UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
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Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
WESTSTAR FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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WESTSTAR FINANCIAL SERVICES CORPORATION
79 Woodfin Place
Asheville, North Carolina 28801
(828) 252-1735
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held
April 16, 2002
NOTICE is hereby given that the Annual Meeting of Shareholders of Weststar
Financial Services Corporation (the "Company") will be held as follows:
Place: Renaissance Asheville Hotel
Asheville, North Carolina
Date: April 16, 2002
Time: 3:00 p.m.
The purposes of the meeting are:
1. To elect three (3) members of the Board of Directors for three
(3) year terms.
2. To ratify the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for 2002.
3. To transact any other business that may properly come before the
meeting.
You are cordially invited to attend the meeting in person. However, even if you
expect to attend the meeting, you are requested to complete, sign and date the
enclosed appointment of proxy and return it in the envelope provided for that
purpose to ensure that a quorum is present at the meeting. The giving of an
appointment of proxy will not affect your right to revoke it or to attend the
meeting and vote in person.
By Order of the Board of Directors
/s/ G. Gordon Greenwood
-----------------------
G. Gordon Greenwood
President and Chief Executive Officer
March 6, 2002
WESTSTAR FINANCIAL SERVICES CORPORATION
79 Woodfin Place
Asheville, North Carolina 28801
(828) 252-1735
PROXY STATEMENT
Mailing Date: On or about March 6, 2002
ANNUAL MEETING OF SHAREHOLDERS
------------------------------
To Be Held
April 16, 2002
General
This Proxy Statement is furnished in connection with the solicitation of
the enclosed appointment of proxy by the Board of Directors of Weststar
Financial Services Corporation (the "Company") for the 2002 Annual Meeting of
Shareholders of the Company (the "Annual Meeting") to be held at the Renaissance
Asheville Hotel, Asheville, North Carolina, at 3:00 p.m. on April 16, 2002, and
any adjournments thereof.
Solicitation and Voting of Appointments of Proxy; Revocation
Persons named in the appointment of proxy as proxies to represent
shareholders at the Annual Meeting are W. Edward Anderson, Randall C. Hall and
Carol L. King. Shares represented by each appointment of proxy which is properly
executed and returned, and not revoked, will be voted in accordance with the
directions contained in the appointment of proxy. If no directions are given,
each such appointment of proxy will be voted FOR the election of each of the
three nominees for director named in Proposal 1 below and FOR Proposal 2. If, at
or before the time of the Annual Meeting, any nominee named in Proposal 1 has
become unavailable for any reason, the proxies will have the discretion to vote
for a substitute nominee. On such other matters as may come before the meeting,
the proxies will be authorized to vote shares represented by each appointment of
proxy in accordance with their best judgment on such matters. An appointment of
proxy may be revoked by the shareholder giving it at any time before it is
exercised by filing with Randall C. Hall, Secretary of the Company, a written
instrument revoking it or a duly executed appointment of proxy bearing a later
date, or by attending the Annual Meeting and announcing his or her intention to
vote in person.
Authorization to Vote on Adjournment and Other Matters
By signing a proxy, shareholders will be authorizing the proxyholders to
vote in their discretion regarding any procedural motions which may come before
the annual meeting. For example, this authority could be used to adjourn the
annual meeting in the Company believes it is desirable to do so. Adjournment or
other procedural matters could be used to obtain more time
before a vote is taken in order to solicit additional proxies or to provide
additional information to shareholders. However, proxies voted against the
Proposals will not be used to adjourn the annual meeting. The Company does not
have any plans to adjourn the meeting at this time, but intends to do so, if
needed, to promote shareholders interests.
Expenses of Solicitation
The Company will pay the cost of preparing, assembling and mailing this
Proxy Statement and other proxy solicitation expenses. In addition to the use of
the mails, appointments of proxy may be solicited in person or by telephone,
without additional compensation, by the officers, directors and employees of the
Company and its wholly-owned subsidiary, The Bank of Asheville (the "Bank").
Record Date
The close of business on February 15, 2002, has been fixed as the record
date (the "Record Date") for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting. Only those shareholders of record
on that date will be eligible to vote on the Proposals described herein.
Voting Securities
The voting securities of the Company are the shares of its common stock,
par value $1.00 per share, of which 9,000,000 shares are authorized, and
preferred stock, no par value, of which 1,000,000 shares are authorized. At
December 31, 2001, there were 869,721 shares of common stock and no shares of
preferred stock outstanding. There are approximately 800 holders of record of
the Company's common stock.
Voting Procedures; Votes Required for Approval
Each shareholder is entitled to one vote for each share held of record on
the Record Date on each director to be elected and on each other matter
submitted for voting. In accordance with North Carolina law, shareholders will
not be entitled to vote cumulatively in the election of directors at the Annual
Meeting.
In the case of Proposal 1 below, the three nominees receiving the greatest
number of votes shall be elected.
In the case of Proposal 2, for such Proposal to be approved, the number of
votes cast for approval must exceed the number of votes cast against the
Proposal. Abstentions and broker nonvotes will have no effect.
2
Ownership of Voting Securities
As of December 31, 2001, no shareholder known to management owned more than
5% of the Company's common stock. As of December 31, 2001, the beneficial
ownership of the Company's common stock, by directors individually, and by
directors and executive officers as a group, was as follows:
NAME OF AMOUNT AND NATURE OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP (1)(2) CLASS (3)
W. Edward Anderson 28,313 3.24
Asheville, NC
Max O. Cogburn, Sr. 17,636 2.02
Asheville, NC
M. David Cogburn, M.D. 20,152(4) 2.31
Asheville, NC
G. Gordon Greenwood 14,573 1.66
Asheville, NC
Darryl J. Hart 10,269 1.18
Asheville, NC
Carol L. King 14,605(5) 1.67
Asheville, NC
Stephen L. Pignatiello 14,346(6) 1.64
Asheville, NC
Kent W. Salisbury, M.D. 27,211(7) 3.11
Asheville, NC
Laura A. Webb 10,161(8) 1.17
Asheville, NC
David N. Wilcox 13,681 1.57
Asheville, NC
All Directors and Executive 177,404 19.46
Officers as a Group (11
persons)
(1) Except as otherwise noted, to the best knowledge of the Company'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 - 100 shares; and Ms. Webb - 990 shares.
(2) Included in the beneficial ownership tabulations are the following
options to purchase shares of common stock of the Company: Mr.
Anderson - 3,946 shares; Mr. M. Cogburn - 3,946 shares; Dr. Cogburn -
2,125 shares; Mr.
3
Greenwood - 6,600 shares; Mr. Hart - 3,946 shares; Ms. King - 3,946
shares; Pignatiello - 3,946 shares; Dr. Salisbury - 3,946 shares; Ms.
Webb - 2,125 shares; and Mr. Wilcox - 3,946 shares.
(3) The calculation of the percentage of class beneficially owned by each
individual and the group is based on a total of (i) 869,721 shares of
common stock outstanding as of December 31, 2001; and (ii) 41,992
options capable of being exercised before March 1, 2002.
(4) Includes 100 shares held by Dr. Cogburn's spouse.
(5) Includes 110 shares held by Ms. King as custodian for a minor child.
(6) Includes 6,130 shares held by Mr. Pignatiello as custodian for minor
children.
(7) Includes 1,210 shares the voting power of which is directed by Dr.
Salisbury.
(8) Includes 990 shares owned by Ms. Webb's spouse.
Reports of Changes in Beneficial Ownership
Directors and executive officers of the Company are required by federal law
to file reports with the Securities and Exchange Commission regarding the amount
of and changes in their beneficial ownership of the Company's Common Stock. To
the knowledge of the management of the Company based upon information supplied
to the Company by the directors and executive officers, all required reports of
directors and executive officers of the Company have been timely filed.
PROPOSAL 1: ELECTION OF DIRECTORS
---------------------------------
The Bylaws of the Company provide that its Board of Directors shall consist
of between eight and twelve members, as determined by the Board of Directors or
the shareholders, and, if there are nine or more directors, that they shall be
classified into three groups with staggered terms of three years in as equal
numbers as possible. The Board of Directors has set the number of directors of
the Company at ten. The three directors whose terms expire at the Annual Meeting
have been renominated to three-year terms:
Position(s) Director Principal Occupation
Name and Age Held Since and Business Experience During Past Five Years
- ------------ ---- ----- ----------------------------------------------
Max O. Cogburn, Sr. Director 1997 Attorney and Partner, Cogburn, Goosman, Brazil & Rose,
(74) P.A., Asheville, NC
Carol L. King Director 1997 CPA and President, Carol L. King & Associates, P.A.,
(56) Asheville, NC
David N. Wilcox Director 1997 Vice President, Wilcox Travel Agency, Inc., Asheville, NC
(41)
4
Incumbent Directors
The Company's Board of Directors includes the following directors whose
terms will continue after the Annual Meeting. The three nominees and the
incumbent directors also serve as directors of the Bank:
Director Term Principal Occupation
Name and Age Since Expires and Business Experience During Past Five Years
- ------------ ----- ------- ----------------------------------------------
W. Edward Anderson 1997 2004 Director, Hasco Mold Bases, Asheville, NC
(62)
M. David Cogburn, M.D. 1999 2003 President, Carolina Mountain Dermatology, P.A., Arden, NC
(46)
G. Gordon Greenwood 2000 2004 President and Chief Executive Officer of the Company and of
(55) the Bank, January, 2000-Present; Regional Market Manager,
Centura Bank, Asheville 1996-2000; Senior Vice
President/Commercial Loans, First Commercial Bank, 1983-1996.
Darryl J. Hart 1997 2004 Vice President and General Manager, Hart Funeral Services,
(40) Inc., Asheville, NC
Stephen L. Pignatiello 1997 2003 President, P. Comms International, LLC, Asheville, NC
(42)
Kent W. Salisbury, M.D. 1997 2003 Partner, Asheville Cardiology Associates, P.A., Asheville, NC
(58)
Laura A. Webb 1999 2003 President, Webb Investment Services, Inc., Asheville, NC,
(42) Vice President, R. Stanford Webb Agency, Asheville, NC
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" EACH OF THE
THREE NOMINEES FOR DIRECTOR OF THE COMPANY FOR TERMS OF THREE YEARS.
Director Relationships
Only one family relationship on the Board of Directors exists. Max O.
Cogburn, Sr. is the father of M. David Cogburn, M.D. No director is a director
of any corporation with a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934 (the "Exchange Act") or subject to the
requirements of Section 15(d) of the Exchange Act, or any company registered as
an investment company under the Investment Company Act of 1940.
5
Meetings and Committees of the Board of Directors
The Company's Board of Directors held thirteen regular meetings in 2001.
Except for Darryl J. Hart, all directors attended 75% or more of the aggregate
number of meetings of the Board of Directors and any committees on which he or
she served. The Board of Directors intends to meet monthly in 2002. The Board of
Directors has appointed several standing committees including an ALCO Committee,
an Audit Committee, Compensation Committee, an Executive Committee, a Loan
Committee and a Marketing Committee. Those committees will also meet on a
regular basis. The composition of each Committee is as follows:
ALCO Committee Audit Committee Compensation Committee
-------------- --------------- ----------------------
Max O. Cogburn, Sr. W. Edward Anderson W. Edward Anderson
G. Gordon Greenwood Max O. Cogburn, Sr. Max O. Cogburn, Sr.
Carol L. King M. David Cogburn, M.D. G. Gordon Greenwood
Kent W. Salisbury, M.D. Darryl J. Hart Carol L. King
Laura A. Webb Carol L. King Kent W. Salisbury, M.D.
