attorney and Partner, Cogburn, Croosman, Brazil & Rose, P.A.,
(72) Asheville, North Carolina.
M. David Cogburn, M.D. 1999 2003 President, Carolina Mountain Dermatology, P.A., Arden, North
(44) Carolina.
G. Gordon Greenwood 2000 2001 President and Chief Executive Officer, Weststar and The Bank of
(52) Asheville, January 2000-Present; Regional Market Manager, Centura
Bank, Asheville, North Carolina 1996-2000; Senior
Vice President/Commercial Loans, First Commercial Bank,
Asheville, North Carolina 1983-1996.
Darryl J. Hart 1997 2001 Vice President and General Manager, Hart Funeral Services, Inc.,
(38) Asheville, North Carolina.
Carol L. King 1997 2002 President, Carol L. King & Associates, P.A., Asheville, North
(54) Carolina (certified public accountant).
Stephen L. Pignatiello 1997 2003 President, P COMMS INTL, Asheville, North Carolina (wine broker).
(40)
Kent W. Salisbury, M.D. 1997 2003 Partner, Asheville Cardiology Associates, P.A., Asheville, North
(56) Carolina.
Laura A. Webb 1999 2003 President, Webb Investment Services, Inc., Asheville, North
(40) Carolina.
David N. Wilcox 1997 2002 Vice President, Wilcox Travel Agency, Inc., Asheville, North
(39) Carolina.
Director Relationships
Only one family relationship on the Board exists. Max O. Cogburn, Sr. is the
father of M. David Cogburn, M.D. No director is a director of any company with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934 Act or subject to the requirements of Section 15(d) of the 1934 Act,
or any company registered as an investment company under the Investment Company
Act of 1940.
38
Director Compensation
Board Fees. As of July 2000, each non-officer director received $100 for each
Board meeting attended. Prior thereto, the directors received no compensation.
Executive Officers
Set forth below is certain information regarding The Bank of Asheville's and
Weststar's executive officers as of June 30, 2000.
Name Age Position(s) Held Business Experience
- ---- --- ---------------- -------------------
G. Gordon Greenwood 52 President and Chief Executive President and Chief Executive Officer, Weststar
Officer of The Bank of and The Bank of Asheville, January
Asheville and Weststar 2000-Present; Regional Market Manager, Centura
Bank, Asheville, North Carolina 1996-2000;
Senior Vice President/Commercial Loans, First
Commercial Bank, Asheville, North Carolina,
1983-1996.
Randall C. Hall 35 Executive Vice President, Executive Vice President and Chief Financial
Chief Financial Officer of Officer of The Bank of Asheville since December
The Bank of Asheville and 1997; Vice President and Chief Financial
Weststar Officer of Bank of Granite, Granite Falls,
North Carolina, 1988-1997.
Robert E. Tuck, Jr. 42 Senior Vice President and Senior Vice President and Chief Credit Officer
Chief Credit Officer of The of The Bank of Asheville since 1997; Vice
Bank of Asheville President/Business Banker, First Citizens Bank,
Asheville, North Carolina, 1985-1997.
Judy P. Waldroop 43 Senior Vice President Senior Vice President of The Bank of Asheville
of The Bank of Asheville since 1997; Sales and Service Manager, Wachovia
Bank, N.A., Asheville, North Carolina,
1978-1997.
Employment Agreements
All compensation paid to The Bank of Asheville's executive officers is paid by
The Bank of Asheville to such persons in their capacity as executive officers of
The Bank of Asheville. Accordingly, the compensation of such executives is
reviewed and approved annually by the full Board of Directors of The Bank of
Asheville which consist of the same persons. This report is furnished by the
Compensation Committee of The Bank of Asheville's Board of Directors.
During 1999 and until his retirement in February 2000, Mr. Howard B. Montgomery,
Jr. was President and Chief Executive Officer of The Bank of Asheville with a
total compensation of $140,000 per annum. Mr. Montgomery's compensation
consisted of a base salary at a rate of $115,000 per annum. Mr. Montgomery
entered into a three (3) year contract with The Bank of Asheville on November
18, 1997. The contract covered base salary, performance bonuses, employee
benefits and other usual executive perquisites. Additionally, the contract
contained a change in control provision which permitted Mr. Montgomery, within
twenty-four (24) months after a change in control, to terminate his contract and
be entitled to 299% of his base salary. If such termination had occurred on
December 31, 1999, the payout would have been $343,850. As a result of his
retirement, Mr. Montgomery's contract was terminated, and in February 2000, The
Bank of Asheville entered into an agreement similar in nature with G. Gordon
Greenwood. (See discussion below Summary Compensation Table).
39
SUMMARY COMPENSATION TABLE
Annual Compensation (1
-----------------------
Name and Principal Position Year Salary ($) Bonus ($)
- --------------------------- ---- ---------- ---------
Howard B. Montgomery, President and 1999 115,000 4,160
Chief Executive Officer (retired in February 2000)
1998 90,000 -0-
1997 90,000 -0-
(1) Perquisites and personal benefits awarded to Mr. Montgomery did not
exceed 10% of the total annual salary and bonus in any year reported.
The Bank of Asheville has entered into an employment and change of control
agreement with G. Gordon Greenwood (dated February 9, 2000) as its President and
Chief Executive Officer to establish his duties and compensation and to provide
for his continued employment with The Bank of Asheville. The employment
agreement provides for an initial term of five years with renewal at the end of
the third year and on each anniversary thereafter for an additional one year
term provided an affirmative decision to renew is made by the Board of
Directors. The employment agreement provides for an annual base salary of
$125,000, and for participation in other pension and profit-sharing retirement
plans maintained by The Bank of Asheville on behalf of its employees, as well as
fringe benefits normally associated with Mr. Greenwood's position or made
available to all other employees. Additionally, at the sooner to occur of (i) a
"change in control" of The Bank of Asheville or, (ii) the end of the initial
five year term, Mr. Greenwood is to receive a 10 year annuity of $40,000 per
year. Upon adoption of a stock option plan, Mr. Greenwood is to be granted
options to purchase shares of The Bank of Asheville or Weststar valued at 300%
of base compensation. The employment agreement provides that Mr. Greenwood may
be terminated for "cause" as defined in the employment agreement, and that the
employment agreement may otherwise be terminated, in some cases with certain
financial consequences incurred, by The Bank of Asheville or by Mr. Greenwood.
The employment agreement provides that should The Bank of Asheville terminate
the employment agreement other than for cause or disability within 24 months
after a "change in control", or should Mr. Greenwood terminate the agreement
within such 24 months during which his compensation or responsibilities have
been reduced, or his workplace location has been moved outside of Asheville,
North Carolina, then he shall receive a lump sum equal to 299% of his "base
amount" as determined by Section 280G of the Internal Revenue Code. A "Change in
Control" shall be deemed to have occurred upon (i) any person becoming the
beneficial owner or otherwise acquiring control, directly or indirectly, of
securities of The Bank of Asheville representing thirty-five percent (35%) or
more of the voting power of The Bank of Asheville's then outstanding securities;
(ii) the acquisition by any Person in any manner of the ability to elect, or to
control the election, of a majority of the directors of The Bank of Asheville;
(iii) the merger of The Bank of Asheville into another entity or the merger of
any entity into The Bank of Asheville without The Bank of Asheville being the
survivor; or (iv) the acquisition of substantially all of the assets of The Bank
of Asheville by another corporation. The reorganization into a holding company
form of organization is specifically excluded from becoming a "change of
control".
40
401(k) Savings Plan
In 1998, The Bank of Asheville adopted a tax-qualified savings plan which covers
all current full-time employees and any new full-time employees who have
completed 1,000 hours of service for The Bank of Asheville. Under the savings
plan, a participating employee may contribute up to 15% of his or her base
salary on a tax-deferred basis through salary reduction as permitted under
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank of
Asheville may make additional discretionary profit sharing contributions to the
savings plan on behalf of all participants. Such discretionary profit sharing
contributions may not exceed 6% of the aggregate of the pre-tax base salaries of
all participants in the savings plan and are allocated among all participants on
the basis of the participant's age and level of compensation. Amounts deferred
above the first 6% of salary are not matched by The Bank of Asheville. A
participant's contributions and The Bank of Asheville's matching and profit
sharing contributions under the savings plan will be held in trust accounts for
the benefit of participants. A participant is at all times 100% vested with
respect to his or her own contributions under the savings plan, and becomes 100%
vested in the account for The Bank of Asheville's matching and profit sharing
contributions after completing five years of service with The Bank of Asheville.
The value of a participant's accounts under the savings plan becomes payable to
him or her in full upon retirement, total or permanent disability or termination
of employment for any other reason, or becomes payable to a designated
beneficiary upon a participant's death. The savings plan also will contain
provisions for withdrawals in the event of certain hardships. A participant's
contributions, vested matching and profit sharing contributions of The Bank of
Asheville, and any income accrued on such contributions, are not subject to
federal or state taxes until such time as they are withdrawn by the participant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank of Asheville has had, and expects to have in the future, banking
transactions in the ordinary course of business with certain of its current
directors, nominees for director, executive officers and their associates. All
loans included in such transactions were made on substantially the same terms,
including interest rates, repayment terms and collateral, as those prevailing at
the time such loans were made for comparable transactions with other persons,
and do not involve more than the normal risk of collectibility or present other
unfavorable features.
41
On October 1, 1998, a partnership, of which Max O. Cogburn, Sr. and his wife
belong, leased the location of the Candler office to The Bank of Asheville. The
term of the lease is four years and The Bank of Asheville has options to extend
the lease for two additional three year terms. The rent on the land is $24,000
for the first two years and $30,000 for the subsequent two years. Mr. Cogburn
and his wife own one-third of the leased property as tenants-by-the-entirety.
All terms of the lease were reached by arms-length negotiations.
All such transactions have been negotiated on an arms-length basis at terms no
more favorable than would otherwise be obtained from an independent third party.
Beneficial Ownership of Voting Securities
As of June 30, 2000, no shareholder owned more than 5% of Weststar's common
stock.
As of June 30, 2000, the beneficial ownership of Weststar's common stock by
directors of Weststar and The Bank of Asheville individually, and by directors
and executive officers of Weststar and The Bank of Asheville as a group, was as
follows:
Amount and
Nature of
Name and Address Beneficial Percent of
of Beneficial Owner * Ownership (1) Class (2)
- --------------------- ------------- ---------
William E. Anderson 14,500 2.29%
Max O. Cogburn, Sr. 5,500(3) 0.87%
M. David Cogburn, M.D. 6,380 1.01%
G. Gordon Greenwood 1,000 0.16%
Darryl J. Hart 1,999 0.32%
Carol L. King 3,440 0.54%
Stephen P. Pignatiello 2,420 0.38%
Kent W. Salisbury, M.D. 13,200 2.08%
Laura A. Webb 1,100 0.17%
David N. Wilcox 2,600 0.41%
All Directors and
Executive Officers 54,459(4) 8.60%
as a group (13 persons) (5)
* All directors are residents of Asheville, North Carolina.