Stephen L. Pignatiello David N. Wilcox
Executive Committee Loan Committee Marketing Committee
------------------- -------------- -------------------
W. Edward Anderson Max O. Cogburn, Sr. M. David Cogburn, M.D.
Max O. Cogburn, Sr. G. Gordon Greenwood G. Gordon Greenwood
G. Gordon Greenwood Darryl J. Hart Darryl J. Hart
Carol L. King Carol L. King Stephen L. Pignatiello
Kent W. Salisbury, M.D. Stephen L. Pignatiello Laura A. Webb
David N. Wilcox David N. Wilcox David N. Wilcox
Report of Audit Committee
The Audit Committee of the Company is responsible for receiving and
reviewing the annual audit report of the Company's independent auditors and
reports of examinations by bank regulatory agencies, and helping formulate,
implement, and review the Company's and its subsidiary's internal audit
programs.
During the course of its examination of the Company's audit process in
2001, the Audit Committee reviewed and discussed the audited financial
statements with management. The Audit Committee also discussed with the
independent auditors, Deloitte & Touche LLP, all matters required to be
discussed by the Statement of Auditing Standards No. 61, as amended.
Furthermore, the Audit Committee received from Deloitte & Touche LLP disclosures
regarding their independence required by the Independence Standards Board
Standard No. 1, as amended and discussed with Deloitte & Touche LLP their
independence.
Based on the review and discussions above, the Audit Committee recommended
to the Board of Directors that the audited financial statements be included in
the Company's annual report on Form 10-KSB for the year ended December 31, 2001
for filing with the Securities and Exchange Commission.
6
The Company is not a member of any exchange. However, the Audit Committee
members are "independent" as defined by the NASDAQ listing standards.
The Audit Committee has considered whether the principal accountant's
provisions of non-audit services to the Company is compatible with maintaining
independence of Deloitte & Touche LLP. The Audit Committee has determined that
it is compatible with maintaining the independence of Deloitte & Touche LLP.
Audit Fees
The aggregate fees billed by Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their respective affiliates (collectively,
"Deloitte") for professional services rendered for the audit of the Company's
annual financial statements for the fiscal year ended December 31, 2001 and for
the review of the financial statements included in the Company's Quarterly
Reports on Form 10-QSB for the fiscal year ended December 31, 2001 were $39,950.
Financial Information Systems Design and Implementation Fees
There were no professional services rendered by Deloitte for information
technology services relating to financial information systems design and
implementation for the fiscal year ended December 31, 2001.
All Other Fees
The aggregate fees and expenses billed by Deloitte for services rendered to
the Company, other than the services described above under "Audit Fees" for the
fiscal year ended December 31, 2001 were $7,180. This amount includes fees for
tax compliance and planning. This report is submitted by the Audit Committee,
the members of which are listed above.
Director Compensation
Directors received compensation of $100 for every meeting attended during
the fiscal year ended December 31, 2001.
The shareholders of the Company ratified the Weststar Financial Services
Corporation 2001 Nonqualified Stock Option Plan (the "Nonqualified Option Plan")
at the 2001 Annual Meeting of shareholders pursuant to which options on 70,070
shares of the Company's common stock are available for issuance to members of
the Company's Board of Directors. During 2001, options to purchase 69,300 shares
of the Company's common stock were granted under the Nonqualified Option Plan.
7
Executive Officers
Set forth below is certain information regarding the Company's executive
officers.
Position with
Name Age Company Business Experience
- ---- --- ------- -------------------
G. Gordon Greenwood 55 Director, President and Chief Executive Officer of the Company and
President and the Bank; Regional Market Manager, Centura Bank,
Chief Executive Asheville, 1996-2000; Senior Vice-President/Commercial
Officer Loans, First Commercial Bank, 1983-1996.
Randall C. Hall 36 Executive Vice Executive Vice President, Secretary, and Chief Financial
President, Officer of the Company and the Bank, 1997- Present; Vice
Secretary, and President, Secretary and Chief Financial Officer of Bank
Chief Financial of Granite Corp and Bank of Granite, 1988-1997.
Officer
Board Report on Executive Compensation
The Bank 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. 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 there is an
affirmative decision to renew 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 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, 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 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 or Mr. Greenwood. The employment
agreement provides that should the Bank 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 is moved outside of Asheville, North Carolina, then he shall receive a
lump sum equal to two hundred ninety-nine percent (299%) of his "base amount" as
determined by Section 280G of the Internal Revenue Code of 1986. 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,
8
of securities of the Bank representing thirty-five percent (35%) or more of the
voting power of the Bank's now 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; (iii) the merger of the Bank into
another entity or the merger of any entity into the Bank without the Bank being
the survivor; or (iv) the acquisition of substantially all of the assets of the
Bank by another corporation.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
All
Other
LTIP Compen-
Year 1 Salary Bonus Options Payouts 2 sation 3
Name and ------ ------ ----- ------- --------- --------
Principal Position
- ------------------
G. Gordon Greenwood, 2001 $126,021 $13,000 33,000 $546 $6,603
President and Chief 2000 112,050 -0- -0- 506 1,202
Executive Officer
(1) Mr. Greenwood became employed by the Bank in February, 2000.
(2) Includes taxable benefit on group term insurance
(3) Consists of 401(k) contribution
Stock Options
At the Company's 2001 Annual Meeting, the shareholders approved the
adoption of the Weststar Financial Services Corporation 2001 Incentive Stock
Option Plan which provides for the issuance of up to 70,070 options to purchase
shares of the Company's common stock. The following table sets forth information
regarding grants of Incentive Stock Options to Mr. Greenwood during the fiscal
year ended December 31, 2001.
Option Grants in Fiscal Year 2001
(Individual Grants)
Number of Securities
Underlying % of Total Options Exercise or Expiration
Name Options Granted (1) Granted to Employees Base Price $/Share) Date
---- ------------------- -------------------- ------------------- ----
G. Gordon Greenwood 33,000 47.1% $7.77 June 20, 2011
9
(1) Such Incentive Stock Options are subject to a four year vesting schedule
with 20 percent of such options immediately vested upon grant and 20
percent of such options vesting on each anniversary of the date of grant.
The following table sets forth information regarding option exercises and
option values as of the end of the fiscal year ended December 31, 2001.
Aggregated Option Exercises in Fiscal Year 2001
And Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at December 31, Options at December 31,
Acquired 2001 2001(1)
on Value ----------------------------- ------------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- --------
----------------------------- ------------------------------
G. Gordon Greenwood -0- -0- 6,600 / 26,400 $3,168 / $12,672
(1) The Company's stock price on December 31, 2001 was $ 8.25 per share.
401(k) Savings Plan
The Company has no employees who are not also employees of the Bank. Hence,
the 401(k) Savings Plan of the Bank covers all employees of the Company. In
1998, the Bank adopted a tax-qualified savings plan (the "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 employer. 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 (the "Code"), as amended. The employer 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 employer. A participant's
contributions and the employer'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 employer's matching and profit sharing contributions after completing five
years of service with the employer. 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 reason, or becomes
payable to a designated beneficiary upon a participant's death. The savings plan
also will contain provisions or withdrawals in the event of certain hardships. A
participant's contributions, vested matching and profit sharing contributions of
the employer, and any income accrued on such contributions, are subject to
federal or state taxes until such time as they are withdrawn by the participant.
10
Indebtedness of and Transactions with Management
The Bank 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.
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.
PROPOSAL 2: RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of Deloitte & Touche LLP as
the Company's independent public accountants for 2002. A representative of
Deloitte & Touche LLP is expected to be present at the Annual Meeting and
available to respond to appropriate questions, and will have the opportunity to
make a statement if he desires to do so.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION
OF Deloitte & TOUCHE LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR
2002.
OTHER MATTERS
-------------
The Board of Directors knows of no other business that will be brought
before the Annual Meeting. Should other matters properly come before the
meeting, the proxies will be authorized to vote shares represented by each
appointment of proxy in accordance with their best judgment on such matters.
PROPOSALS FOR 2003 ANNUAL MEETING
---------------------------------
It is anticipated that the 2003 Annual Meeting will be held on a date
during April 2003. Any Proposal of a shareholder which is intended to be
presented at the 2003 Annual Meeting must be received by the Company at its main
office in Asheville, North Carolina no later than November 15, 2002, in order
that any such Proposal be timely received for inclusion in the proxy statement
and appointment of proxy to be issued in connection with that meeting. If a
Proposal for the 2003 Annual Meeting is not expected to be included in the proxy
statement for that meeting, the Proposal must be received by the Company by
February 15, 2003 for it to be timely received for consideration. The Company
will use its discretionary authority for any Proposals received thereafter.
11
MANAGEMENT'S
DISCUSSION &
ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion relates to the operations for the years ended December
31, 2001, 2000 and 1999.
For the Year Ended December 31, 2001 Compared to
the Year Ended December 31, 2000
Interest income, the primary source of revenue for the Company, 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 drive interest income. Interest income totaled $6,135,208 for the year
ended December 31, 2001 compared to $5,273,594 in 2000. Growth in interest
income was attributable to growth in interest-earning assets; the average
balance of interest-earning assets increased from $51,007,637 in 2000 to
$71,963,747 in 2001 or 41%. Interest expense, derived from interest-bearing
liabilities such as deposits and borrowed funds, totaled $2,742,677 in 2001
compared to $2,175,502 in 2000. The increase in interest expense was primarily
attributable to growth in interest-bearing liabilities. The average balance of
interest-bearing liabilities grew from $42,327,350 in 2000 to $58,868,331 in
2001 or 39%. The following table sets forth the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in the
volume of interest-earning assets and interest-bearing liabilities and from
changes in yields and rates.
Interest and Rate/Volume Variance
For the Year Ended December 31, 2001
2001 Compared to 2000
Volume Rate Total
Interest-bearing deposits in other banks $ 4,417 $ (283) $ 4,134
Investment securities 134,891 (32,499) 102,392
Federal funds sold 152,490 (60,988) 91,502
Loans 1,523,354 (859,768) 663,586
Increase in interest income $ 1,815,152 $ (953,538) $ 861,614
=========== =========== ===========
Interest-bearing deposits $ 959,589 $ (301,428) $ 658,161
Borrowings (76,512) (14,474) (90,986)
----------- ----------- -----------
Increase in interest expense $ 883,077 $ (315,902) $ 567,175
=========== =========== ===========
(1) The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variance.
Other operating income totaled $1,187,168 in 2001 compared to $532,575 in 2000.
Service charge fees on deposit accounts and other fees and commissions earned
account for the majority of non-interest income. During 2001, the Company earned
$803,478 from service charges on deposit accounts compared to $360,756 in 2000,
an increase of 123%. In addition
13
to growth in deposits, the implementation of a new deposit service resulted in
the increase in service charge income. Other service fees and commissions,
including fees from the origination of mortgage loans, totaled $334,621 in 2001
compared to $160,179 in 2000. Mortgage loan fees accounted for $192,960 or 58%
of other fees and commissions during 2001 compared to $40,239 or 25% of other
fees and commissions during 2000. Other income, primarily the fees from the
sales of checks and deposit slips and recoveries other than loans, provided
additional income of $49,069 in 2001 compared to $11,640 in 2000. Other expenses
totaled $2,994,649 in 2001 compared to $2,548,579 in 2000. Expenses increased as
a result of increased personnel expense and increased supplies expense to
process the bank's growth in loans and deposits. Salaries and benefits accounted
for $1,426,729 in 2001 or 48% of other expenses compared to $1,209,456 or 47% in
2000. Equipment expenses totaled $259,628 in 2001 compared to $232,735 in 2000.
The increase in equipment expense reflects the Company's desire to provide state
of the art technology for customer service. Other non-interest expenses of
$1,308,292 in 2001 compared to $1,106,388 in 2000 included sundry items such as
marketing, accounting, occupancy, insurance, and data processing. In 2001, the
Company recorded $434,030 in income tax expense. During 2000, the Company
recognized an income tax benefit of $320,154 primarily related to the release of
a valuation allowance of $543,000 previously recorded against deferred tax
assets, net of income taxes related to operations for the year ended December
31, 2000. 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 believed the realization of the deferred tax asset was
more likely than not. The valuation allowance was reversed in the first quarter
of 2000, thereby providing a deferred tax benefit. Net income for 2001 totaled
$600,600 compared to $947,282 in 2000 or $.71 per share and $1.36 per share for
2001 and 2000, respectively. The return on average assets and equity,
respectively, were .77% and 8.07% for 2001 compared to 1.68% and 16.39% in 2000.