(1) Except as otherwise noted, to the best knowledge of Weststar's management,
the above individuals and group exercise sole voting and investment power with
respect to all shares shown as beneficially owned other than the following
shares as to which such powers are shared: Dr. Cogburn - 220 shares; Dr.
Salisbury - 2,200 shares; and Mr. Tuck - 200 shares.
(2) The calculation of the percentage of class beneficially owned by each
individual and the group is based on the sum of a total of 633,298 outstanding
shares of common stock outstanding as of June 30, 2000.
(3) Mr. Cogburn disclaims beneficial ownership of his spouse's shares.
42
(4) The Board of Directors intends to purchase, in the aggregate, a number of
shares equaling approximately $500,000 in value.
(5) Includes Randall C. Hall, Executive Vice President, Secretary and Chief
Financial Officer, Robert E. Tuck, Senior Vice President and Chief Credit
Officer and Judy P. Waldroop, Senior Vice President.
SUPERVISION AND REGULATION
Regulation of The Bank of Asheville
The Bank of Asheville is extensively regulated under both federal and state law.
Generally, these laws and regulations are intended to protect depositors and
borrowers, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulation may have a material effect on the business of
Weststar and The Bank of Asheville.
State Law. The Bank of Asheville is subject to extensive supervision and
regulation by the North Carolina Commissioner of Banks. The Commissioner
oversees state laws that set specific requirements for bank capital and regulate
deposits in, and loans and investments by, banks, including the amounts, types,
and in some cases, rates. The Commissioner supervises and performs periodic
examinations of North Carolina-chartered banks to assure compliance with state
banking statutes and regulations, and The Bank of Asheville is required to make
regular reports to the Commissioner describing in detail the resources, assets,
liabilities and financial condition of The Bank of Asheville. Among other
things, the Commissioner regulates mergers and consolidations of state-chartered
banks, the payment of dividends, loans to officers and directors, record
keeping, types and amounts of loans and investments, and the establishment of
branches.
Deposit Insurance. As a member institution of the FDIC, The Bank of Asheville's
deposits are insured up to a maximum of $100,000 per depositor through the Bank
Insurance Fund, administered by the FDIC, and each member institution is
required to pay semi-annual deposit insurance premium assessments to the FDIC.
The Bank Insurance Fund assessment rates have a range of 0 cents to 27 cents for
every $100 in assessable deposits. Banks with no premium are subject to an
annual statutory minimum assessment.
Capital Requirements. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
43
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1," or core capital, includes common equity,
qualifying noncumulative perpetual preferred stock and minority interests in
equity accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions. "Tier 2," or supplementary capital,
includes among other things, limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations and less
required deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant. As of December 31, 1999, The Bank of Asheville
was classified as "well-capitalized" with Tier 1 and Total Risk-Based Capital of
15.88% and 17.13% respectively.
The federal banking agencies have adopted regulations specifying that they will
include, in their evaluations of a bank's capital adequacy, an assessment of the
bank's interest rate risk ("IRR") exposure. The standards for measuring the
adequacy and effectiveness of a banking organization's interest rate risk
management include: (1) a measurement of board of director and senior management
oversight, and (2) a determination of whether a banking organization's
procedures for comprehensive risk management are appropriate for the
circumstances of the specific banking organization.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of The Bank of Asheville to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the shareholders.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991,
Congress enacted the Federal Deposit Insurance Corporation Improvement Act of
1991, which substantially revised the bank regulatory and funding provisions of
the FDIC and made significant revisions to several other federal banking
statutes. FDICIA provides for, among other things:
- - publicly available annual financial condition and management reports for
certain financial institutions, including audits by independent
accountants,
44
- - the establishment of uniform accounting standards by federal banking
agencies,
- - the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with greater
scrutiny and restrictions placed on depository institutions with lower
levels of capital,
- - additional grounds for the appointment of a conservator or receiver, and
- - restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA provides the federal banking agencies with significantly expanded powers
to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Miscellaneous. The dividends that may be paid by The Bank of Asheville are
subject to legal limitations. In accordance with North Carolina banking law,
dividends may not be paid unless The Bank of Asheville's capital surplus is at
least 50% of its paid-in capital.
Shareholders of banks may be compelled by the North Carolina Commissioner of
Banks pursuant to North Carolina law to invest additional capital in the event
their bank's capital shall have become impaired by losses or otherwise. Failure
to pay such an assessment could result in a forced sale of a shareholder's bank
stock.
The earnings of The Bank of Asheville will be affected significantly by the
policies of the Federal Reserve Board, which is responsible for regulating the
United States money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market transactions in United States government securities, changes in the rate
paid by banks on bank borrowings, and changes in reserve requirements against
bank deposits. These techniques are used in varying combinations to influence
overall growth and distribution of bank loans, investments, and deposits, and
their use may also affect interest rates charged on loans or paid for deposits.
45
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and money markets, as well as the effect of actions by monetary and
fiscal authorities, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of The
Bank of Asheville.
The Bank of Asheville cannot predict what legislation might be enacted or what
regulations might be adopted, or if enacted or adopted, the effect thereof on
The Bank of Asheville's operations.
Regulation of Weststar
Federal Regulation. Weststar is subject to examination, regulation and periodic
reporting under The Bank of Asheville Holding Company Act, as administered by
the Federal Reserve Board. The Federal Reserve Board has adopted capital
adequacy guidelines for bank holding companies on a consolidated basis.
Weststar is required to obtain the prior approval of the Federal Reserve Board
to acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior Federal Reserve Board approval is required for Weststar to
acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after giving effect to such acquisition, it
would, directly or indirectly, own or control more than five percent of any
class of voting shares of such bank or bank holding company.
The merger or consolidation of Weststar with another bank, or the acquisition by
Weststar of assets of another bank, or the assumption of liability by Weststar
to pay any deposits in another bank, will require the prior written approval of
the primary federal bank regulatory agency of the acquiring or surviving bank
under the federal Bank Merger Act. The decision is based upon a consideration of
statutory factors similar to those outlined above with respect to the Bank
Holding Company Act. In addition, in certain such cases an application to, and
the prior approval of, the Federal Reserve Board under the Bank Holding Company
Act and/or the North Carolina Banking Commission may be required.
Weststar 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 Weststar's consolidated net worth. The
Federal Reserve Board may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, Federal Reserve Board order or directive, or
any condition imposed by, or written agreement with, the Federal Reserve Board.
Such notice and approval is not required for a bank holding company that would
be treated as "well capitalized" under applicable regulations of the Federal
Reserve Board, that has received a composite "1" or "2" rating at its most
recent bank holding company inspection by the Federal Reserve Board, and that is
not the subject of any unresolved supervisory issues.
46
The status of Weststar as a registered bank holding company under the Bank
Holding Company does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without limitation,
certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging in, or
acquiring five percent or more of any class of voting securities of any company
engaged in, non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve
Board has determined by regulation to be so closely related to banking as to be
a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to
promote community welfare; and
- acquiring a savings and loan association.
In evaluating a written notice of such an acquisition, the Federal Reserve Board
will consider various factors, including among others the financial and
managerial resources of the notifying bank holding company and the relative
public benefits and adverse effects which may be expected to result from the
performance of the activity by an affiliate of such company. The Federal Reserve
Board may apply different standards to activities proposed to be commenced de
novo and activities commenced by acquisition, in whole or in part, of a going
concern. The required notice period may be extended by the Federal Reserve Board
under certain circumstances, including a notice for acquisition of a company
engaged in activities not previously approved by regulation of the Federal
Reserve Board. If such a proposed acquisition is not disapproved or subjected to
conditions by the Federal Reserve Board within the applicable notice period, it
is deemed approved by the Federal Reserve Board.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines
in its examination and regulation of bank holding companies. If capital falls
below minimum guidelines, a bank holding company may, among other things, be
denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies:
- a leverage capital requirement expressed as a percentage of total
assets;
- a risk-based requirement expressed as a percentage of total
risk-weighted assets; and
47
- a Tier 1 leverage requirement expressed as a percentage of total
assets.
The leverage capital requirement consists of a minimum ratio of total capital to
total assets of 6%, with an expressed expectation that banking organizations
generally should operate above such minimum level. The risk-based requirement
consists of a minimum ratio of total capital to total risk-weighted assets of
8%, of which at least one-half must be Tier 1 capital (which consists
principally of shareholders' equity). The Tier 1 leverage requirement consists
of a minimum ratio of Tier 1 capital to total assets of 3% for the most
highly-rated companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
The Federal Reserve Board's regulations provide that the foregoing capital
requirements will generally be applied on a bank-only (rather than a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets. On a pro forma basis, assuming the
issuance and sale of 117,600 shares of common stock (the minimum amount offered
in this prospectus) at $9.50 per share, our leverage capital ratio, total
risk-based capital ratio and Tier 1 leverage ratio immediately after this
offering, in each case as calculated on a consolidated basis and a bank-only
basis under the Federal Reserve Board's capital guidelines, would be 12.97%,
16.54% and 15.28%, respectively, significantly exceeding the minimum
requirements.
Federal Deposit Insurance Corporation Improvement Act requires the federal bank
regulatory agencies biennially to review risk-based capital standards to ensure
that they adequately address interest rate risk, concentration of credit risk
and risks from non-traditional activities and, since adoption of the Riegle
Community Development and Regulatory Improvement Act of 1994, to do so taking
into account the size and activities of depository institutions and the
avoidance of undue reporting burdens. In 1995, the agencies adopted regulations
requiring as part of the assessment of an institution's capital adequacy the
consideration of (a) identified concentrations of credit risks, (b) the exposure
of the institution to a decline in the value of its capital due to changes in
interest rates and (c) the application of revised conversion factors and netting
rules on the institution's potential future exposure from derivative
transactions.
In addition, in September 1996 the agencies adopted amendments to their
respective risk-based capital standards to require banks and bank holding
companies having significant exposure to market risk arising from, among other
things, trading of debt instruments, (1) to measure that risk using an internal
value-at-risk model conforming to the parameters established in the agencies'
standards and (2) to maintain a commensurate amount of additional capital to
reflect such risk. The new rules were adopted effective January 1, 1997, with
compliance mandatory from and after January 1, 1998.
48
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
depository institutions are liable to the FDIC for losses suffered or
anticipated by the FDIC in connection with the default of a commonly controlled
depository institution or any assistance provided by the FDIC to such an
institution in danger of default. This law is applicable to the extent that
Weststar maintains, as a separate subsidiary, a depository institution in
addition to The Bank of Asheville.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions imposed by the Federal Reserve Act on any extension
of credit to, or purchase of assets from, or letter of credit on behalf of, the
bank holding company or its subsidiaries, and on the investment in or acceptance
of stocks or securities of such holding company or its subsidiaries as
collateral for loans. In addition, provisions of the Federal Reserve Act and
Federal Reserve Board regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of The Bank of
Asheville, Weststar, any subsidiary of Weststar and related interests of such
persons. Moreover, subsidiaries of bank holding companies are prohibited from
engaging in certain tie-in arrangements (with the holding company or any of its
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
Any loans by a bank holding company to a subsidiary bank are subordinate in
right of payment to deposits and to certain other indebtedness of the subsidiary
bank. In the event of a bank holding company's bankruptcy, any commitment by the
bank holding company to a federal bank regulatory agency to maintain the capital
of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to
a priority of payment. This priority would also apply to guarantees of capital
plans under Federal Deposit Insurance Corporation Improvement Act.
Branching
Under the Riegle Act, the Federal Reserve Board may approve bank holding company
acquisitions of banks in other states, subject to certain aging and deposit
concentration limits. As of June 1, 1997, banks in one state may merge with
banks in another state, unless the other state has chosen not to implement this
section of the Riegle Act. These mergers are also subject to similar aging and
deposit concentration limits.
North Carolina "opted-in" to the provisions of the Riegle Act. Since July 1,
1995, an out-of-state bank that did not already maintain a branch in North
Carolina was permitted to establish and maintain a de novo branch in North
Carolina, or acquire a branch in North Carolina, if the laws of the home state
of the out-of-state bank permit North Carolina banks to engage in the same
activities in that state under substantially the same terms as permitted by
North Carolina. Also, North Carolina banks may merge with out-of-state banks,
and an out-of-state bank resulting from such an interstate merger transaction
may maintain and operate the branches in North Carolina of a merged North
Carolina bank, if the laws of the home state of the out-of-state bank involved
in the interstate merger transaction permit interstate merger.
49
Recent Legislative Developments
Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999, which was signed
into law on November 12, 1999, will allow a bank holding company to qualify as a
"financial holding company" and, as a result, be permitted to engage in a
broader range of activities that are "financial in nature" and in activities
that are determined to be incidental or complementary to activities that are
financial in nature. The Gramm-Leach-Bliley Act amends the Bank Holding Company
Act to include a list of activities that are financial in nature, and the list
includes activities such as underwriting, dealing in and making a market in
securities, insurance underwriting and agency activities and merchant banking.
The Federal Reserve Board is authorized to determine other activities that are
financial in nature or incidental or complementary to such activities. The
Gramm-Leach-Bliley Act also authorizes banks to engage through financial
subsidiaries in certain of the activities permitted for financial holding
companies.
On September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996, was enacted which contained a comprehensive approach to
recapitalize the FDIC's Savings Association Insurance Fund and to assure payment
of the Financing Corporation obligations. All of The Bank of Asheville's
deposits are insured by the FDIC's Bank Insurance Fund. Under the Growth Act,
banks with deposits that are insured under the Bank Insurance Fund are required
to pay a portion of the interest due on bonds that were issued by the Financing
Corporation to help shore up the ailing Federal Savings and Loan Insurance
Corporation in 1987. The Growth Act stipulates that the Bank Insurance Fund
assessment rate to contribute toward the Financing Corporation obligations must
be equal to one-fifth the Savings Association Insurance Fund assessment rate
through year-end 2000, or until the insurance funds are merged, whichever occurs
first. The amount of Financing Corporation debt service to be paid by all Bank
Insurance Fund-insured institutions is approximately $0.0126 per $100 of Bank
Insurance Fund-insured deposits for each year from 1997 through 2000 when the
obligation of Bank Insurance Fund-insured institutions increases to
approximately $0.0240 per $100 of Bank Insurance Fund-insured deposits per year
through the year 2019, subject in all cases to adjustments by the FDIC on a
quarterly basis. The Growth Act also contained provisions protecting banks from
liability for environmental clean-up costs; prohibiting credit unions sponsored
by Farm Credit System banks; easing application requirements for most bank
holding companies when they acquire a thrift or a permissible non-bank
operation; easing Fair Credit Reporting Act restrictions between bank holding
company affiliates; and reducing the regulatory burden under the Real Estate
Settlement Procedures Act, the Truth-in-Savings Act, the Truth-in-Lending Act
and the Home Savings Mortgage Disclosure Act.
50
DESCRIPTION OF CAPITAL STOCK
The following is a summary of the material provisions of Weststar's Articles of
Incorporation and Bylaws.
General
The Articles of Incorporation of Weststar authorize the issuance of 10,000,000
shares of capital stock, consisting of 9,000,000 shares of common stock, par
value $1.00 per share, and 1,000,000 shares of preferred stock at no par value.
Upon completion of this offering, assuming the maximum number of shares are
sold, there will be 1,043,298 shares of common stock outstanding and no shares
of preferred stock issued and outstanding.
Common Stock
Dividend Rights. As a North Carolina corporation, Weststar is not directly
subject to the restrictions on the payment of dividends applicable to The Bank
of Asheville. Holders of shares of Weststar's common stock are entitled to
receive such cash dividends as the Board of Directors of Weststar may declare
out of funds legally available therefor. However, the payment of dividends by
Weststar will be subject to the restrictions of North Carolina law applicable to
the declaration of dividends by a business corporation. Under such provisions,
cash dividends may not be paid if a corporation will not be able to pay its
debts as they become due in the usual course of business after making such cash
dividend distribution or the corporation's total assets would be less than the
sum of its total liabilities plus the amount that would be needed to satisfy
certain liquidation preferential rights. The ability of Weststar to pay
dividends to the holders of shares of Weststar's common stock is, at least at
the present time, completely dependent upon the amount of dividends The Bank of
Asheville pays to Weststar.
Voting Rights. Each share of Weststar's common stock entitles the holder thereof
to one vote on all matters upon which shareholders have the right to vote. In
addition, if the Board of Directors of Weststar consists of nine or more
directors, its members will be classified so that approximately one-third of the
directors will be elected each year. Shareholders of Weststar are not entitled
to cumulate their votes for the election of directors.
Liquidation Rights. In the event of any liquidation, dissolution or winding up
of Weststar, the holders of shares of Weststar's common stock are entitled to
receive, after payment of all debts and liabilities of Weststar, all remaining
assets of Weststar available for distribution in cash or in kind. In the event
of any liquidation, dissolution or winding up of The Bank of Asheville,
Weststar, as the holder of all shares of Bank common stock, would be entitled to
receive payment of all debts and liabilities of The Bank of Asheville (including
all deposits and accrued interest thereon) and all remaining assets of The Bank
of Asheville available for distribution in cash or in kind.
51
Preemptive Rights; Redemption. Holders of shares of Weststar's common stock are
not entitled to preemptive rights with respect to any shares that may be issued.
Weststar's common stock is not subject to call or redemption.
Preferred Stock
The authorized preferred stock is available for issuance from time to time at
the discretion of the Board of Directors without shareholder approval. The Board
of Directors has the authority to prescribe for each series of preferred stock
it establishes the number of shares in that series, the number of votes (if any)
to which the shares in that series are entitled, the consideration for the
shares in that series, and the designations, powers, preferences and other
rights, qualifications, limitations or restrictions of the shares in that
series. Depending upon the rights prescribed for a series of preferred stock,
the issuance of preferred stock could have an adverse effect on the voting power
of the holders of common stock and could adversely affect holders of common
stock by delaying or preventing a change in control, making removal of our
present management more difficult or imposing restrictions upon the payment of
dividends and other distributions to the holders of common stock.
Authorized But Unissued Shares
North Carolina law does not require shareholder approval for any issuance of
authorized shares. Authorized but unissued shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of authorized but unissued shares may be to enable the board of
directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of us by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management and possibly deprive the
shareholders of opportunities to sell their shares of common stock at prices
higher than prevailing market prices.
Certain Articles and Bylaw Provisions Having Potential Anti-Takeover Effects
General. The following is a summary of the material provisions of Weststar's
Articles of Incorporation and Bylaws which address matters of corporate
governance and the rights of shareholders. Certain of these provisions may delay
or prevent takeover attempts not first approved by the Board of Directors of
Weststar (including takeovers which certain shareholders may deem to be in their
best interests). These provisions also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders. All references
to the Articles of Incorporation and Bylaws are to Weststar's Articles of
Incorporation and Bylaws in effect as of the date of this prospectus.
Classification of the Board of Directors. The Bylaws provide that if the number
of directors is nine or more (the number of directors is currently 10), the
Board of Directors of Weststar shall be divided into three classes, Class I,
Class II and Class III, which shall be as nearly equal in number as possible. If
so classified, each director shall serve for a term ending on the date of the
third annual meeting of shareholders following the annual meeting at which the
director was elected (except for certain initial directors whose terms may be
shorter than three years as necessary to effect the classification process). A
director elected to fill a vacancy shall serve only until the next meeting of
shareholders at which directors are elected. Approximately one-third of the
members of the Board of Directors of Weststar will be elected each year, and two
annual meetings will be required for Weststar's shareholders to change a
majority of the members constituting the Board of Directors of Weststar.
52
Removal of Directors; Filling Vacancies. Weststar's Articles of Incorporation
provide that shareholders may remove one or more of the directors with cause
which includes:
1. Criminal prosecution and conviction during the course of a director's
service as a director of Weststar of an act of fraud embezzlement,
theft, or personal dishonesty;
2. The prosecution and conviction of any criminal offense involving
dishonesty or breach of trust, or
3. The occurrence of any event resulting in a director being excluded
from coverage, or having coverage limited as to the director when
compared to other covered directors under any of the fidelity bonds or
insurance policies covering its directors, officers or employees.
Vacancies occurring in the Board of Directors of Weststar may be filled by the
shareholders or a majority of the remaining directors, even though less than a
quorum, or by the sole remaining director.
Amendment of Bylaws. Subject to certain restrictions described below, either a
majority of the Board of Directors or the shareholders of Weststar may amend or
repeal the Bylaws. A bylaw adopted, amended or repealed by the shareholders may
not be readopted, amended or repealed by the Board of Directors of Weststar.
Generally, the shareholders of Weststar may adopt, amend, or repeal the Bylaws
in accordance with the North Carolina Business Corporations Act.
The Board of Directors is permitted by Weststar's Articles of Incorporation to
consider other constituents besides the shareholders if faced with a proposal
that could cause a change in control. Such constituents are employees,
depositors, customers, creditors and the communities in which Weststar and its
subsidiaries conduct business. Further, the Board is permitted to evaluate the
competence, experience and integrity of any proposed acquiror as well as the
prospects for success of such a takeover proposal from a regulatory perspective.
Special Meetings of Shareholders. Weststar's Bylaws provide that special
meetings of shareholders may be called only by the President or Board of
Directors of Weststar.
53
Certain Provisions of North Carolina Law
Weststar is subject to the North Carolina Shareholder Protection Act and the
North Carolina Control Share Acquisition Act, each of which, if applicable,
would hinder the ability of a third party to acquire control of either company.