Comprehensive income, which is the change in equity during a period excluding
changes resulting from investments by shareholders and distributions to
shareholders, totaled $639,477 in 2001 compared to $952,763 in 2000.
NET INTEREST INCOME
Net interest income (the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, primarily deposits)
represents the most significant portion of the Company's earnings. It is
management's on-going policy to maximize net interest income, while maintaining
an acceptable level of risk. Net interest income totaled $3,392,531 in 2001
compared to $3,098,092 in 2000. The Company's net yield on earning assets was
4.7% and 6.1% for the years 2001 and 2000, respectively. During 2001, the
Federal Reserve Bank decreased its discount rate by 475 basis points, which
resulted in an overall decreased net yield on earning assets for the Company.
The Company continues efforts to maximize this spread by management of both loan
and deposit rates in order to support the overall earnings growth. The following
table presents the daily average balances, interest income / expense and average
rates earned and paid on interest-earning assets and interest-bearing
liabilities of the Company.
14
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
For the Years Ended December 31, 2001 and 2000
2001 2000
Interest Interest
Average Average Income/ Average Average Income/
Balance Rate Expense Balance Rate Expense
ASSETS:
Loans (1) $ 63,318,525 9.1% $ 5,734,776 $ 47,822,498 10.6% $ 5,071,190
Taxable securities 4,452,785 5.4% 241,278 2,191,380 6.4% 140,816
Tax-exempt securities (2) 60,460 4.8% 1,930 - - -
Federal funds sold 4,037,962 3.8% 151,459 969,082 6.2% 59,957
Interest-bearing deposits 94,015 6.1% 5,765 24,677 6.6% 1,631
-------------- ------------ ------------ ------------
Total interest-earning assets 71,963,747 8.5% 6,135,208 51,007,637 10.3% 5,273,594
------------- ------------
-------------- ------------
All other assets 5,863,532 5,355,536
-------------- ------------
Total assets $ 77,827,279 $ 56,363,173
--------------
Liabilities and Shareholders' Equity:
Interest-bearing deposits $ 58,796,429 4.7% $ 2,738,809 $ 41,073,052 5.1% $ 2,080,648
Other borrowings 71,902 5.4% 3,868 1,254,298 7.6% 94,854
-------------- ------------ ------------ ------------
Total interest-bearing liabilities 58,868,331 4.7% 2,742,677 42,327,350 5.1% 2,175,502
Other liabilities 11,519,306 8,256,448
Shareholders' equity 7,439,642 5,779,375
-------------- ------------
Total liabilities and shareholders' equity $ 77,827,279 $ 56,363,173
-------------- ------------
Net yield on earning-assets and net
Interest income (3) 4.7% $ 3,392,531 6.1% $ 3,098,092
------------ ------------
Interest rate spread (4) 3.8% 5.2%
(1) Non-accrual loans have been included.
(2) Yields on tax-exempt securities have been tax effected using a 34% tax rate.
(3) Net yield on earning assets is computed by dividing net interest earned by
average earning assets.
(4) The interest rate spread is the interest-earning assets rate less the
interest-bearing liabilities rate.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objectives of the Company's liquidity management policy include providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for on-going operation of the
Company and regulatory requirements. Liquidity requirements of the Company are
met primarily through two categories of funds. The first is core deposits, which
includes demand deposits, savings accounts and certificates of deposits. The
Company considers these to be a stable portion of the Company's liability mix
and results of on-going stable commercial and consumer banking relationships. At
December 31, 2001 and 2000 core deposits totaled $62,065,371 or 86% and
$56,473,479 or 89%, respectively, of the Company's total deposits.
The other principal methods of funding utilized by the Company are through large
denomination certificates of deposit, federal funds purchased and other
short-term
15
borrowings. Upstream correspondent banks, including the Federal Home Loan Bank
of Atlanta, have made available to the Company lines of credit of approximately
$11.6 million. Funding can also be borrowed from the Federal Reserve Bank's
discount window. Funds borrowed from the Federal Reserve Bank are based upon a
percentage of the underlying collateral. The Company has not incurred a need to
borrow from the Federal Reserve Bank, as a result no securities have been
allocated to secure borrowings. The Company's policy is to emphasize core
deposit growth rather than growth through purchased or brokered liabilities as
the cost of these funds are greater.
The Company'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 Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company'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.
As a part of its interest rate risk management policy, the Company 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 December 31, 2001, 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
16
interest rate sensitivity of the Company'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.
17
1 - 90 91 - 180 181 - 365 Total Non-
Days Days Days One Year Sensitive Total
Interest-earning assets:
Interest bearing deposits $ 36,115 $ 36,115 $ 36,115
Federal funds sold 1,585,000 1,585,000 1,585,000
Investment securities -- $ 750,000 750,000 $ 6,043,328 6,793,328
Federal Home Loan
Bank stock -- -- -- 229,800 229,800
Loans 48,536,873 $ 1,736,309 2,823,386 53,096,568 12,134,414 65,230,982
---------- ------------ --------- ---------- ---------- ----------
Total interest-earning assets 50,157,988 1,736,309 3,573,386 55,467,683 18,407,542 73,875,225
Interest-bearing liabilities:
Time deposits 18,197,519 7,829,318 5,520,923 31,547,760 450,801 31,998,561
All other deposits 25,890,653 -- -- 25,890,653 -- 5,890,653
---------- ------------ --------- ---------- ---------- ----------
Total interest-
bearing liabilities 44,089,173 7,829,318 5,520,923 57,438,413 $ 450,801 $ 57,889,214
Interest sensitivity gap $ 6,069,816 $ (6,093,009) $ (1,947,537) $ (1,970,730)
Cumulative interest
sensitivity gap $ 6,068,816 $ (23,193) $ (1,970,730)
Interest-earning assets
as a percent of interest
sensitive liabilities 113.8% 22.2% 64.7% 96.6%
The Company has established an acceptable range of 80% to 120% for
interest-earning assets as a percent of interest sensitive liabilities.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
AS OF DECEMBER 31, 2001
Within One to Five
One Five Years
Year Years or More
Real estate - Construction $10,703,788 $ 435,800
Real estate - Mortgage 20,779,534 12,575,680 $ 1,833,796
Predetermined rate, maturity
greater than one year 13,011,480 1,833,796
Variable rate or maturing within
one year 31,483,322 -- --
The Company paid an average rate of 4.6% on interest-bearing deposits during
2001 compared to 5.1% during 2000. Significant growth in deposits came from
interest-bearing accounts. Interest-bearing accounts grew by $5,339,370 with
interest-bearing transaction and savings accounts accounting for $5,186,165 or
97%. Increased customer awareness of interest rates increases the importance of
rate management by the Company. The Company's management continuously monitors
market pricing, competitor rates, and profitability. Deposits continue to be the
principal source of funds for continued growth, so the Company attempts to
structure its rates so as to promote deposit and asset growth while at the same
time
18
increasing overall profit management. The daily average amounts of deposits of
the Company are summarized below.
Average Deposits
For the Year Ended December 31, 2001
Non-interest bearing deposits $ 9,874,195
Interest-bearing 59,813,140
-----------
Total $69,687,335
===========
The above table includes deposits of $100,000 and over which at December 31,
2001 totaled $10,066,980. The table below presents the maturities of these
deposits of $100,000 or more.
Maturities of Deposits of $100,000 or More
December 31, 2001
Greater
Within Within Within Than
Three Six Twelve One
Months Months Months Year
Time deposits of $100,000 or more $6,050,084 $1,753,166 $2,263,730 $ --
CAPITAL RESOURCES
As of December 31, 2001 and 2000, the Company's ratio of total capital to
risk-adjusted assets was 13.79%, and 12.01%, respectively. Average capital to
average assets totaled 9.56% and 10.25% at December 31, 2001 and 2000,
respectively. During the fourth quarter of 2000 the Company began a secondary
stock offering, which was completed out on February 28, 2001. The Company issued
157,397 shares and raised $1,221,910 in net capital. Proceeds generated during
the offering are being used to enhance capital and liquidity positions, fund
expansion plans, including the establishment of additional branch offices in and
around Buncombe County, and for general corporate purposes. The Company remains
well capitalized and with the capital generated during the secondary offering
fully expects to be able to meet future capital needs caused by growth and
expansion as well as regulatory requirements. The Company is not aware of any
current recommendation by regulatory authorities, which if implemented would
materially affect the Company's liquidity, capital resources or operations.
LOANS
The Company makes loans within its market area, defined as Asheville and
Buncombe County, North Carolina. It makes both commercial and consumer loans.
Total loans outstanding at December 31, 2001 and 2000 were $65,230,982 and
$60,292,631, respectively. The Company places emphasis on consumer loans and
commercial loans to small businesses and professionals. The Company has a
diversified loan portfolio with no concentration to any one borrower or
industry. The amounts and types of loans outstanding for the years ended
December 31, 2001 and 2000 are as follows:
19
2001 2000
LOANS
Real estate
Construction $ 11,139,588 $ 8,894,309
Mortgage 35,189,010 32,332,304
Commercial, financial and agricultural 16,512,498 17,939,971
Consumer 2,553,710 1,338,067
Total loans 65,394,806 60,504,651
Deferred origination fees, net (163,824) (212,020)
------------ ------------
Total loans, net of deferred fees $ 65,230,982 $ 60,292,631
============ ============
Commercial, consumer and real estate mortgage loans of $54,255,218 and
$51,610,342 at December 31, 2001 and 2000, respectively, are loans for which the
principal source of repayment is derived from the ongoing cash flow of the
business or individual. Real estate construction loans of $11,139,588 and
$8,894,309 at December 31, 2001 and 2000, respectively, are loans for which the
principal source of repayment comes from the sale of real estate or from
obtaining permanent financing.
The Company 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 are issued at then current market rates and have fixed expiration
dates of 1 year 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 Company to
assure the performance of a customer to a third party. The unused portion of
commitments to extend credit at December 31, 2001 and 2000 was $19,280,406 and
$16,143,800, respectively.
Non-accrual loans totaled $1,050,813, and $522,137 at December 31, 2001 and
2000, respectively. If interest from non-accrual loans had been recognized in
accordance with the original terms of the loans, net income for 2001 and 2000
would not have been materially different from the amounts reported. The increase
in non-accrual loans was primarily attributable to a small number of larger
balance loans, which experienced deterioration in performance.
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed hereunder, or under "loans" or
"Asset Quality" narrative discussions do not (i) represent or result from trends
or uncertainties that management expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information that causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
20
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 $605,006 and
$199,650 at December 31, 2001 and 2000, respectively. The increase in impaired
loans, reflects a small number of larger balance loans, which experienced
deterioration in asset quality. The average recorded balance of impaired loans
during 2001 was not significantly different from the balance at December 31,
2001 and 2000. The related allowance for loan losses determined in accordance
with SFAS No. 114 for impaired loans was $68,353 and $86,152 at December 31,
2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, the
Company recognized interest income from impaired loans of $40,272 and $27,993,
respectively.
Loans are considered impaired when based on current information, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement, including interest payments. Impaired
loans are carried at the lower of the recorded investment in the loan, the
estimated present value of the total expected future cash flows, discounted at
the loan's effective rate or the fair value of the collateral, if the loan is
collateral dependent.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management considers the Company's asset quality to be of primary importance.
The allowance for loan losses, which is utilized to absorb losses inherent in
the loan portfolio, is maintained at a level sufficient to provide for estimated
potential charge-offs of non-collectible loans. The loan portfolio is analyzed
periodically 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. This
methodology is based upon management's periodic review of the collectibility of
the loans in light of the current status of the portfolio, historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. Because the Company has been in
existence for a relatively short time, and therefore has a limited history,
management has also considered in applying its analytical methodology the loss
experience and allowance levels of other peer community banks and the historical
experiences encountered by the Company's management and senior lending officers.
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 non-performing 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 judgement, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
developed in the following way.
21
- - 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.
- - Pass graded loan loss factors are based on average annual net charge-offs
rate over a period believed to be 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 allowance for loan losses is a significant estimate that can and does change
based upon management's process in analyzing the laon portfolio and on
management's assumptions about specific borrowers and applicable economic and
environmental conditions. Specific reserves are affected by the underlying
quality of the collateral securing the loans. General reserves reflect changes
in market conditions, similar types of loans or loans among a similar group,
changes in regulations and laws, among other factors.
The Company 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 relative 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, the
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.
The provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
The allowance for loan losses at December 31, 2001 and 2000 was $978,467 and
$871,706 or 1.50% and 1.45%, respectively, of gross loans outstanding. The ratio
of net charge-offs to average loans outstanding during the year was .70% and
.23%, during 2001 and 2000, respectively. This ratio reflects management's
conservative lending and effective efforts to recover credit losses.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
2001 2000
Balance at beginning of year $ 871,706 $ 528,808
Loans charged-off:
Commercial, financial and agricultural (373,087) (112,062)
Real estate: Mortgage (90,275) --
22
Consumer (27,238) --
Total charge-offs (490,600) (112,062)
Recoveries of loans previously charged -off:
Commercial, financial and agricultural 45,270
Consumer 1,671 --
Total recoveries 46,941 --
Net charge-offs (443,659) (112,062)
Additions charged to operations 550,420 454,960
Balance at end of year $ 978,467 $ 871,706
Ratio of net charge-offs during the year to
average loans outstanding during the year .70% .23%
The Company does not have any significant loan concentrations. During the
period, loan terms remained relatively unchanged, and loan quality reflected
slight deterioration. However, the magnitude did not result in a 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 2001, there were no changes in the 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.
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.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2001 and 2000
2001 2000
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
Real estate $645,743 71% $553,337 68%
Commercial, financial and agricultural 280,653 25% 278,879 30%
Consumer 19,381 4% 15,822 2%
Unallocated 32,690 -- 23,668 --
-------- --- -------- ---
Total allowance $978,467 100% $871,706 100%
======== === ======== ===
INVESTMENT SECURITIES
At December 31, 2001 and 2000, securities carried at market value totaled
$6,859,668 and $2,022,608, respectively, with amortized costs of $6,793,328 and
$2,019,607, respectively. All investment securities are available for sale.
Securities available for sale are securities
23
which will be held for an indefinite period of time, including securities that
management intends to use as part of its asset/liability management strategy, or
that may be sold in response to changes in interest rates, changes in prepayment
risk or the need to increase regulatory capital or other similar factors.
MATURITIES AND YIELDS OF DEBT SECURITIES
December 31, 2001 and 2000
December 31, 2001
Available for sale: (1)
Type
Certificates of deposit due - within 1 year $ 750,000 4.6%
U.S. Government agencies due - 1 to 5 years 5,782,333 4.7%
N.C. Municipal bonds due - 5 to 10 years (2) 260,995 5.9%
---------- ---
Total $6,793,328 4.8%
========== ===
24
December 31, 2000
Available for sale: (1)
Type
Within
1 Year Yield
U.S. Treasury Notes $ 745,990 6.4%
U.S. Government Agencies 1,273,617 6.6%
---------- ---
Total $2,019,607 6.6%
========== ===
(1) Securities available for sale are stated at amortized cost. (2) Yields on
tax-exempt securities reflect tax equivalent yields using 34% tax rate.
For the Year Ended December 31, 2000 Compared to
the Year Ended December 31, 1999
Interest income, the primary source of revenue for the Company, 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 drive interest income. Interest income totaled $5,273,594 for the year
ended December 31, 2000 compared to $2,760,318 in 1999. Growth in interest
income was primarily attributable to growth in interest-earning assets; the
average balance of interest-earning assets increased from $30,211,789 in 1999 to
$51,007,637 in 2000 or 69%. Interest expense, derived from interest-bearing
liabilities such as deposits and borrowed funds, totaled $2,175,502 for 2000
compared to $1,128,641 for 1999. The increase in interest expense was primarily
attributable to growth in interest-bearing liabilities. The average balance of
interest-bearing liabilities grew from $24,825,935 in 1999 to $42,327,350 in
2000 or 70%. The following table sets forth the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in the
volume of interest-earning assets and interest-bearing liabilities and from
changes in yields and rates.
Interest and Rate/Volume Variance
For the Year Ended December 31, 2000
2000 Compared to 1999
Volume Rate Total
Interest-bearing deposits in other banks $ (55) $ 475 $ 420
Investment securities (20,158) 37,030 16,872
Federal funds sold (102,608) 19,610 (82,998)
Loans 2,368,932 210,050 2,578,982
----------- ----------- -----------
Increase in interest income $ 2,246,111 $ 267,165 $ 2,513,276
=========== =========== ===========
Interest-bearing deposits $ 831,553 $ 122,073 $ 953,626
Borrowings 80,195 13,040 93,235
----------- ----------- -----------
Increase in interest expense $ 911,748 $ 135,113 $ 1,046,861
=========== =========== ===========
25
(1) The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variance.
Other operating income totaled $532,575 in 2000 compared to $414,864 in 1999.
Service charge fees on deposit accounts and other fees and commissions earned
account for the majority of non-interest income. During 2000, the Company earned
$360,756 from service charges on deposit accounts compared to $272,911 in 1999,
an increase of 32%. Other service fees and commissions, including fees from the
origination of mortgage loans, totaled $160,179 in 2000 compared to $131,316 in
1999. Mortgage loan fees accounted for $40,239 or 25% of other fees and
commissions during 2000 compared to $50,339 or 38% of other fees and commissions
during 1999. Other income, primarily the fees from the sales of checks and
deposit slips, provided additional income of $11,640 in 2000 compared to $10,637
in 1999. Other expenses totaled $2,548,579 in 2000 compared to $2,018,808 in
1999. 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 benefits accounted for $1,209,456 in 2000 or
47% of other expenses compared to $1,049,339 or 52% in 1999. Equipment expenses
totaled $232,735 in 2000 compared to $201,738 in 1999. Other non-interest
expenses of $967,875 in 2000 compared to $688,451 in 1999 included sundry items
such as marketing, accounting, insurance, and data processing. The Company
recognized an income tax benefit of $320,154 primarily related to the release of
a valuation allowance of $543,000 previously recorded against deferred tax
assets, net of income taxes related to operations for the year. 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. Net income for 2000 totaled $947,282 compared to a net
loss of $249,653 in 1999 or $1.50 per share and $(.41) per share for 2000 and
1999, respectively. The return on average assets and equity, respectively, were
1.68% and 16.39% for 2000 compared to (.74%) and (5.05%) in 1999. Comprehensive
income (loss), which is the change in equity during a period excluding changes
resulting from investments by shareholders and distributions to shareholders,
totaled $952,763 in 2000 compared to $(251,596) in 1999.
NET INTEREST INCOME
Net interest income (the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, primarily deposits)
represents the most significant portion of the Company's earnings. It is
management's on-going policy to maximize net interest income. Net interest
income totaled $3,098,092 in 2000 compared to $1,631,677 in 1999. The Company's
net yield on earning assets was 6.1% and 5.4% for 2000 and 1999, respectively.
The Company continues efforts to maximize this spread by management of both loan
and deposit rates in order to support the overall earnings growth. The following
table
26
presents the daily average balances, interest income / expense and average rates
earned and paid on interest-earning assets and interest-bearing liabilities of
the Company.
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
For the Years Ended December 31, 2000 and 1999
2000 1999
Interest Interest
Average Average Income/ Average Average Income/
Balance Rate Expense Balance Rate Expense
ASSETS:
Loans (1) $ 47,822,498 10.6% $ 5,071,190 $ 24,857,014 10.0% $ 2,492,208
Taxable securities 2,191,380 6.4% 140,816 2,548,495 4.7% 123,944
Federal funds sold 969,082 6.2% 59,957 2,780,640 5.1% 142,955
Interest-bearing deposits 24,677 6.6% 1,631 25,640 4.7% 1,211
------------- ------------ ------------- ------------
Total interest-earning assets 51,007,637 10.3% 5,273,594 30,211,789 9.1% 2,760,318
------------ ------------
------------- -------------
All other assets 5,355,536 3,617,418
------------- -------------
Total assets $ 56,363,173 $ 33,829,207
-------------
-------------
Liabilities and Shareholders' Equity:
Interest-bearing deposits $ 41,073,052 5.1% $ 2,080,648 $ 24,796,661 4.6% $ 1,127,022
Other borrowings 1,254,298 7.6% 94,854 29,274 5.5% 1,619
------------- ------------ ------------- ------------
Total interest-bearing liabilities 42,327,350 5.1% 2,175,502 24,825,935 4.6% 1,128,641
Other liabilities 8,256,448 4,067,281
Shareholders' equity 5,779,375 4,935,991
------------- -------------
Total liabilities and shareholders' equity $ 56,363,173 $ 33,829,207
------------- -------------
Net yield on earning-assets and net
Interest income (2) 6.1% $ 3,098,092 5.4% $ 1,631,677
------------ ------------
Interest rate spread (3) 5.2% 4.5%
(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.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objectives of the Company's liquidity management policy include providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for on-going operation of the
Company and regulatory requirements. Liquidity requirements of the Company are
met primarily through two categories of funds. The first is core deposits, which
includes demand deposits, savings accounts and certificates of deposits. The
Company considers these to be a stable portion of the Company's liability mix
and results of on-going stable commercial and consumer banking relationships. At
December 31, 2000 and 1999 core deposits totaled $56,473,479 or 89% and
$32,300,296 or 85%, respectively, of the Company's total deposits.
27
The other principal method of funding utilized by the Company is through large
denomination certificates of deposit, federal funds purchased and other
short-term borrowings. The Company's policy is to emphasize core deposit growth
rather than growth through purchased or brokered liabilities as the cost of
these funds are greater.
The Company'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 Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company'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.
As a part of its interest rate risk management policy, the Company 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 December 31, 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
Company'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.