The Shareholder Protection Act generally requires that, unless certain "fair
price" and other conditions are met, the affirmative vote of the holders of 95%
of the voting shares of a corporation is necessary to adopt or authorize a
business combination with any other entity, if that entity is the beneficial
owner, directly or indirectly, of more than 20% of the voting shares of the
corporation. The Control Share Act provides that any person or party who
acquires "control shares" (defined as a number of shares which, when added to
other shares held, gives the holder voting power in the election of directors
equal to 20%, 33 1/3% or a majority of all voting power) may only vote those
shares if the remaining shareholders of the corporation, by resolution, permit
those shares to be voted. If the shareholders of the corporation permit the
"control shares" to be accorded voting rights and the holder of the "control
shares" has a majority of all voting power for the election of directors, the
other shareholders of the corporation have the right to the redemption of their
shares at the fair value of the shares as of the date prior to the date on which
the vote was taken which gave voting rights to the "control shares." The
provisions of the Shareholder Protection Act and the Control Share Act may have
the effect of discouraging a change of control by allowing minority shareholders
to prevent a transaction favored by a majority of the shareholders. The primary
purpose of these provisions is to encourage negotiations with the board of
directors of a company by groups or corporations interested in acquiring control
of the company.
The acquisition of more than ten percent (10%) of the outstanding Weststar
common stock may, in certain circumstances, be subject to the provisions of the
Change in Bank Control Act of 1978. The FDIC has also adopted a regulation
pursuant to the Change in Bank Control Act which generally requires persons who
at any time intend to acquire control of an FDIC-insured state-chartered
non-member bank, either directly or indirectly through an acquisition of control
of its holding company, to provide 60 days prior written notice and certain
financial and other information to the FDIC. Control for the purpose of this Act
exists in situations in which the acquiring party has voting control of at least
twenty-five percent (25%) of any class of voting stock or the power to direct
the management or policies of the bank or the holding company. However, under
FDIC regulations, control is presumed to exist where the acquiring party has
voting control of at least ten percent (10%) of any class of voting securities
if (a) the bank or holding company has a class of voting securities which is
registered under Section 12 of the Securities Exchange Act of 1934, or (b) the
acquiring party would be the largest holder of a class of voting shares of the
bank or the holding company. The statute and underlying regulations authorize
the FDIC to disapprove a proposed acquisition on certain specified grounds.
Prior approval of the Federal Reserve Board would be required for any
acquisition of control of The Bank of Asheville or Weststar by any bank holding
company under the Bank Holding Company Act. Control for purposes of the Bank
Holding Company Act would be based on, among other things, a twenty-five percent
(25%) voting stock test or on the ability of the holding company otherwise to
control the election of a majority of the Board of Directors of Weststar. As
part of such acquisition, the acquiring company (unless already so registered)
would be required to register as a bank holding company under the Bank Holding
Company Act.
54
The Securities Exchange Act of 1934 Act requires that a purchaser of any class
of a corporation's securities registered under the 1934 Act notify the SEC and
such corporation within ten days after its purchases exceed five percent of the
outstanding shares of that class of securities. This notice must disclose the
background and identity of the purchaser, the source and amount of funds used
for the purchase, the number of shares owned and, if the purpose of the
transaction is to acquire control of the corporation, any plans to alter
materially the corporation's business or corporate structure. In addition, any
tender offer to acquire a corporation's securities is subject to the limitations
and disclosure requirements of the 1934 Act.
Indemnification of Directors and Officers
Insofar as indemnification for liabilities arising under the Securities Act of
1933 Act may be permitted to our directors, officers and controlling persons
under the provisions discussed above or otherwise, we have been advised that, in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Exchange Act of 1934 Act and is, therefore,
unenforceable.
Registrar and Transfer Agent
The registrar and transfer agent for our common stock is Registrar and Transfer
Company, Cranford, New Jersey.
Shares Eligible for Future Sale
Upon completion of this offering, we expect to have 1,043,298 shares of common
stock outstanding assuming the maximum number of shares are sold, all of which
either will have been registered with the SEC under the Securities Act of 1933
Act or will have been outstanding for a sufficient period of time so that they
will be eligible for resale without registration under the 1933 Act unless they
were acquired by our directors, executive officers or other affiliates. Our
affiliates generally will be able to sell shares of the common stock only in
accordance with the limitations of Rule 144 under the 1933 Act.
In general, under Rule 144 as currently in effect, an affiliate (as defined in
Rule 144) may sell shares of common stock within any three-month period in an
amount limited to the greater of 1% of our outstanding shares of common stock or
the average weekly trading volume in our common stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
Prior to this offering, the common stock has been trading on the Nasdaq OTC
Bulletin Board, and we cannot predict the effect, if any, that sales of shares
or the availability of shares for sale will have on the prevailing market price
of the common stock after completion of this offering. Nevertheless, sales of
substantial amounts of common stock in the public market could have an adverse
effect on prevailing market prices.
55
METHOD OF SUBSCRIPTION/PLAN OF DISTRIBUTION
Weststar has engaged Wachovia Securities, Inc. to sell a portion of the common
stock being offered through this Offering on a best efforts basis. The
management of Weststar will conduct this offering, without remuneration, to all
shareholders and customers of The Bank of Asheville as of September 2, 2000.
Simultaneously, Wachovia will commence its marketing efforts primarily through
the offices of its retail brokerage division, IJL/Wachovia. Wachovia can, with
our consent, engage other agents to sell our common stock. Wachovia will receive
a commission of 6.0% of the offering price for all shares sold by any of its
registered brokers. If any other agents sell any common stock through an
engagement with Wachovia, they will receive a portion of that commission.
All subscribers must make checks payable to "First Citizens Bank/Weststar
Financial Services Corporation - Escrow Account". All funds received either by
Weststar or Wachovia will be forwarded to First Citizens Bank by noon of the
next business day after receipt.
LEGAL OPINIONS
Gaeta & Glesener, P.A., Raleigh, North Carolina, will pass upon the legality of
the securities offered by this prospectus for us.
EXPERTS
The financial statements of The Bank of Asheville as of December 31, 1999 and
1998, and for the years ended December 31, 1999 and 1998 and the period from
October 29, 1997 (date of incorporation) to December 31, 1997, included in this
prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and have been so included in reliance
upon the report of such firm given their authority as experts in accounting and
auditing.
56
TABLE OF CONTENTS
THE BANK OF ASHEVILLE
Independent Auditors' Report F-
Balance Sheets as of December 31, 1999 and 1998 F-
Statements of Operations for the years ended December 31, 1999 and 1998 and the F-
Period from October 29, 1997 (Date of Incorporation) to December 31, 1997
Statements of Changes in Shareholders' Equity for the years ended December 31, F-
1999 and 1998 and the Period from October 29, 1997 (Date of Incorporation)
to December 31, 1997
Statements of Cash Flows for the years ended December 31, 1999 and 1998 and the F-
Period from October 29, 1997 (Date of Incorporation) to December 31, 1997
Notes to Financial Statements F-
WESTSTAR FINANCIAL SERVICES CORPORATION
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 (Unaudited) F-
Consolidated Statements of Operations for the three months and six months ended F-
June 30, 2000 and 1999 (Unaudited)
Consolidated Statements of Comprehensive Income (Loss) for the three months and F-
six months ended June 30, 2000 and 1999 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity for the six months F-
ended June 30, 2000 and 1999(Unaudited)
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and F-
1999 (Unaudited)
Notes to Consolidated Financial Statements F-
1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of The Bank of Asheville:
We have audited the accompanying balance sheets of The Bank of Asheville (the
"Bank") as of December 31, 1999 and 1998 and the related statements of
operations, changes in shareholders' equity, and cash flows for the years ended
December 31, 1999 and 1998 and the period from October 29, 1997 (date of
incorporation) to December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Bank at December 31, 1999 and 1998 and
the results of its operations and its cash flows for the years ended December
31, 1999 and 1998 and the period from October 29, 1997 (date of incorporation)
to December 31, 1997, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 25, 2000
THE BANK OF ASHEVILLE
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
ASSETS:
Cash and cash equivalents (Notes 1, 7 and 12):
Cash and due from banks $ 1,892,403 $ 676,714
Interest-bearing deposits 2,784 99,000
Federal funds sold 2,110,000 2,770,000
------------ ------------
Total cash and cash equivalents 4,005,187 3,545,714
------------ ------------
Investment securities (Notes 1, 2 and 12) - available for sale, at fair
value (amortized cost of $2,508,339 and $2,087,778 at
December 31, 1999 and 1998, respectively) 2,502,411 2,085,000
------------ ------------
Loans (Notes 3 and 12) 34,460,724 14,023,265
Allowance for loan losses (Notes 1 and 4) (528,808) (218,719)
------------ ------------
Net loans 33,931,916 13,804,546
Premises and equipment, net (Notes 1, 5 and 9) 2,455,507 2,200,051
Accrued interest receivable 220,151 100,039
Federal Home Loan Bank stock, at cost 58,100 -
Organizational costs, net (Note 1) - 116,203
Deferred income taxes 133,688 -
Other assets 61,137 41,142
------------ ------------
TOTAL $ 43,368,097 $ 21,892,695
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 6):
Demand $ 4,780,881 $ 2,759,092
NOW accounts 3,154,225 1,820,714
Money market accounts 10,623,376 4,079,314
Savings 583,797 328,820
Time deposits of $100,000 or more 5,620,684 3,206,120
Other time deposits 13,158,017 4,252,588
Total deposits 37,920,980 16,446,648
Accrued interest payable 159,149 64,497
Deferred income taxes - 23,021
Other liabilities 119,569 195,954
------------ ------------
Total liabilities 38,199,698 16,730,120
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY (Notes 1 and 10):
Common stock, $5 par value, authorized - 10,000,000 shares; outstanding shares
- 633,298 and 607,557 at December 31, 1999
and 1998, respectively 3,166,490 3,037,785
Additional paid-in capital 3,596,444 3,467,729
Accumulated deficit (1,590,896) (1,341,243)
Accumulated other comprehensive loss (Note 2) (3,639) (1,696)
------------ ------------
Total shareholders' equity 5,168,399 5,162,575
------------ ------------
TOTAL $ 43,368,097 $ 21,892,695
============ ============
2
THE BANK OF ASHEVILLE
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM OCTOBER 29, 1997
(DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1999 1998 1997
INTEREST INCOME:
Interest and fees on loans $ 2,492,208 $ 661,439 $ 1,262
Federal funds sold 142,955 186,602 24,947
Interest-bearing deposits 1,211 4,560 64,482
Investments:
U. S. Treasuries 26,129 64,213 5,000
U. S. Government agencies 95,105 144,537 5,164
Corporate dividends 2,710 - -
----------- ----------- -----------
Total interest income 2,760,318 1,061,351 100,855
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 189,677 109,687 581
Other time and savings deposits 937,345 286,900 1,860
Federal funds purchased 1,522 - -
Note payable - 27,922 1,111
Other interest expense 97 - -
----------- ----------- -----------
Total interest expense 1,128,641 424,509 3,552
----------- ----------- -----------
NET INTEREST INCOME 1,631,677 636,842 97,303
PROVISION FOR LOAN LOSSES (Notes 1 and 4) 316,685 269,614 3,200
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,314,992 367,228 94,103
OTHER INCOME:
Service charges on deposit accounts 272,911 83,349 30
Other service fees and commissions 131,316 29,162 563
Other 10,637 4,533 420
----------- ----------- -----------
Total other income 414,864 117,044 1,013
----------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 941,253 649,415 98,119
Employee benefits 108,086 66,246 9,467
Occupancy expense, net 79,280 64,128 4,299
Equipment rentals, depreciation and maintenance 201,738 132,439 29,526
Other 688,451 546,671 91,528
----------- ----------- -----------
Total other expenses 2,018,808 1,458,899 232,939
----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE AND INCOME TAXES (288,952) (974,627) (137,823)
INCOME TAX PROVISION (BENEFIT) (Notes 1 and 8) (110,625) - 24,103
----------- ----------- -----------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (178,327) (974,627) (161,926)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $44,877 (Note 1) (71,326) - -
----------- ----------- -----------
ET LOSS (249,653) (974,627) (161,926)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX -
Unrealized holding gains (losses) on securities available for sale (1,943) (8,270) 6,574
COMPREHENSIVE LOSS $ (251,596) $ (982,897) $ (155,352)
============ ============ ============
3
THE BANK OF ASHEVILLE
STATEMENTS OF OPERATIONS (Continued)
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM OCTOBER 29, 1997
(DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1999 1998 1997
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.29) $ (1.60) $ (.27)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (.12) - -
-------- --------- -------
BASIC NET LOSS PER SHARE $ (.41) $ (1.60) $ (.27)
======== ========= =======
See notes to financial statements.
4
THE BANK OF ASHEVILLE
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM OCTOBER 29, 1997
(DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Total
Accumulated Shareholders'
Common Stock Additional Other Equity
----------------------- Paid-In Accumulated Comprehensive (Notes 1
Shares Amount Capital Deficit Income (Loss) and 10)
BALANCE, OCTOBER 29, 1997 607,557 $ 3,037,785 $ 3,467,729 $ (204,690) $ - $ 6,300,824
Net change in unrealized gain on
securities available for sale - - - - 6,574 6,574
Net loss - - - (161,926) - (161,926)
------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 607,557 3,037,785 3,467,729 (366,616) 6,574 6,145,472
Net change in unrealized gain on
securities available for sale - - - - (8,270) (8,270)
Net loss - - - (974,627) - (974,627)
------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 607,557 3,037,785 3,467,729 (1,341,243) (1,696) 5,162,575
Net change in unrealized loss on
securities available for sale - - - - (1,943) (1,943)
Warrants exercised 25,741 128,705 128,715 - - 257,420
Net loss - - - (249,653) - (249,653)
BALANCE, DECEMBER 31, 1999 633,298 $ 3,166,490 $ 3,596,444 $(1,590,896) $ (3,639) $ 5,168,399
======= =========== =========== =========== =========== ===========
5
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
AND THE PERIOD FROM OCTOBER 29, 1997 (date of incorporation) to December 31,
1997.
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (249,653) $ (974,627) $ (161,926)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 173,617 97,946 27,047
Amortization of organization costs - 29,669 2,472
Provision for loan loss 316,685 269,614 3,200
Premium amortization and discount accretion, net (70,843) (116,570) (126)
Deferred income tax (benefit) provision (155,502) - 24,103
Cumulative effect of a change in accounting principle 116,203 - -
Increase in accrued interest receivable (120,112) (71,952) (28,087)
Increase (decrease) in accrued interest payable 94,652 62,358 (4,077)
(Increase) decrease in other assets (19,981) 13,393 28,478
(Decrease) increase in other liabilities (76,398) 114,216 26,088
------------- ------------- -----------
Net cash provided by (used in) operating activities 8,668 (575,953) (82,828)
------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (4,449,719) (7,087,865) (2,977,217)
Maturities of securities available for sale 4,100,000 8,094,000 -
Net increase in loans (20,444,055) (13,863,234) (214,126)
Additions to premises and equipment (429,073) (1,747,777) (461,440)
Purchases of Federal Home Loan Bank stock (58,100) - -
------------- ------------- -----------
Net cash used in investing activities (21,280,947) (14,604,876) (3,652,783)
------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts and
savings accounts 10,154,339 7,654,464 1,333,476
Net increase in certificates of deposits 11,319,993 7,019,264 439,444
Proceeds from notes payable - 990,000 150,000
Repayment of notes payable - (1,140,000) -
Issuance of common stock 257,420 - -
------------- ------------- -----------
Net cash provided by financing activities 21,731,752 14,523,728 1,922,920
------------- ------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 459,473 (657,101) (1,812,691)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,545,714 4,202,815 6,015,506
------------- ------------- -----------
End of period $ 4,005,187 $ 3,545,714 $ 4,202,815
============ ============ ===========
SUPPLEMENTAL DISCLOSURE - Cash paid during the
period for interest $ 1,033,989 $ 362,151 $ 7,629
============ ========== =======
See notes to financial statements
1
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM OCTOBER 29, 1997
(DATE OF INCORPORATION) TO DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Bank of Asheville (the "Bank") is a state chartered
commercial bank headquartered in Asheville, North Carolina and provides consumer
and commercial banking services in the Buncombe County and surrounding areas.
The Bank was organized and incorporated in North Carolina on October 29, 1997
and began accepting deposits and making loans on December 1, 1997.
Prior to receiving a bank charter and articles of incorporation, the
Bank conducted an initial public offering of its common stock. Net proceeds from
the public offering were $6,505,514 representing 607,557 shares of common stock
sold at $11.00 per share net of costs. Operations prior to incorporation
consisted only of organizational activities and the sale of common stock.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Investment Securities - Debt securities that the Bank has the positive
intent and ability to hold to maturity are classified as "held-to-maturity
securities" and reported at amortized cost. Debt and equity securities that are
bought and held principally for the purpose of selling in the near term are
classified as "trading securities" and reported at fair value, with unrealized
gains and losses included in earnings. Debt securities not classified as either
held-to-maturity securities or trading securities and equity securities not
classified as trading securities are classified as "available-for-sale
securities" and reported at fair value, with unrealized gains and losses
reported as other comprehensive income. Gains and losses on held for investment
securities are recognized at the time of sale based upon the specific
identification method. Declines in the fair value of individual held-to-maturity
and available-for-sale securities below their cost that are other than
temporary, result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
Premiums and discounts are recognized in interest expense, or interest income,
respectively, using the interest method over the period to maturity. Transfers
of securities between classifications are accounted for at fair value. The Bank
has not classified any securities as trading or held-to-maturity securities.
Loans - Loans held for investment are stated at the amount of unpaid
principal, reduced by an allowance for loan losses.
Allowance for Loan Losses - The provision for loan losses charged to
operations is an amount which management believes is sufficient to bring the
allowance for loan losses to an estimated balance considered adequate to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, current economic
conditions, historical loan loss experience and other risk factors. Recovery of
the carrying value of loans is dependent to some extent on future economic,
operating and other conditions that may be beyond the Bank's control.
Unanticipated future adverse changes in such conditions could result in material
adjustments to the allowance for loan losses.
2
Loans that are deemed to be impaired (i.e., probable that the Bank will be
unable to collect all amounts due according to the terms of the loan agreement)
are measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical matter, at the loan's
observable market value or fair value of the collateral if the loan is
collateral dependent. A valuation reserve is established to record the
difference between the stated loan amount and the loan's present value, market
value, or fair value of the collateral, as appropriate, of the impaired loan.
Impaired loans may be valued on a loan-by-loan basis (e.g., loans with risk
characteristics unique to an individual borrower) or on an aggregate basis
(e.g., loans with similar risk characteristics). As of December 31, 1999 and
1998, there were no loans within the Bank's portfolio that were considered to be
impaired.
Premises and Equipment and Other Long-Lived Assets - Premises and
equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization, computed by the straight-line method, are charged
to operations over the properties' estimated useful lives, which range from 25
to 50 years for buildings, 5 to 15 years for furniture and equipment or, in the
case of leasehold improvements, the term of the lease, if shorter. Maintenance
and repairs are charged to operations in the year incurred. Gains and losses on
dispositions are included in current operations.
The Bank reviews long-lived assets and certain identifiable intangibles
to be held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the sum
of the expected cash flows is less than the stated amount of the asset, an
impairment loss is recognized.
Income Taxes - Deferred income taxes are computed using the asset and
liability approach. The tax effects of differences between the tax and financial
accounting bases of assets and liabilities are reflected in the balance sheet at
the tax rates expected to be in effect when the differences reverse. A valuation
allowance is provided as a reserve against deferred tax assets when realization
is deemed not to be likely. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
Interest Income and Expense - The Bank utilizes the accrual method of
accounting. Substantially all loans earn interest on the level yield method
based on the daily outstanding balance. The accrual of interest is discontinued
when, in management's judgment, the interest may not be collected.
The Bank defers the immediate recognition of certain loan origination
fees and certain loan origination costs when new loans are originated and
amortizes these deferred amounts over the life of each related loan as an
adjustment to interest income.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Net Loss Per Share - Basic net loss per common share amount has been
computed using the weighted average number of shares of common stock outstanding
during the respective period (615,521 shares in 1999 and 607,557 shares in 1998
and 1997). There were no potentially dilutive securities during 1999, 1998 and
1997.
3
New Accounting Standards - In April 1998, the AICPA issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities, which provides
additional guidance on the financial reporting of start-up and organizational
costs, requiring such costs to be expensed as incurred. As a result, the Bank
wrote off its unamortized start-up and organizational costs of $116,203 as of
January 1, 1999 as a cumulative effect of a change in accounting principle.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative. The statement is
effective for the Bank's fiscal year 2001 financial statements and may not be
applied retroactively. The Bank has not yet completed its analysis of the
effects of this new standard on its results of operations or financial position.
2. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values
of investment securities at December 31, 1999 and 1998 are as follows:
Available-for-sale securities consist of the following at December 31,
1999:
Unrealized Fair
Amortized ------------------------------- Value
Type and Maturity Group Cost Gains Losses
U. S. Treasury due - within 1 year $ 749,505 $ - $ (595) $ 748,910
U. S. Government agencies due - within 1 year 1,758,834 - (5,333) 1,753,501
---------- ---------- ----------- -----------
Total at December 31, 1999 $ 2,508,339 $ - $ (5,928) $ 2,502,411
=========== ========== =========== ===========
Available-for-sale securities consist of the following at December 31,
1998:
Unrealized Fair
Amortized ------------------------------- Value
Type and Maturity Group Cost Gains Losses
U. S. Treasury due - within 1 year $ 604,288 $ 212 $ - $ 604,500
U. S. Government agencies due - within 1 year 1,483,490 - (2,990) 1,480,500
---------- -- -------- ---------
Total at December 31, 1998 $2,087,778 $ 212 $ (2,990) $2,085,000
============ ====== ========== ===========
4
3. LOANS
Loans at December 31, 1999 and 1998 classified by type, are as follows:
1999 1998
Real estate:
Construction $ 7,152,238 $ 1,780,563
Mortgage 16,963,594 7,414,218
Commercial, financial and agricultural 9,926,255 4,594,259
Consumer 562,765 299,105
-------- -------
Subtotal 34,604,852 14,088,145
Net deferred loan origination fees (144,128) (64,880)
---------- --------
Total $ 34,460,724 $ 14,023,265
============= ============
Non-performing assets at December 31, 1999 and 1998 are as follows:
1999 1998
Non-accrual loans $247,559 $ -
No loans have been restructured during the 1997, 1998 or 1999 periods.