28
1 - 90 91 - 180 181 - 365 Total Non
Days Days Days One Year Sensitive Total
Interest-earning assets:
Interest bearing deposits $ 352,394 $ 352,394 $ 352,394
Federal funds sold 900,000 900,000 900,000
Investment securities 773,500 $ 500,102 $ 746,005 2,019,607 2,019,607
Federal Home Loan
Bank stock -- -- -- -- $ 225,000 225,000
Loans 40,691,994 3,213,275 2,492,293 46,397,562 13,895,069 60,292,631
Total interest-earning assets 42,717,888 3,713,377 3,238,298 49,669,563 14,120,069 63,789,632
Interest-bearing liabilities:
Time deposits 5,260,485 6,167,576 15,745,955 27,174,016 4,671,340 31,845,356
All other deposits 20,704,488 -- -- 20,704,488 -- 20,704,488
---------- ---------- ---------- ---------- ---------- ----------
Total interest-
bearing liabilities 25,964,973 6,167,576 15,745,955 47,875,504 $ 4,671,340 $ 52,549,844
Interest sensitivity gap $ 16,752,915 $ (2,454,199) $(12,504,657) $ 1,794,059
Cumulative interest
sensitivity gap $ 16,752,915 $ 14,298,716 $ 1,794,059
Interest-earning assets
as a percent of interest
sensitive liabilities 164.5% 60.2% 20.6% 103.8%
The Company has established an acceptable range of 80% to 120% for
interest-earning assets as a percent of interest sensitive liabilities.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
AS OF DECEMBER 31, 2000
Within One to Five
One Five Years or
Year Years More
Real estate - Construction $ 8,204,279 $ 690,030
Real estate - Mortgage 20,402,621 11,598,738 $ 330,945
Predetermined rate, maturity
greater than one year 12,252,268 316,258
Variable rate or maturing within
one year 28,606,900 36,500 14,687
The Company paid an average rate of 5.1% on interest-bearing deposits during
2000 compared to 4.6% during 1999. Significant growth in deposits came from
interest-bearing accounts. Interest-bearing accounts grew by $19,409,745 with
time deposits accounting for $13,066,655 or 67%. Increased customer awareness of
interest rates increases the importance of rate management by the Company. The
Company's management continuously monitors market pricing, competitor rates, and
profitability. Deposits continue to be the principal source of funds for
continued growth, so the Company attempts to structure its rates so as to
promote deposit and asset growth while at the same time increasing overall
profit management. The daily average amounts of deposits of the Company are
summarized below.
29
Average Deposits
For the Year Ended December 31, 2000
Non-interest bearing deposits $ 7,748,195
Interest-bearing 41,073,052
----------
Total $48,821,247
===========
The above table includes deposits of $100,000 and over which at December 31,
2000 totaled $6,729,107. The table below presents the maturities of these
deposits of $100,000 or more.
Maturities of Deposits of $100,000 or More
December 31, 2000
Greater
Within Within Within Than
Three Six Twelve One
Months Months Months Year
Time deposits of $100,000 or more $2,613,897 $1,235,154 $1,872,430 $1,007,626
CAPITAL RESOURCES
As of December 31, 2000 and 1999, the Company's ratio of total capital to
risk-adjusted assets was 12.01%, and 17.13%, respectively. Average capital to
average assets totaled 10.25% and 14.60% at December 31, 2000 and 1999,
respectively. During the fourth quarter of 2000, the Company began a secondary
stock offering. The Company 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. Proceeds, net of estimated expenses of the offering, would generate a
minimum of $981,680 and a maximum of $3,759,480 in capital. At December 31, 2000
approximately $328,396 in subscriptions had been received, representing
subscriptions for 34,568 shares. In January 2001, the Board of Directors elected
to extend the offer until February 28, 2001 and lowered the offering price from
$9.50 to $8.00 as a result of suppressed capital markets. In addition, the
minimum and maximum number of shares to be offered were changed to 62,500 and
486,800, respectively. Proceeds generated during the offer will be used to
enhance capital and liquidity positions, fund expansion plans, including the
establishment of additional branch offices in and around Buncombe County, and
for general corporate purposes. The Company remains well capitalized and with
the capital generated during the secondary offering fully expects to be able to
meet future capital needs caused by growth and expansion as well as regulatory
requirements. The Company is not aware of any current recommendation by
regulatory authorities, which if implemented would materially affect the
company's liquidity, capital resources or operations.
LOANS
The Company makes loans within its market area, defined as Asheville and
Buncombe County, North Carolina. It makes both commercial and consumer loans.
Total loans outstanding at December 31, 2000 and 1999 were $60,292,631 and
$34,460,724, respectively.
30
The Company places emphasis on consumer loans and commercial loans to small
businesses and professionals. The Company has a diversified loan portfolio with
no concentration to any one borrower, industry or market region. The amounts and
types of loans outstanding for the years ended December 31, 2000 and 1999 are as
follows:
2000 1999
LOANS
Real estate
Construction $ 8,894,309 $ 7,152,238
Mortgage 32,332,304 16,963,594
Commercial, financial and agricultural 17,939,971 9,926,255
Consumer 1,338,067 562,765
Total loans 60,504,651 34,604,852
Deferred origination fees, net (212,020) (144,128)
Total loans, net of deferred fees $ 60,292,631 $ 34,460,724
Commercial, consumer and real estate mortgage loans of $51,610,342 and
$27,452,614 at December 31, 2000 and 1999, respectively, are loans for which the
principal source of repayment is derived from the ongoing cash flow of the
business or individual. Real estate construction loans of $8,894,309 and
$7,152,238 at December 31, 2000 and 1999, respectively, are loans for which the
principal source of repayment comes from the sale of real estate or from
obtaining permanent financing.
Non-accrual loans totaled $522,137, and $247,559 at December 31, 2000 and 1999,
respectively. If interest from non-accrual loans had been recognized in
accordance with the original terms of the loans, net income for 2000 and 1999
would not have been materially different from the amounts reported.
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed hereunder, or under "loans" or
"Asset Quality" narrative discussions do not (i) represent or result from trends
or uncertainties that management expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information that causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
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 $199,650 and
none at December 31, 2000 and 1999, respectively. The average recorded balance
of impaired loans during 2000 was not significantly different from the balance
at December 31, 2000 and 1999. The related allowance for loan losses determined
in accordance with SFAS No. 114 for impaired loans was $86,152 at December 31,
2000 and none at December 31, 1999, respectively. For the years ended December
31, 2000 and 1999, the Company recognized interest income from impaired loans of
$27,993 and $4,044, respectively.
31
Loans are considered impaired when based on current information, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement, including interest payments. Impaired
loans are carried at the lower of the recorded investment in the loan, the
estimated present value of the total expected future cash flows, discounted at
the loan's effective rate or the fair value of the collateral, if the loan is
collateral dependent.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management considers the Company's asset quality to be of primary importance.
The allowance for loan losses, which is utilized to absorb losses inherent in
the loan portfolio, is maintained at a level sufficient to provide for estimated
potential charge-offs of non-collectible loans. The loan portfolio is analyzed
periodically 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. This
methodology is based upon management's periodic review of the collectibility of
the loans in light of the current status of the portfolio, historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. Because the Company has been in
existence for a relatively short time, and therefore has a limited history,
management has also considered in applying its analytical methodology the loss
experience and allowance levels of other peer community banks and the historical
experiences encountered by the Company's management and senior lending officers.
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 non-performing 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 judgement, 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.
- - Pass graded loan loss factors are based on average annual net charge-offs
rate over a period believed to be 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.
32
The Company 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 relative 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, the
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.
The provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
The allowance for loan losses at December 31, 2000 and 1999 was $871,706 and
$528,808 or 1.45% and 1.53%, respectively, of gross loans outstanding. The ratio
of net charge-offs to average loans outstanding during the year was .23% and
.03%., during 2000 and 1999, respectively. This ratio reflects management's
conservative lending and effective efforts to recover credit losses.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
2000 1999
---- ----
Balance at beginning of year $ 528,808 $ 218,719
Loans charged-off:
Commercial, financial and agricultural (112,062) (16,453)
Consumer -- (2,114)
--------- ---------
Total charge-offs (112,062) (18,567)
--------- ---------
Recoveries of loans previously charged -off:
Commercial , financial and agricultural -- 11,971
--------- ---------
Net charge-offs (112,062) (6,596)
--------- ---------
Additions charged to operations 454,960 316,685
--------- ---------
Balance at end of year $ 871,706 $ 528,808
========= =========
Ratio of net charge-offs during the year to
average loans outstanding during the year .23% .03%
The Company 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 2000, there were no changes in the estimation methods or assumptions that
affected our methodology for assessing the appropriateness of the formula and
specific allowance for
33
credit losses. Changes in estimates and assumptions regarding the effects of
economic and business conditions on borrowers affect the assessment of the
allowance.
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.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2000 and 1999
2000 1999
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
Real estate $553,337 68% $367,919 70%
Commercial, financial and agricultural 278,879 30% 150,445 29%
Consumer 15,822 2% 8,650 1%
Unallocated 23,668 -- 1,796 --
-------- --- -------- ---
Total allowance $871,706 100% $528,808 100%
======== === ======== ===
INVESTMENT SECURITIES
At December 31, 2000 and 1999, securities carried at market value totaled
$2,022,608 and $2,502,411, respectively, with amortized costs of $2,019,607 and
$2,508,339, respectively. All investment securities are available for sale.
Securities available for sale are securities which will be held for an
indefinite period of time, including securities that management intends to use
as part of its asset/liability management strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk or the need to
increase regulatory capital or other similar factors.
MATURITIES AND YIELDS OF DEBT SECURITIES
December 31, 2000 and 1999
December 31, 2000
Available for sale: (1)
Type
Remaining
Within Average
1 Year Yield Life
U.S. Treasury Notes $ 745,990 6.4% 4 months
U.S. Government Agencies 1,273,617 6.6% 7 months
---------- --- --------
Total $2,019,607 6.6%
========== ===
34
December 31, 1999
Available for sale: (1)
Type Remaining
Within Average
1 Year Yield Life
U.S. Treasury Notes $ 749,505 5.5% 6 months
U.S. Government Agencies 1,758,834 5.5% 4 months
---------- ---
Total $2,508,339 5.5%
========== ===
(2) Securities available for sale are stated at amortized cost.
For the Year Ended December 31, 1999 Compared to
the Year Ended December 31, 1998
Interest income, the primary source of revenue for the Company, 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 drive 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 in 1998 to
$30,211,789 in 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%. The following table sets forth the dollar amount of increase (decrease)
in interest income and interest expense resulting from changes in the volume of
interest-earning assets and interest-bearing liabilities and from changes in
yields and rates.
Interest and Rate/Volume Variance
For the Year Ended December 31, 1999
1999 Compared to 1998
Volume Rate Total
Interest-bearing 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
----------- ----------- -----------
Increase (decrease) in interest income $ 1,729,981 $ (31,014) $ 1,698,967
=========== =========== ===========
Interest-bearing deposits $ 754,770 $ (24,335) $ 730,435
Borrowings (20,483) (5,820) (26,303)
----------- ----------- -----------
Increase (decrease) in interest expense $ 734,287 $ (30,155) $ 704,132
=========== =========== ===========
(1) The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variance.
35
Other operating income totaled $414,864 in 1999 compared to $117,044 in 1998.
Service charge fees on deposit accounts and other fees and commissions earned
account for the majority of non-interest income. During 1999, the Company 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. Other 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 benefits 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 accounting principle,
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.
NET INTEREST INCOME
Net interest income (the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, primarily deposits)
represents the most significant portion of the Company's earnings. It is
management's on-going policy to maximize net interest income. Net interest
income totaled $1,631,677 in 1999 compared to $636,842 in 1998. The Company's
net yield on earning assets was 5.4% and 4.6% for the years 1999 and 1998,
respectively. The Company continues to maximize this spread by management of
both loan and deposit rates in order to support the overall earnings growth. The
following table presents the daily average balances, interest income / expense
and average rates earned and paid on interest-earning assets and
interest-bearing liabilities of the Company.
36
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
For the Years Ended December 31, 1999 and 1998
1999 1998
Interest Interest
Average Average Income/ Average Average Income/
Balance Rate Expense Balance Rate Expense
ASSETS:
Loans (1) $ 24,857,014 10.0% $ 2,492,208 $ 6,596,204 10.0% $ 661,439
Taxable securities 2,548,495 4.7% 123,944 3,773,274 5.5% 208,750
Federal funds sold 2,780,640 5.1% 142,955 3,425,331 5.4% 186,602
Interest-bearing deposits 25,640 4.7% 1,211 92,041 5.0% 4,560
------------- ----------- ----------- -----------
Total interest-earning assets 30,211,789 9.1% 2,760,318 13,886,850 7.6% 1,061,351
----------- -----------
------------- -----------
All other assets 3,617,418 2,110,422
------------- -----------
Total assets $ 33,829,207 $15,997,272
-----------
-------------
Liabilities and Shareholders' Equity:
Interest-bearing deposits $ 24,796,661 4.6% $ 1,127,022 $ 8,077,958 4.9% $ 396,587
Other borrowings 29,274 5.5% 1,619 312,446 8.9% 27,922
------------- ----------- ----------- -----------
Total interest-bearing liabilities 24,825,935 4.6% 1,128,641 8,390,404 5.1% 424,509
Other liabilities 4,067,281 1,934,554
Shareholders' equity 4,935,991 5,672,314
------------- -----------
Total liabilities and shareholders' equity $ 33,829,207 $15,997,272
------------- -----------
Net yield on earning-assets and net
Interest income (2) 5.4% $ 1,631,677 4.6% $ 636,842
----------- -----------
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.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objectives of the Company's liquidity management policy include providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for on-going operation of the
Company and regulatory requirements. Liquidity requirements of the Company are
met primarily through two categories of funds. The first is core deposits, which
includes demand deposits, savings accounts and certificates of deposits. The
Company considers these to be a stable portion of the Company's liability mix
and results of on-going stable commercial and consumer banking relationships. At
December 31, 1999 and 1998 core deposits totaled $32,300,296 or 85% and
$13,240,528 or 81%, respectively, of the Company's total deposits.
The other principal method of funding utilized by the Company is through large
denomination certificates of deposit, federal funds purchased and other
short-term borrowings. The Company's policy is to emphasize core deposit growth
rather than growth through purchased or brokered liabilities as the cost of
these funds are greater.
37
The Company'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 Company's controls, such as market interest rates an competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company'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.
As a part of its interest rate risk management policy, the Company 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 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 for the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, 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
Company'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.
38
1 - 90 91 - 180 181 - 365 Total Non-
Days Days Days One Year Sensitive Total
Interest-earning assets:
Interest bearing deposits $ 2,784 $ 2,784 $ 2,784
Federal funds sold 2,110,000 2,110,000 2,110,000
Investment securities -- $ 2,008,996 $ 499,343 2,508,339 2,508,339
Federal Home Loan
Bank stock -- -- -- -- $ 58,100 58,100
Loans 22,422,026 2,741,389 2,754,141 27,917,556 6,543,168 34,460,724
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 24,534,810 4,750,385 3,253,484 32,538,679 6,601,268 39,139,947
Interest-bearing liabilities:
Time deposits 2,815,269 6,716,633 7,905,034 17,436,936 1,341,765 18,778,701
All other deposits 14,361,398 -- -- 14,361,398 -- 14,361,398
----------- ----------- ----------- ----------- ----------- -----------
Total interest-
bearing liabilities 17,176,667 6,716,633 7,905,034 31,798,334 $ 341,765 $33,140,099
Interest sensitivity gap $ 7,358,143 $(1,966,248) $(4,651,550) $ 740,345
Cumulative interest
sensitivity gap $ 7,358,143 $ 5,391,895 $ 740,345
Interest-earning assets
as a percent of interest
sensitive liabilities 142.8% 70.7% 41.2% 102.3%
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
AS OF DECEMBER 31, 1999
Within One to Five
One Five Years or
Year Years More
Real estate - Construction $ 6,808,752 $ 343,486 $ --
Real estate - Mortgage 9,966,789 6,151,858 844,947
Predetermined rate, maturity
greater than one year 6,475,521 844,947
Variable rate or maturing within
one year 16,745,541 49,823 --
The Company paid an average rate of 4.6% on interest-bearing deposits during
1999 compared to 5.0% in 1998. Significant growth in deposits came from
interest-bearing accounts. Interest-bearing accounts grew by $19,452,543 with
time deposits accounting for $11,319,993 or 58.2%. Increased customer awareness
of interest rates increases the importance of rate management by the Company.
The Company's management continuously monitors market pricing, competitor rates,
and profitability. Deposits continue to be the principal source of funds for
continued growth, so the Company attempts to structure its rates so as to
promote deposit and asset growth while at the same time increasing overall
profit management. The daily average amounts of deposits of the Company are
summarized below.
39
Average Deposits
For the Year Ended December 31, 1999
Non-interest bearing deposits $ 3,843,578
Interest-bearing 24,796,661
-----------
Total $28,640,239
===========
The above table includes deposits of $100,000 and over which at December 31,
1999 totaled $5,620,684. The table below presents the maturities of these
deposits of $100,000 or more.
Maturities of Deposits of $100,000 or More
December 31, 1999
Greater
Within Within Within Than
Three Six Twelve One
Months Months Months Year
Time deposits of $100,000 or more $2,083,909 $1,800,047 $1,418,309 $ 318,419
CAPITAL RESOURCES
During the third quarter of 1999, the Company called the warrants attached to
its common stock. As a result of the call, 25,731 additional shares of common
stock were issued, and $257,310 in additional capital was raised. As of December
31, 1999 and 1998, the Company's ratio of total capital to risk-adjusted assets
was 17.13%, and 31.6%, respectively. Average capital to average assets totaled
14.60% and 35.46% at December 31, 1999 and 1998, respectively. The Company
remains well capitalized and fully expects to be able to meet future capital
needs caused by growth and expansion as well as regulatory requirements. The
Company is not aware of any current recommendation by regulatory authorities,
which if implemented would materially affect the company's liquidity, capital
resources or operations.
LOANS
The Company makes loans within its market area, defined as Asheville and
Buncombe County, North Carolina. It makes both commercial and consumer loans.
Total loans outstanding at December 31, 1999 and 1998 were $34,460,724 and
$14,023,265, respectively. The Company places emphasis on consumer loans and
commercial loans to small businesses and professionals. The Company has a
diversified loan portfolio with no concentration to any one borrower, industry
or market region. The amounts and types of loans outstanding for the years ended
December 31, 1999 and 1998 are as follows:
40
1999 1998
LOANS
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
------------ ------------
Total loans 34,604,852 14,088,145
Deferred origination fees, net (144,128) (64,880)
------------ ------------
Total loans, net of deferred fees $ 34,460,724 $ 14,023,265
============ ============
Non-accrual loans at December 31, 1999 totaled $247,559, and none on December
31, 1998. If interest from non-accrual loans had been recognized in accordance
with the original terms of the loans, net income for 1999 would not have been
materially different from the amounts reported.
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed hereunder, or under "loans" or
"Asset Quality" narrative discussions do not (i) represent or result from trends
or uncertainties that management expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information that causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
Commercial, consumer and real estate mortgage loans of $27,452,614 and
$12,307,582 at 1999 and 1998, respectively, are loans for which the principal
source of repayment is derived from the ongoing cash flow of the business or
individual. Real estate construction loans of $7,152,238 and $1,780,563 at 1999
and 1998, respectively, are loans for which the principal source of repayment
comes from the sale of real estate or from obtaining permanent financing.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management considers the Company's asset quality to be of primary importance.
The allowance for loan losses, which is utilized to absorb losses inherent in
the loan portfolio, is maintained at a level sufficient to provide for estimated
potential charge-offs of non-collectible loans. The loan portfolio is analyzed
periodically 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. This
methodology is based upon management's periodic review of the collectibility of
the loans in light of the current status of the portfolio, historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. Because the Company has been in
existence for a relatively short time, and therefore has a limited history,
management has also considered in applying its analytical methodology the loss
experience and allowance levels of other peer community banks and the historical
experiences encountered by the Company's management and senior lending officers.
Weststar's
41
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 non-performing 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 judgement, 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.
- - Pass graded loan loss factors are based on average annual net charge-offs
rate over a period believed to be 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 Company 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 relative 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, the
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.
The provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
The allowance for loan losses at December 31, 1999 and 1998 was $528,808 and
$218,719 or 1.53% and 1.56%, respectively, of gross loans outstanding. The ratio
of net charge-offs to average loans outstanding during the year was .03% and .8%
during 1999 and 1998, respectively. This ratio reflects management's
conservative lending and effective efforts to recover credit losses.
42
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
1999 1998
Balance at beginning of year $218,719 $ 3,200
Loans charged-off:
Commercial, financial and agricultural (16,453) (55,522)
Consumer (2,114) (316)
-------- --------
Total charge-offs (18,567) (55,838)
-------- --------
Recoveries of loans previously charged -off:
Commercial, financial and agricultural 11,971 1,743
-------- --------
Net charge-offs (6,596) (54,095)
-------- --------
Additions charged to operations 316,685 269,614
-------- --------
Balance at end of year $528,808 $218,719
======== ========
Ratio of net charge-offs during the year to
average loans outstanding during the year .03% .8%
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.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 1999 and 1998
1999 1998
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
Real estate $367,917 70% $140,500 65%
Commercial, financial and agricultural 150,445 29% 68,040 33%
Consumer 8,650 1% 4,340 2%
--- ---
Unallocated 1,796 5,839
-------- --------
Total allowance $528,808 100% $218,719 100%
======== === ======== ===
INVESTMENT SECURITIES
At December 31, 1999 and 1998, securities carried at market value totaled
$2,502,411 and $2,085,000, respectively, with amortized costs of $2,508,339 and
$2,087,778, respectively. All investment securities are available for sale.
Securities available for sale are securities which will be held for an
indefinite period of time, including securities that management intends to use
as part of its asset/liability management strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk or the need to
increase regulatory capital or other similar factors.
43
MATURITIES AND YIELDS OF DEBT SECURITIES
December 31, 1999 and 1998
December 31, 1999
Available for sale: (1)
Type Remaining
Within Average
1 Year Yield Life
U.S. Treasury Notes $ 749,505 5.5% 6 months
U.S. Government Agencies 1,758,834 5.5% 4 months
--------- ---
Total $2,566,439 5.5%
==========
December 31, 1998
Available for sale: (1)
Type Remaining
Within Average
1 Year Yield Life
U.S. Treasury Notes $ 604,288 4.6% 7 months
U.S. Government Agencies 1,483,490 5.4% 2 months
--------- ---
Total $2,087,778 5.2%
========== ===
(1) Securities available for sale are stated at amortized cost.
In February 1999, the Company opened its first full-service office outside of
the main office. A modular unit currently serves as the banking office. The
Company owns the modular unit, but leases the property on which the unit is
located. Terms of the lease are consistent with current market rates for such
leases. During 1999, the new office, known as the Candler Office, generated
approximately $720 thousand in loans and $9.1 million in deposits.
During the second quarter of 1998, the Company purchased the first floor of 79
Woodfin Place, where the main office is located. The Company owns approximately
10,000 square feet of operating space, but leases approximately 5,000 square
feet to other tenants.
INFLATION
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of a bank is affected
more by changes in interest rates than inflation. Interest rates generally
increase as the rate of inflation increase, but the magnitude of the change in
rates may not be the same.
While the effect of inflation is normally not as significant as it is on those
businesses which have large investments in plant and inventories, it does have
an effect. There are normally corresponding increases in the money supply, and
banks will normally experience above average growth in assets, loans and
deposits. Also, general increases in the prices of goods and services will
result in increase operating expense.
44
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of the shareholders of Weststar Financial Services
Corporation will be held at 3:00 p.m., Tuesday, April 16, 2002, at the
Renaissance Hotel, One Thomas Wolfe Place, Asheville, North Carolina (located
off Interstate I-240 at exit 5-B).