Directors and officers of the Bank and companies with which they are
affiliated are customers of and borrowers from the Bank in the ordinary course
of business. At December 31, 1999 and 1998, directors' and principal officers'
direct and indirect indebtedness to the Bank aggregated $136,856 and $131,870,
respectively.
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended December
31, 1999, 1998 and 1997 are as follows: ]
1999 1998 1997
Balance at beginning of period $ 218,719 $ 3,200 $ -
Additions charged to operations 316,685 269,614 3,200
Charge-offs (18,567) (55,838) -
Recoveries 11,971 1,743 -
--------- ---------- ---------
Balance at end of period $ 528,808 $ 218,719 $ 3,200
========= ========= =========
5
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are as follows:
1999 1998
Land $ 113,900 $ 113,900
Land improvements 121,874 -
Building and improvements 1,475,842 1,182,107
Furniture and equipment 744,064 502,472
Leasehold improvements 287,852 287,852
Construction in progress 10,585 238,714
----------- -----------
Total 2,754,117 2,325,045
Less accumulated depreciation and amortization (298,610) (124,994)
----------- -----------
Total $ 2,455,507 $ 2,200,051
=========== ===========
6. DEPOSIT ACCOUNTS
At December 31, 1999, the scheduled maturities of time deposits of
$100,000 or more are as follows:
Within three months $ 2,083,909
Within six months 1,800,047
Within twelve months 1,418,309
Greater than one year 318,419
--------------------
Total $ 5,620,684
====================
7. NOTE PAYABLE
A 9.5% note payable, due in monthly installments of $4,805, was repaid
in full as of December 31, 1998.
8. INCOME TAXES
The income tax benefits for 1997 and 1999 were comprised solely of
deferred tax benefits.
For the years ended December 31, 1999 and 1998, a deferred tax benefit
of $1,207 and $1,082, respectively, was allocated to other comprehensive income
as the tax effect of the unrealized loss on investment securities available for
sale.
6
A reconciliation of reported income tax benefit for the periods ended
December 31, 1999, 1998 and 1997 to the amount of tax benefit computed by
multiplying the loss before income taxes by the statutory federal income tax
rate of 34% follows:
1999 1998 1997
Tax benefit at statutory rate $(137,757) $(331,373) $(116,454)
Increase (decrease) in income tax benefit
resulting from:
State income tax benefit net of federal tax benefit (17,745) (54,115) (16,955)
Valuation allowance - 385,488 157,512
---------- -------- ---------
Income taxes reported $(155,502) $ - $ 24,103
========== ======== =========
The tax effect of the cumulative temporary differences and
carryforwards that gave rise to the deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
1999 Assets Liabilities Total
Net operating loss carryforward $ 468,180 $ 468,180
Contribution carryforward 8,164 8,164
Allowance for loan losses 180,792 180,792
Unrealized loss on securities available for sale 2,289 2,289
Depreciation - $ (58,707) (58,707)
Capitalized start-up expenditures 68,351 - 68,351
Capitalized organization costs 33,420 - 33,420
Prepaid expenses - (20,554) (20,554)
Other, net - (5,247) (5,247)
Valuation allowance (543,000) - (543,000)
---------- ---------- ---------
Total $ 218,196 $ (84,508) $ 133,688
========== =========== =========
1998 Assets Liabilities Total
Net operating loss carryforward $ 445,757 $ 445,757
Contribution carryforward 5,753 5,753
Allowance for loan losses 53,189 53,189
Unrealized loss on securities available for sale 1,082 1,082
Depreciation - $ (28,394) (28,394)
Capitalized start-up expenditures 66,680 - 66,680
Prepaid expenses - (6,936) (6,936)
Other, net - (17,152) (17,152)
Valuation allowance (543,000) - (543,000)
---------- ---------- ---------
Total $ 29,461 $ (52,482) $ (23,021)
========== =========== =========
As of December 31, 1999, federal and state operating loss carryovers of
approximately $1,190,000 and $1,358,000, respectively, are available to offset
future federal and state taxable income. The carryover period is 5 years for
state and 20 years for federal, which will result in expirations of varying
amounts.
The Bank has a charitable contribution carryforward of $24,011
available to reduce federal taxable income. This credit will expire in year
2003.
7
Management has evaluated the available evidence about future taxable
income and other possible sources of realization of deferred tax assets. The
valuation allowance at December 31, 1999 reduces deferred tax assets to an
amount that represents management's best estimate of the amount of such deferred
tax assets which more likely than not will be realized.
9. LEASES
The Bank leases the banking facility premises and equipment under
operating lease agreements. Future minimum rental payments are as follows:
2000 $34,045
2001 33,473
2002 24,525
Thereafter -
-------
Total $92,043
=======
The land for a branch office is leased from a partnership that includes
a director of the Bank. The annual rental is $24,000. Rental expense charged to
operations under all operating lease agreements was $45,529, $46,910 and $25,265
for the periods ended December 31, 1999, 1998 and 1997, respectively.
10. REGULATION AND REGULATORY RESTRICTIONS
The Bank is regulated by the Federal Deposit Insurance Corporation
("FDIC") and the North Carolina State Banking Commission.
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). As of December 31, 1999, the most recent regulatory
notifications categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. Management believes, as of December 31,
1999 and 1998, that the Bank meets all capital adequacy requirements to which it
is subject. To be categorized as adequately capitalized under the regulatory
framework for prompt corrective action, the Bank must monitor the minimum
capital ratios as set forth in the table below.
8
The Bank's actual capital amounts and ratios are also presented in the
table (dollar amounts in thousands):
To be Well
Capitalized Under
For Capital Promp Corrective
Actual Adequacy Purposes Action Provisions
-------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1999:
Total Capital (to Risk Weighted Assets) $5,580 17.13% $2,605 8.00% $3,256 10.00%
Tier I Capital (to Risk Weighted Assets) $5,171 15.88% $1,303 4.00% $1,954 6.00%
Tier I Capital (to Average Assets) $5,171 12.63% $1,638 4.00% $2,078 5.00%
To be Well
Capitalized Under
For Capital Promp Corrective
Actual Adequacy Purposes Action Provisions
-------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) $5,257 31.60% $1,331 8.0% $ 1,664 10.0%
Tier I Capital (to Risk Weighted Assets) $5,049 30.35% $ 665 4.0% $ 998 6.0%
Tier I Capital (to Average Assets) $5,049 25.25% $ 800 4.0% $ 1,000 5.0%
11. COMMITMENTS AND CONTINGENCIES
The Bank has various financial instruments (outstanding commitments)
with off-balance sheet risk that are issued in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Commitments to
extend credit are legally binding agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts outstanding do not necessarily represent future cash
requirements. Standby letters of credit represent conditional commitments issued
by the Bank to assure the performance of a customer to a third party. The unused
portion of commitments to extend credit at December 31, 1999 and 1998 was
$5,536,642 and $2,583,000, respectively.
The Bank's exposure to credit loss for commitments to extend credit and
standby letters of credit is the contractual amount of those financial
instruments. The Bank uses the same credit policies for making commitments and
issuing standby letters of credit as it does for on-balance sheet financial
instruments. Each customer's creditworthiness is evaluated on an individual
case-by-case basis. The amount and type of collateral, if deemed necessary by
management, is based upon this evaluation of creditworthiness. Collateral held
varies, but may include marketable securities, deposits, property, plant and
equipment, investment assets, inventories and accounts receivable. Management
does not anticipate any significant losses as a result of these financial
instruments.
In the normal course of its operations, the Bank from time to time is
party to various legal proceedings. Based upon information currently available,
and after consultation with its legal counsel, management believes that such
legal proceedings, in the aggregate, will not have a material adverse effect on
the Bank's business, financial position or results of operations.
9
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1999. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
December 31,
-------------------------------------------------------
1999 1998
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands) (In Thousands)
Assets:
Cash and cash equivalents $ 4,005 $ 4,005 $ 3,546 $ 3,546
Marketable securities 2,502 2,502 2,085 2,085
Federal Home Loan Bank stock 58 58 - -
Loans 34,461 34,463 14,023 13,840
Liabilities:
Demand deposits 19,142 19,142 8,989 8,989
Time deposits 18,779 18,793 7,458 7,475
Off-Balance-Sheet-commitments to
extend credit - 5,537 - 2,583
13. EMPLOYEE BENEFIT PLAN
The Bank sponsors a defined contribution 401(k) plan, which allows
those employees who have attained the age of 21 years and worked 1,000 hours to
elect to contribute a portion of their salary to the plan in accordance with the
provisions and limits set forth in the plan document. The plan was established
in March 1999. The Bank makes discretionary matching contributions in an amount
determined each plan year to each participant who makes 401(k) savings
contributions during the year. The Bank may also make a discretionary
profit-sharing contribution for a plan year to those participants employed
during the year. The Bank's contribution expense to the plan was $10,000 for the
year ended December 31, 1999.
14. SUBSEQUENT EVENT
In January 2000, the Bank signed a nonbinding letter of intent to
purchase 100% of the voting equity of an insurance agency. The Bank is currently
negotiating the terms of the transaction but a definitive agreement has not been
reached.
10
Weststar Financial Services Corporation & Subsidiary
- ----------------------------------------------------
Consolidated Balance Sheets (unaudited)
June 30, December 31,
2000 1999
-------------- ---------------
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 6,496,704 $ 1,892,403
Interest-bearing deposits 5,075 2,784
Federal funds sold 2,210,000 2,110,000
-------------- ---------------
Total cash and cash equivalents 8,711,779 4,005,187
-------------- ---------------
Investment securities -
Available for sale, at fair value (amortized cost of
$2,011,824 and $2,508,339, respectively) 2,008,293 2,502,411
-------------- ---------------
Loans 47,607,223 34,460,724
Allowance for loan losses (686,008) (528,808)
-------------- ---------------
Net loans 46,921,215 33,931,916
Premises and equipment, net 2,357,299 2,455,507
Accrued interest receivable 366,927 220,151
Federal Home Loan Bank stock, at cost 145,600 58,100
Deferred income taxes 606,452 133,688
Other assets 104,282 61,137
-------------- ---------------
TOTAL $ 61,221,847 $ 43,368,097
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 9,059,033 $ 4,780,881
NOW accounts 9,258,522 3,154,225
Money market accounts 12,927,842 10,623,376
Savings 913,150 583,797
Time deposits of $100,000 or more 5,506,095 5,620,684
Other time deposits 17,366,145 13,158,017
-------------- ---------------
Total deposits 55,030,787 37,920,980
Accrued interest payable 187,609 159,149
Other liabilities 151,888 119,569
-------------- ---------------
Total liabilities 55,370,284 38,199,698
-------------- ---------------
SHAREHOLDERS' EQUITY:
Preferred stock; authorized $1,000,000; issued and outstanding - none - -
Common stock, $1 par value, authorized - 9,000,000
shares; issued and outstanding - 633,298 and 633,298, respectively 633,298 633,298
Additional paid-in capital 6,129,636 6,129,636
Accumulated deficit (909,204) (1,590,896)
Accumulated other comprehensive loss (2,167) (3,639)
-------------- ---------------
Total shareholders' equity 5,851,563 5,168,399
-------------- ---------------
TOTAL $ 61,221,847 $ 43,368,097
============== ===============
See notes to consolidated financial statements.