STOCK TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
908.497.2312 or 800.368.5948
SHAREHOLDER INFORMATION
For information, contact Randall C. Hall, Executive Vice President and
Secretary, Weststar Financial Services Corporation, 79 Woodfin Place, Asheville,
North Carolina, 28801, 828.232.2904.
COPIES OF FORM 10-KSB
Copies of Weststar Financial Services Corporation's Annual Report to the
Securities and Exchange Commission may be obtained by shareholders at no charge
by writing: Randall C. Hall, Executive Vice President and Secretary, Weststar
Financial Services Corporation, 79 Woodfin Place, Asheville, North Carolina
28801.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Post Office Box 9197
Hickory, North Carolina 28603
MARKET SUMMARY
Weststar Financial Services Corporation stock is traded on the Over-The-Counter
Bulletin Board under the symbol "WFSC." There were 869,721 shares outstanding at
December 31, 2001 owned by approximately 800 shareholders.
During 2001, 107,470 shares of the Company's common stock were traded. The
closing price of the stock was $8.25.
2001 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr.
High $7.73 $7.77 $7.73 $8.25
Low $6.47 $6.42 $7.05 $7.09
Close $7.73 $7.27 $7.50 $8.25
2000 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr.
High $8.64 $8.52 $8.07 $8.18
Low $5.80 $5.11 $4.55 $4.66
Close $7.61 $6.93 $5.11 $6.93
Share prices have been adjusted to reflect an 11-for-10 stock dividend paid in
November 2001.
MARKET INFORMATION
Weststar Financial Services Corporation and its subsidiary, The Bank of
Asheville, serve the people of Asheville and Buncombe County of North Carolina.
This region offers an exceptional quality of life, with scenic and cultural
treasures to over 190,000 citizens.
45
Quarterly Financial Data (unaudited)
2001 1Q 2Q 3Q 4Q
Net interest income $ 894,643 $842,198 $787,545 $868,145
Provision for loan losses 114,070 103,700 105,000 227,650
Net interest income after provision
for loan losses 780,573 738,498 682,545 640,495
Other income 186,561 276,793 306,126 417,688
Other expenses 724,197 743,332 756,159 770,961
Income before taxes 242,937 271,959 232,512 287,222
Income tax provision 100,011 113,978 98,942 121,099
Net income $ 142,926 $ 157,981 $133,570 $166,123
Earnings Per Share
Basic $ .19 $ .18 $ .15 $ .19
Diluted $ .19 $ .18 $ .15 $ .19
Average shares outstanding
Basic 756,264 869,721 869,721 869,721
Diluted 756,264 869,721 869,721 869,721
2000 1Q 2Q 3Q 4Q
Net interest income $ 585,718 $736,453 $850,350 $925,571
Provision for loan losses 57,200 100,000 160,260 137,500
Net interest income after provision
for loan losses 528,518 636,453 690,090 788,071
Other income 119,075 113,910 136,018 163,572
Other expenses 596,032 593,908 623,342 735,297
Income before taxes 51,561 156,455 202,766 216,346
Income tax provision (benefit) (530,612) 56,936 70,049 83,473
Net income $ 582,173 $99,519 $132,717 $132,873
Earnings Per Share
Basic $ .84 $ .14 $ .19 $ .19
Diluted $ .84 $ .14 $ .19 $ .19
Average shares outstanding
Basic 696,628 696,628 696,628 696,628
Diluted 696,628 696,628 696,628 696,628
46
FORWARD LOOKING STATEMENTS
The foregoing discussion may contain forward looking statements within the
meaning of the Private Securities Litigation Reform Act. The accuracy of such
forward looking statements could be affected by such factors as, including but
not limited to, the financial success or changing strategies of the Company's
customers, actions of government regulators, or general economic conditions.
47
Weststar Financial Services
Corporation and Subsidiary
Consolidated Financial Statements
as of and for the Years Ended
December 31, 2001, 2000 and 1999,
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Weststar Financial Services Corporation:
We have audited the accompanying consolidated balance sheets of Weststar
Financial Services Corporation and subsidiary (the "Company") as of December 31,
2001 and 2000 and the related consolidated statements of operations and
comprehensive income (loss), changes in shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company'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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 16, 2002
F-1
WESTSTAR FINANCIAL SERVICES CORPORATION & Subsidiary
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------------------------------
ASSETS 2001 2000
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 3,805,590 $ 3,791,415
Interest-bearing deposits 36,115 352,394
Federal funds sold 1,585,000 900,000
Total cash and cash equivalents 5,426,705 5,043,809
Investment securities - available for sale, at fair value
(amortized cost of $6,793,328 and $2,019,607 at
December 31, 2001 and 2000, respectively) 6,859,668 2,022,608
Loans 65,230,982 60,292,631
Allowance for loan losses (978,467) (871,706)
Net loans 64,252,515 59,420,925
Premises and equipment, net 2,195,191 2,432,535
Accrued interest receivable 470,592 433,394
Federal Home Loan Bank stock, at cost 229,800 225,000
Deferred income taxes 246,510 459,931
Foreclosed properties 752,539 --
Other assets 218,645 152,215
------------ ------------
TOTAL $ 80,652,165 $ 70,190,417
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 14,243,137 $ 10,652,742
NOW accounts 8,435,579 7,838,070
Money market accounts 16,296,256 12,111,132
Savings 1,158,818 755,286
Time deposits of $100,000 or more 10,066,980 6,729,107
Other time deposits 21,931,581 25,116,249
------------ ------------
Total deposits 72,132,351 63,202,586
Accrued interest payable 197,220 285,064
Other liabilities 340,397 253,209
Stock subscriptions -- 328,396
------------ ------------
Total liabilities 72,669,968 64,069,255
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, authorized - 9,000,000 shares;
outstanding shares - 869,721 and 633,298 at December 31, 2001
and 2000, respectively 869,721 633,298
Additional paid-in capital 7,114,771 6,129,636
Accumulated deficit (43,014) (643,614)
Accumulated other comprehensive income 40,719 1,842
------------ ------------
Total shareholders' equity 7,982,197 6,121,162
------------ ------------
TOTAL $ 80,652,165 $ 70,190,417
============ ============
See notes to consolidated financial statements.
F-2
WESTSTAR FINANCIAL SERVICES CORPORATION & Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
INTEREST INCOME:
Interest and fees on loans $ 5,734,776 $ 5,071,190 $ 2,492,208
Federal funds sold 151,459 59,957 142,955
Interest-bearing deposits 5,765 1,631 1,211
Investments:
Certificates of deposit 14,513 -- --
U. S. Treasuries 27,997 44,575 26,129
U. S. Government agencies 182,884 88,252 95,105
Municipal bonds 1,930 -- --
Corporate dividends 15,884 7,989 2,710
----------- ----------- -----------
Total interest income 6,135,208 5,273,594 2,760,318
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 527,051 372,642 189,677
Other time and savings deposits 2,211,758 1,708,006 937,345
Federal funds purchased 1,083 94,813 1,522
Other interest expense 2,785 41 97
----------- ----------- -----------
Total interest expense 2,742,677 2,175,502 1,128,641
----------- ----------- -----------
NET INTEREST INCOME 3,392,531 3,098,092 1,631,677
PROVISION FOR LOAN LOSSES 550,420 454,960 316,685
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,842,111 2,643,132 1,314,992
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 803,478 360,756 272,911
Other service fees and commissions 334,621 160,179 131,316
Other 49,069 11,640 10,637
----------- ----------- -----------
Total other income 1,187,168 532,575 414,864
----------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 1,181,512 1,037,525 941,253
Employee benefits 245,217 171,931 108,086
Occupancy expense, net 159,735 138,513 79,280
Equipment rentals, depreciation and maintenance 259,628 232,735 201,738
Supplies 175,964 144,597 115,339
Professional fees 627,778 587,060 362,343
Marketing 143,782 183,418 133,621
Other 201,033 52,800 77,148
----------- ----------- -----------
Total other expenses 2,994,649 2,548,579 2,018,808
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE AND INCOME TAXES 1,034,630 627,128 (288,952)
INCOME TAX PROVISION (BENEFIT) 434,030 (320,154) (110,625)
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 600,600 947,282 (178,327)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $44,877 (Note 1) -- -- (71,326)
----------- ----------- -----------
NET INCOME (LOSS) 600,600 947,282 (249,653)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX -
Unrealized holding gains (losses) on securities available for sale 38,877 5,481 (1,943)
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 639,477 $ 952,763 $ (251,596)
=========== =========== ===========
F-3
WESTSTAR FINANCIAL SERVICES CORPORATION & Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------------------
2001 2000 1999
BASIC AND DILUTED INCOME (LOSS) PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 1) $ .71 $ 1.36 $ (.29)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (.12)
------- -------- -------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
(Note 1) $ .71 $ 1.36 $ (.41)
======= ======== =======
See notes to consolidated financial statements
F-4
WESTSTAR FINANCIAL SERVICES CORPORATION & Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ----------------------------------------------------------------------------------------------------------------------------------
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
available for sale -- -- -- -- (1,943) (1,943)
Warrants exercised 25,741 25,741 231,679 -- -- 257,420
Net loss -- -- -- (249,653) -- (249,653)
------- --------- ----------- ----------- --------- -----------
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
available for sale -- -- -- -- 5,481 5,481
Net income -- -- -- 947,282 -- 947,282
------- --------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2000 633,298 633,298 6,129,636 (643,614) 1,842 6,121,162
Net change in unrealized gains (losses)
securities available for sale -- -- -- -- 38,877 38,877
Issuance of common stock 157,397 157,397 1,064,513 -- -- 1,221,910
Stock dividend 79,026 79,026 (79,026) -- -- --
Cash paid in lieu of fractional shares -- -- (352) -- -- (352)
Net income -- -- -- 600,600 -- 600,600
------- --------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2001 869,721 $ 869,721 $ 7,114,771 $ (43,014) $ 40,719 $ 7,982,197
======= ========= =========== =========== ========= ===========
See notes to consolidated financial statements
F-5
WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ---------------------------------------------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 600,600 $ 947,282 $ (249,653)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 284,741 256,538 173,617
Provision for loan loss 550,420 454,960 316,685
Premium amortization and discount accretion, net (2,826) (22,033) (70,843)
Deferred income tax provision (benefit) 188,959 (329,691) (155,502)
Gain on sales of foreclosed properties (3,401) -- --
Cumulative effect of a change in accounting principle -- -- 116,203
Increase in accrued interest receivable (37,198) (213,243) (120,112)
(Decrease) increase in accrued interest payable (87,844) 125,915 94,652
Increase in other assets (66,430) (91,092) (19,981)
Increase (decrease) in other liabilities 87,188 133,653 (76,398)
------------ ------------ ------------
Net cash provided by operating activities 1,514,209 1,262,289 8,668
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (7,520,895) (2,010,234) (4,449,719)
Maturities of securities available for sale 2,750,000 2,521,000 4,100,000
Net increase in loans (5,746,475) (25,943,969) (20,444,055)
Proceeds from the sales of foreclosed properties 22,000 -- --
Net expenditures on foreclosed properties (406,673) -- --
Additions to premises and equipment (47,397) (233,566) (429,073)
Purchases of Federal Home Loan Bank stock (4,800) (166,900) (58,100)
------------ ------------ ------------
Net cash used in investing activities (10,954,240) (25,833,669) (21,280,947)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts and
savings accounts 8,776,560 12,214,951 10,154,339
Net increase in certificates of deposits 153,205 13,066,655 11,319,993
Cash paid for fractional shares (352) -- --
Issuance of common stock 1,221,910 -- 257,420
Common stock subscriptions (328,396) 328,396 --
------------ ------------ ------------
Net cash provided by financing activities 9,822,927 25,610,002 21,731,752
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 382,896 1,038,622 459,473
CASH AND CASH EQUIVALENTS:
Beginning of year 5,043,809 4,005,187 3,545,714
------------ ------------ ------------
End of year $ 5,426,705 $ 5,043,809 $ 4,005,187
============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 2,830,521 $ 2,049,587 $ 1,033,989
============ ============ ============
Cash paid for income taxes $ 208,545 $ 7,600 $ --
============ ============ ==========
NONCASH TRANSACTIONS -
Loans transferred to foreclosed properties $ 364,465 $ -- $ --
============ ============ ============
See notes to consolidated financial statements.