11
Weststar Financial Services Corporation & Subsidiary
- ----------------------------------------------------
Consolidated Statements of Operations (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------- --------------- --------------- ----------------
INTEREST INCOME:
Interest and fees on loans $ 1,148,316 $ 533,178 $ 2,081,502 $ 939,246
Federal funds sold 13,336 56,946 40,782 98,067
Interest-bearing deposits with other banks 62 5 116 1,158
Investments:
U.S Treasuries 10,372 8,805 20,674 15,500
U.S. Government agencies 22,343 22,719 46,457 41,471
Other 1,212 525 2,347 525
---------------- --------------- --------------- ----------------
Total interest income 1,195,641 622,178 2,191,878 1,095,967
---------------- --------------- --------------- ----------------
INTEREST EXPENSE:
Time deposits of $100,000 or more 84,353 37,984 166,996 76,895
Other time and savings deposits 371,508 226,746 699,343 394,350
Federal funds purchased 3,327 - 3,327 -
Other interest expense - - 41 -
---------------- --------------- --------------- ----------------
Total interest expense 459,188 264,730 869,707 471,245
---------------- --------------- --------------- ----------------
NET INTEREST INCOME 736,453 357,448 1,322,171 624,722
PROVISION FOR LOAN LOSSES 100,000 129,825 157,200 204,285
---------------- --------------- --------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 636,453 227,623 1,164,971 420,437
---------------- --------------- --------------- ----------------
OTHER INCOME:
Service charges on deposit accounts 79,016 75,821 169,042 114,545
Other service fees and commissions 31,490 23,836 56,760 38,193
Other 3,404 2,240 7,183 4,221
---------------- --------------- --------------- ----------------
Total other income 113,910 101,897 232,985 156,959
---------------- --------------- --------------- ----------------
OTHER EXPENSES:
Salaries and wages 251,107 226,465 515,538 428,168
Employee benefits 49,618 18,818 78,816 38,431
Occupancy expense, net 34,515 18,321 63,053 36,915
Equipment rentals, depreciation and
Maintenance 56,025 44,496 113,521 92,891
Other 202,643 147,697 419,012 307,620
---------------- --------------- --------------- ----------------
Total other expenses 593,908 455,797 1,189,940 904,025
---------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND INCOME TAXES 156,455 (126,277) 208,016 (326,629)
INCOME TAX PROVISION (BENEFIT) 56,936 - (473,676) -
---------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 99,519 (126,277) 681,692 (326,629)
---------------- --------------- --------------- ----------------
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX
BENEFIT OF $44,877 - - - (71,326)
---------------- --------------- --------------- ----------------
NET INCOME (LOSS) $ 9,519 $ (126,277) $ 681,692 $ (397,955)
================ =============== =============== ================
PER SHARE AMOUNTS:
Basic and diluted income (loss) before cumulative
Effect of a change in accounting principle $ 0.16 $ (0.21) $ 1.08 $ (0.54)
Cumulative effect of a change in accounting
Principle - - - (.12)
---------------- --------------- --------------- ----------------
Basic and diluted net income (loss) $ 0.16 $ (0.21) $ 1.08 $ (0.66)
================ =============== =============== ================
See notes to consolidated financial statements
12
WESTSTAR FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
NET INCOME/(LOSS) $ 99,519 $ (126,277) $ 681,692 $ (397,955)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on securities
available for sale, net of income taxes 1,272 (2,210) 1,472 (3,676)
--------------- -------------- -------------- ----------------
COMPREHENSIVE INCOME (LOSS) $ 100,791 $ (128,487) $ 683,164 $ (401,631)
=============== ============== ============== ================
See notes to consolidated financial statements.
13
WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
- ----------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- ---------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2000 and 1999(unaudited)
Accumulated
Common Stock Additional Other Total
---------------------------- Paid-In Accumulated Comprehensive Shareholders
Shares Amount Capital Deficit Income (Loss) Equity
Balance December 31, 1999 633,298 $633,298 $6,129,636 $(1,590,896) $ (3,639) $ 5,168,399
Net change in unrealized
loss on securities held for sale 1,472 1,472
Net income 681,692 681,692
-----------------------------------------------------------------------------------------
Balance June 30, 2000 633,298 $633,298 $6,129,636 $ (909,204) $ (2,167) $ 5,851,563
=========================================================================================
Accumulated
Common Stock Additional Other Total
--------------------------- Paid-In Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit Income (Loss) Equity
Balance December 31, 1998 607,557 $607,557 $5,897,957 $(1,341,243) $ (1,696) $5,162,575
Net change in unrealized
loss on securities held for sale (3,676) (3,676)
Issuance of common stock 10 10 100 110
Net loss (397,955) (397,955)
-----------------------------------------------------------------------------------------
Balance June 30, 1999 607,567 $607,567 $5,898,057 $(1,739,198) $ (5,372) $4,761,054
=========================================================================================
See notes to consolidated financial statements.
14
Weststar Financial Services Corporation & Subsidiary
Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 681,692 $ (397,955)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 114,123 82,435
Provision for loan loss 157,200 204,285
Premium amortization and discount accretion, net (14,500) (33,944)
Cumulative effect of a change in accounting principle -- 71,326
Increase in accrued interest receivable (146,776) (70,240)
Increase in accrued interest payable 28,460 40,836
Increase in other assets (43,159) (31,223)
Deferred income taxes (473,676) --
Increase (decrease) in other liabilities 32,319 (108,574)
------------ ------------
Net cash provided (used) by operating activities 335,683 (243,054)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Federal Home Loan Bank stock (87,500) --
Purchases of securities available for sale (1,509,984) (2,509,711)
Maturities of securities available for sale 2,021,000 1,500,000
Net increase in loans (13,146,499) (11,338,691)
Additions to premises and equipment (15,915) (378,629)
Issuance of common stock -- 110
------------ ------------
Net cash used in investing activities (12,738,898) (12,726,921)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and savings accounts 13,016,268 9,919,566
Net increase in certificates of deposits 4,093,539 2,561,835
------------ ------------
Net cash provided by financing activities 17,109,807 12,481,401
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,706,592 (488,574)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,005,187 3,545,714
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,711,779 $ 3,057,140
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 841,247 $ 430,409
Income taxes -- --
See notes to consolidated financial statements.
15
WESTSTAR FINANCIAL SERVICES CORPORTION
NOTES TO FINANCIAL STATEMENTS
1. Weststar Financial Services Corporation (the "Company") is a bank
holding company with one subsidiary, The Bank of Asheville, a state
chartered commercial bank incorporated in North Carolina on October 29,
1997. Common shares of The Bank of Asheville were exchanged for common
shares of the Company on April 29, 2000.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the consolidated
financial position of the Company as of June 30, 2000 and December 31,
1999, and the consolidated results of their operations and their cash
flows for the three and six month periods ended June 30, 2000 and 1999.
The accounting policies followed are set forth in Note 1 to the 1999
Annual Report to Shareholders (Form 10-KSB) on file with the Federal
Deposit Insurance Corporation.
2. Loans at June 30, 2000 and December 31, 1999 classified by type are as
follows:
June 30, December 31,
2000 1999
Real Estate:
Construction $ 8,853,209 $ 7,152,238
Mortgage 24,199,749 16,963,594
Commercial, financial and agricultural 13,831,650 9,926,255
Consumer 922,609 562,765
-------------- -------------
Subtotal 47,807,217 34,604,852
Net deferred loan origination fees (199,994) (144,128)
-------------- -------------
Total $47,607,223 $34,460,724
============== =============
3. At December 31, 1999, the Company had a $543,000 valuation allowance
related to deferred tax assets for which, in the opinion of management,
realization was not reasonably assured. Based upon the taxable income
being generated in 2000 and management expectations of continued
profitability, management now believes that realization of the deferred
tax assets is more likely than not. The valuation allowance was
reversed in the first quarter of 2000, thereby providing a deferred tax
benefit.
4. In the normal course of business there are various commitments and
contingent liabilities such as commitments to extend credit, which are
not reflected on the financial statements. The unused portion of lines
to extend credit were $9,800,142 and $5,536,642 at June 30, 2000 and
December 31, 1999, respectively.
5. Basic earnings per share have been computed using the weighted average
number of shares of common stock outstanding of 633,298 and 607,567 for
the quarters ended June 30, 2000 and 1999, respectively and 633,298 and
607,566 for the six month periods ended June 30, 2000 and 1999,
respectively. There were no potentially dilutive securities during the
three and six month periods ended June 30, 2000.
6. The Company's capital at June 30, 2000 and December 31, 1999 to risk
weighted assets totaled 14.42% and 21.09%, respectively. Current
federal regulations require that the Company maintain a minimum ratio
of total capital to risk weighted assets of 8%, with at least 4% being
in the form of Tier 1 capital, as defined in the regulations. In
addition, the Company must maintain a leverage ratio of 4%. As of June
30, 2000 and December 31, 1999, the Company's capital exceeded the
current capital requirements.
16
7. The SEC has issued Staff Accounting Bulletin No. 101 ("SAB 101"), as
amended on June 26, 2000, titled "Revenue Recognition in Financial
Statements". SAB 101 provides SEC guidance on the recognition,
presentation and disclosure of revenue in accordance with generally
accepted accounting principles in the financial statements. The Company
must implement any applicable provisions of SAB 101 no later than the
fourth quarter of the current fiscal year. The Company has determined
that implementation of the applicable provisions of SAB 101 will not
have a material effect on the Company's financial statements and
current disclosures. However, the SEC has recently indicated that it
intends to issue further guidance with respect to adoption of specific
issues addressed by SAB 101. Until such time as this additional
guidance is issued, the Company is unable to assess the impact, if any,
it may have on the Company's financial statements and current
disclosures.
17
For Company Use (Do Not Fill In) Paid with Subscription $ __________
No. of Shares Requested ___________ Refund (if any) $ __________
No. of Shares Accepted ___________ Balance Due $ __________
SUBSCRIPTION OFFER
Weststar Financial Services Corporation
Asheville, North Carolina
The undersigned, having received and reviewed the prospectus dated ______, 2000,
of Weststar Financial Services Corporation (the "Company"), a bank holding
company organized under the laws of the State of North Carolina, and in sole
reliance on the information contained therein, hereby subscribes for
_______________________________ shares of the common stock (par value $1.00 per
share) of Weststar at a price of $____ per share. The minimum subscription is
100 shares and the maximum is 5% of the aggregate shares subscribed in the
offering, unless such maximum number is waived by the Board of Directors.
The subscription is paid herewith, in United States dollars either by check,
draft or money order drawn to the order of "First Citizens Bank/Weststar
Financial Services Corporation - Escrow Account."
Mail subscriptions and payment to:
Weststar Financial Services Corporation
Attention: Escrow Agent
79 Woodfin Place
Asheville, North Carolina 28801-2426
In connection with this subscription, the undersigned acknowledges and agrees
that:
1. This Subscription Offer may not be canceled, terminated or revoked
by the undersigned before December 31, 2000, unless extended by Weststar until
February 28, 2001.
2. The Company reserves the right to accept this Subscription Offer for
a lesser number of shares than the number noted above, or to reject it
altogether, for any reason or no reason, whether or not the subscriptions of
other subscribers are treated differently. Subscriptions may be accepted at any
time. The Company also reserves the right to cancel accepted Subscription Offers
for any reason or no reason until the date the shares purchased through this
Offering are issued. Acceptances must be in writing and are legally effective
and binding when mailed to the address shown on this Subscription Offer, or in
the case of a subscriber whose address has changed and who has provided the new
address to Weststar in writing, to the new address. If the subscription is
accepted in part, the undersigned agrees to purchase the accepted number of
shares subject to the terms of this Subscription Offer. A refund, with interest,
will be made of all amounts received for subscriptions not accepted. This
subscription is nonassignable and nontransferable, except with the written
consent of Weststar.
3. All funds paid under this Subscription Offer will be held in the
Escrow Account as provided in the prospectus with First Citizens Bank, Raleigh,
North Carolina ("First Citizens Bank") and will be forwarded directly to First
Citizens Bank by 12:00 noon of the next business day after receipt. If by
December 31, 2000 (unless extended to February 28, 2001), Weststar has not
received subscriptions for at least 117,600 shares of its common stock, a refund
of the funds paid under this Subscription Offer, with interest, will be returned
to the subscribers. (See " METHOD OF SUBSCRIPTION/ PLAN OF DISTRIBUTION" in the
prospectus.)
1
4. All terms of the prospectus of Weststar dated _________, 2000 are
incorporated herein by reference. The undersigned acknowledges he/she has
received a copy of the prospectus.
5. The undersigned will not purchase or otherwise acquire, directly or
indirectly, a beneficial interest in more than 5% of the aggregate shares to be
outstanding after the offering unless such limit is waived by the Board of
Directors.
6. SUBSTITUTE FORM W-9: Under penalties of perjury, I certify that (1)
the Social Security Number or Taxpayer Identification Number given below is
correct; and (2) I am not subject to backup withholding. (INSTRUCTION: YOU MUST
CROSS OUT ITEM (2) DIRECTLY ABOVE IF YOU HAVE BEEN NOTIFIED BY THE INTERNAL
REVENUE SERVICE THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF
UNDER-REPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN.)
7. By his/her initials below, the subscriber acknowledges and agrees
that:
(1) THESE SECURITIES ARE NOT DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER AGENCY OR PERSON AND
ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL; (2)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE FDIC, THE NORTH CAROLINA BANKING COMMISSION, OR ANY
OTHER REGULATORY BODY, NOR HAS ANY REGULATORY BODY PASSED ON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS, AND THAT ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL; AND (3) SUBSCRIBER HAS RECEIVED A COPY OF THE PROSPECTUS BEFORE
SIGNING THIS SUBSCRIPTION OFFER.
If this Subscription Offer is being processed through a registered broker-dealer
that by execution hereof such broker-dealer is authorized to transfer sufficient
funds as indicated above from my account with such broker-dealer to First
Citizens Bank as Escrow Agent.
Instruction: Each subscriber must place initials on the line below to indicate
that he/she has read the above paragraphs.
_____________ (Subscriber's Initials) _____________ (Subscriber's Initials)
Subscriber has signed this Subscription Offer on the date indicated beside
his/her signature below, and hereby requests that certificates evidencing shares
of common stock purchased pursuant to this Subscription Offer be registered in
the name and form of ownership described below.
__________________________________(SEAL) _______________________________
(Signature) (Date)
__________________________________(SEAL) _______________________________
(Additional Signature, if required) (Date)
2
Complete all blanks on this Subscription Offer Form and make check or money
order in the amount of $_____ for each share subscribed payable to "First
Citizens Bank/Weststar Financial Services Corporation - Escrow Account" and mail
subscription and check to:
Weststar Financial Services Corporation
Attn: Escrow Agent
79 Woodfin Place
Asheville, North Carolina 28801-2426
Any questions concerning subscriptions or the offering may be directed to the
above address or to (828) 252-1735.
STOCK REGISTRATION INFORMATION
(PLEASE PRINT)
- --------------------------------------------------------------------------------
Name(s) in which stock is to be registered
- --------------------------------------------------------------------------------
Address (Street or Post Office Box)
- --------------------------------------------------------------------------------
City, State, and Zip Code
(---)----------------(---)------------------------------------------------------
Daytime Phone Evening Phone Taxpayer ID (Social Security Number)
Legal form of ownership:
( ) Individual ( ) Joint Tenants with Right of Survivorship
( ) Tenants in Common ( ) Uniform Transfers to Minors
( ) Other _______________
3
[OUTSIDE BACK COVER]
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Prospectus Summary
Risk Factors 410,000 Shares (Maximum)
Forward Looking Statements 117,600 Shares (Minimum)
Use of Proceeds
Market for Common Stock and Related
Shareholder matters [LOGO]
Dividend Policy
Capitalization WESTSTAR FINANCIAL SERVICES
Management's Discussion and Analysis of CORPORATION
Financial Condition and Results of Operations
Business
Management COMMON STOCK
Certain Relationships and Related Transactions
Supervision and Regulation
Description of Capital Stock
Method of Subscription/Plan of Distribution PROSPECTUS
Legal Opinions
Experts
Index to Financial Statements _____________, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes permit a
corporation to indemnify its directors, officers, employees or agents under
either or both a statutory or nonstatutory scheme of indemnification. Under the
statutory scheme, a corporation may, with certain exceptions, indemnify a
director, officer, employee or agent of the corporation who was, is, or is
threatened to be made, a party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (a) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (b) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification described above
under the statutory scheme, Section 55-8-57 of the North Carolina General
Statutes permits a corporation to indemnify or agree to indemnify any of its
directors, officers, employees or agents against liability and expenses
(including attorney's fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interests of the corporation. The
Bylaws of Weststar provide for indemnification to the fullest extent permitted
under North Carolina law for persons who serve as directors or officers of
Weststar, or at the request of Weststar serve as an officer, director, agent,
partner, trustee, administrator or employee for any other foreign or domestic
entity, except to the extent such activities were at the time taken known or
believed by the potential indemnities to be clearly in conflict with the best
interests of Weststar. Accordingly, Weststar may indemnify its directors,
officers or employees in accordance with either the statutory or non-statutory
standards.
Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes require a
corporation, unless its articles of incorporation provide otherwise, to
indemnify a director or officer who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina General Statutes provides that a
corporation may purchase and maintain insurance on behalf of an individual who
is or was a director, officer, employee or agent of the corporation against
certain liabilities incurred by such persons, whether or not the corporation is
otherwise authorized by the NCBCA to indemnify such party. Weststar has
purchased a standard directors' and officers liability policy which will,
subject to certain limitations, indemnify Weststar and its officers and
directors for damages they become legally obligated to pay as a result of any
negligent act, error, or omission committed by directors or officers while
acting in their capacity as such. Weststar may also purchase such a policy.
As permitted by North Carolina law, Article 5 of Weststar's Articles of
Incorporation limits the personal liability of directors for monetary damages
for breaches of duty as a director arising out of any legal action whether by or
in the right of Weststar or otherwise, provided that such limitation will not
apply to (i) acts or omissions that the director at the time of such breach knew
or believed were clearly in conflict with the best interests of Weststar, (ii)
any liability under Section 55-8-33 of the General Statutes of North Carolina,
or (iii) any transaction from which the director derived an improper personal
benefit (which does not include a director's reasonable compensation or other
reasonable incidental benefit for or on account of his service as a director,
officer, employee, independent contractor, attorney, or consultant of Weststar).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration Fee $ 920
NASD Fee 4,600
Sales Agent Commission (1) 50,000
Printing and Engraving Expenses (1) 8,000
Legal Fees and Expenses 50,000
Accounting Fees and Expenses (1) 15,000
Blue Sky Fees and Expenses (1) 1,500
Miscellaneous 2,500
--------
Total $132,520
(1) Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Weststar has sold no unregistered securities since it was chartered on February
8, 2000.
ITEM 27. INDEX TO EXHIBITS.
The following exhibits are filed with this Registration Statement:
Exhibit
Number Description
1.1 Sales Agency Agreement (previously filed)
1.2 Escrow Agreement (previously filed)
3.1 Articles of Incorporation of Weststar Financial Services
Corporation *
3.2 Bylaws of Weststar Financial Services Corporation *
4 Specimen Common Stock Certificate *
5 Opinion of Gaeta & Glesener, P.A. regarding the legality of the
securities being registered (previously filed )
10.1 Employment Agreement of G. Gordon Greenwood dated
February 9, 2000*
10.2 Employment Agreement of Randall C. Hall dated March 20, 1998*
10.3 401(k) Savings Plan of The Bank of Asheville *
21 Subsidiaries of Weststar Financial Services Corporation
(previously filed)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of Gaeta & Glesener, P.A. (contained in Exhibit 5 thereto)
24 Power of Attorney (previously filed)
27 Financial Data Schedule (previously filed)
* Incorporated by reference to the Registration Statement of Weststar
Financial Services Corporation on Form S-4, Registration No. 333-30200
as filed with the Securities and Exchange Commission on February 11,
2000.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Asheville, State of North
Carolina, on November 7, 2000.
WESTSTAR FINANCIAL SERVICES CORPORATION
By: /s/ G. Gordon Greenwood
G. Gordon Greenwood
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below on November 7, 2000 by the following persons in
the capacities indicated.
/s/ G. Gordon Greenwood
- --------------------------------------
G. Gordon Greenwood
President and Chief Executive Officer
/s/ Randall C. Hall
- --------------------------------------
Randall C. Hall
Executive Vice President
/s/ William E. Anderson*
- --------------------------------------
William E. Anderson
Director
/s/ Max O. Cogburn, Sr.*
- --------------------------------------
Max O. Cogburn, Sr.
Director
/s/ M. David Cogburn, Jr., M.D.*
- --------------------------------------
M. David Cogburn, Jr., M.D.
Director
/s/ Darryl J. Hart*
- --------------------------------------
Darryl J. Hart
Director
/s/ Carol L. King*
- --------------------------------------
Carol L. King
Director
/s/ Stephen L. Pignatiello*
- --------------------------------------
Stephen L. Pignatiello
Director
/s/ Kent W. Salisbury, M.D.*
- --------------------------------------
Kent W. Salisbury, M.D.
Director
/s/ Laura A. Webb*
- --------------------------------------
Laura A. Webb
Director
/s/ David N. Wilcox*
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David N. Wilcox
Director
* /s/ G. Gordon Greenwood
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By G. Gordon Greenwood
Attorney-in-Fact