F-6
WESTSTAR FINANCIAL SERVICES CORPORATION & Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Weststar Financial Services Corporation is a holding company with
one subsidiary, The Bank of Asheville (the "Bank"), a state chartered commercial
bank incorporated in North Carolina on October 29, 1997. The Bank provides
consumer and commercial banking services in Buncombe County and surrounding
areas. Common shares of The Bank of Asheville were exchanged for common shares
of Weststar Financial Services Corporation on April 29, 2000.
Basis of Presentation - The consolidated financial statements include the
accounts of Weststar Financial Services Corporation and its wholly owned
subsidiary, The Bank of Asheville (herein referred to collectively as the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
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 Company 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 a component of 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 writedowns of the individual securities to their
fair value. The related writedowns 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
Company 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 Company's control.
Unanticipated future adverse changes in such conditions could result in material
adjustments to the allowance for loan losses.
F-7
Loans that are deemed to be impaired (i.e., probable that the Company 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).
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 Company reviews long-lived assets and certain identifiable intangibles 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 related to the asset is less than the stated amount of the asset, an
impairment loss is recognized.
Foreclosed Properties - Foreclosed properties are stated at the lower of cost or
fair value. Any initial losses at the time of foreclosure are charged against
the allowance for loan losses with any subsequent losses or write-downs included
in the consolidated statements of operations as a component of other expenses.
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 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 Company 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 Company 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.
Change in Accounting Principle - In April 1998, the AICPA issued Statement of
Position 98-5, Reporting on the Cost 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 Company
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.
F-8
Net Income (Loss) Per Share - Basic and diluted net income (loss) per common
share has been computed using the weighted average number of shares of common
stock outstanding during the year (841,734 shares in 2001, 633,298 shares in
2000 and 615,521 shares in 1999). There were no dilutive securities during 2000
and 1999. During 2001, there were 139,139 potentially dilutive shares not
included because the effect was antidilutive.
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board ("FASB") issued 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. The new
standard requires than an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 was amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
for FASB Statement No. 133, which delayed the Company's effective date until
January 1, 2001. The adoption of SFAS No. 133 did not have a material effect on
the Company's financial statements and disclosures.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 140
revises the standards for accounting for securitization and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of the provisions of SFAS No. 125 without reconsideration. The
statement is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. The adoption of
SFAS No. 140 did not have a material effect on the Company's financial
statements and disclosures.
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.
SFAS No. 142 requires that goodwill and other intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. The statement is effective for fiscal years beginning after December
15, 2001. Management does not believe the adoption of SFAS No. 142 will have an
effect on the Company's financial statements and disclosures.
In June 2001, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 sets forth guidelines for determining the
allowance for loan losses under generally accepted accounting principles. In
addition, SAB No. 102 sets forth guidelines for documentation by registrants in
support of the allowance for loan losses. The Company adopted SAB No. 102 on
October 1, 2001. The Company prepares a detailed loan classification and applies
an estimated loss calculation methodology, which is the basis for the
determination of the allowance for loan losses. This methodology and related
documentation thereof, has historically been in place. The Company believes the
adoption of SAB No. 102 will not have an impact on its consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. SFAS No. 144 retains the fundamental provisions of SFAS No. 121
for (a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. Management does not believe the adoption of SFAS No. 144 will have a
material effect on the Company's financial position and results of operations.
F-9
2. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 2001 and 2000 are as follows:
Available-for-sale securities consist of the following at December 31, 2001:
Unrealized
Amortized --------------------------- Fair
Type and Maturity Group Cost Gains Losses Value
Certificates of deposit due - within 1 year $ 750,000 $ -- $ -- $ 750,000
U.S. Government agencies due - 1 to 5 years 5,782,333 79,230 (6,726) 5,854,837
N.C. Municipal bond due - 1 to 5 years 260,995 -- (6,164) 254,831
---------- ---------- ---------- ----------
Total at December 31, 2001 $6,793,328 $ 79,230 $ (12,890) $6,859,668
========== ========== ========== ==========
Available-for-sale securities consist of the following at December 31, 2000:
Unrealized
Amortized --------------------------- Fair
Type and Maturity Group Cost Gains Losses Value
U. S. Treasury due - within 1 year $ 745,990 $ 1,703 $-- $ 747,693
U. S. Government agencies due -
within 1 year 1,273,617 1,298 -- 1,274,915
Total at December 31, 2000 $2,019,607 $ 3,001 $-- $2,022,608
3. LOANS
Loans at December 31, 2001 and 2000 classified by type are as follows:
2001 2000
Real estate:
Construction $ 11,139,588 $ 8,894,309
Mortgage 35,189,010 32,332,304
Commercial, financial and agricultural 16,512,498 17,939,971
Consumer 2,553,710 1,338,067
------------ ------------
Subtotal 65,394,806 60,504,651
Net deferred loan origination fees (163,824) (212,020)
------------ ------------
Total $ 65,230,982 $ 60,292,631
============ ============
Nonperforming assets at December 31, 2001 and 2000:
2001 2000
Nonaccrual loans $1,050,813 $ 522,137
Other real estate owned 733,941 --
Total $1,784,754 $ 522,137
F-10
No loans have been restructured during 2001, 2000 or 1999. If interest from
non-accrual loans had been recognized in accordance with the original terms of
the loans, net income for 2001, 2000, and 1999 would not have been materially
different from the amounts reported. Loans totaling $605,006 and $199,650 were
considered impaired as of December 31, 2001 and 2000, respectively. No loans
were considered impaired at December 31, 1999. The related allowance for loan
losses determined for impaired loans was $68,353 and $86,152 at December 31,
2001 and 2000, respectively. For the years ended December 31, 2001, 2000 and
1999, the Company recognized interest income from impaired loans of
approximately $40,272, $27,993 and $4,044, respectively.
Directors and officers of the Company and companies with which they are
affiliated are customers of and borrowers from the Company in the ordinary
course of business. At December 31, 2001 and 2000, directors' and principal
officers' direct and indirect indebtedness to the Company aggregated $258,352
and $281,268, respectively.
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2001
and 2000 are as follows:
2001 2000 1999
Balance at beginning of year $ 871,706 $ 528,808 $ 218,719
Additions charged to operations 550,420 454,960 316,685
Charge-offs (490,600) (112,062) (18,567)
Recoveries 46,941 -- 11,971
--------- --------- ---------
Balance at end of year $ 978,467 $ 871,706 $ 528,808
========= ========= =========
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2001 and 2000 are as follows:
2001 2000
Land $ 113,900 $ 113,900
Land improvements 121,873 121,873
Building and improvements 1,507,329 1,491,346
Furniture and equipment 914,810 886,400
Leasehold improvements 374,164 373,643
Construction in progress 3,004 521
----------- -----------
Total 3,035,080 2,987,683
Less accumulated depreciation and amortization (839,889) (555,148)
----------- -----------
Total $ 2,195,191 $ 2,432,535
=========== ===========
F-11
6. DEPOSIT ACCOUNTS
At December 31, 2001, the scheduled maturities of time deposits of $100,000 or
more are as follows:
Within 3 months $ 6,050,085
Within 6 months 1,753,166
Within 12 months 2,263,729
Greater than 1 year --
-----------
Total $10,066,980
===========
7. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 2001, 2000 and 1999 follow:
2001 2000 1999
Income tax provision (benefit):
Current $ 245,071 $ 9,537 $ --
Deferred 188,959 (329,691) (155,502)
--------- --------- ---------
Total $ 434,030 $(320,154) $(155,502)
========= ========= =========
For the years ended December 31, 2001, 2000 and 1999, a deferred tax provision
(benefit) of $24,462, $3,448 and $(1,207), respectively, was allocated to other
comprehensive income as the tax effect of the unrealized gain/loss on investment
securities available for sale.
A reconciliation of reported income tax provision (benefit) for the periods
ended December 31, 2001, 2000 and 1999 to the amount of tax provision (benefit)
computed by multiplying the loss before income taxes by the statutory federal
income tax rate of 34% follows:
2001 2000 1999
Income tax provision (benefit) at statutory rate $ 351,774 $ 213,224 $(137,757)
Increase (decrease) resulting from:
State income taxes net of federal tax benefit 38,966 30,551 (17,745)
Valuation allowance -- (543,000) --
Other 43,290 (20,929) --
--------- --------- ---------
Tax provision (benefit) reported $ 434,030 $(320,154) $(155,502)
========= ========= =========
F-12
The tax effect of the cumulative temporary differences and carryforwards that
gave rise to the deferred tax assets and liabilities at December 31, 2001, 2000
and 1999 are as follows:
2001 Assets Liabilities Total
Allowance for loan losses $ 317,600 $ -- $ 317,600
Unrealized gain on securities available for sale -- (25,621) (25,621)
Depreciation -- (20,053) (20,053)
Capitalized start-up expenditures 21,445 -- 21,445
Capitalized organization costs 10,486 -- 10,486
Prepaid expenses -- (35,985) (35,985)
Deferred compensation 22,263 -- 22,263
Other, net -- (43,625) (43,625)
Total $ 371,794 $(125,284) $ 246,510
2000
Net operating loss carryforward $ 123,427 $ -- $ 123,427
Contribution carryforward 8,164 -- 8,164
Allowance for loan losses 302,010 -- 302,010
Unrealized gain on securities available for sale -- (1,159) (1,159)
Depreciation -- (43,873) (43,873)
Capitalized start-up expenditures 44,916 -- 44,916
Capitalized organization costs 21,962 -- 21,962
Prepaid expenses -- (34,514) (34,514)
Deferred compensation 9,459 -- 9,459
AMT credit carryforward 9,539 -- 9,539
Other, net 20,000 -- 20,000
Total $ 539,477 $ (79,546) $ 459,931
As of December 31, 2001, all of the federal and state operating loss carryovers
and charitable contribution carryforwards from prior years have been utilized to
offset federal and state taxable income.
During 2000, the Company recognized an income tax benefit of $320,154 primarily
related to the release of a valuation allowance of $543,000 previously recorded
against deferred tax assets, net of income taxes related to operations for the
year. At December 31, 1999, management believed the realization of the deferred
tax asset was not reasonably assured. Based upon the taxable income being
generated in 2000 and management's expectations of continued profitability,
management determined the realization of the deferred tax asset was more likely
than not. The valuation allowance was reversed in the first quarter of 2000,
thereby providing a deferred tax benefit.
8. LEASES
The Company leases certain banking facility premises and equipment under
operating lease agreements. Future minimum rental payments are as follows:
2002 $37,856
2003 6,199
-------
Total $44,055
=======
F-13
The land for a branch office is leased from a partnership that includes a
director of the Company. The annual rental is $22,500. Rental expense charged to
operations under all operating lease agreements was $50,721, $42,555 and $45,529
for the years ended December 31, 2001, 2000 and 1999, respectively.
9. SHAREHOLDERS' EQUITY
In connection with the initial public offering of The Bank of Asheville common
stock in 1997, the Bank issued 60,360 stock purchase warrants to certain common
stockholders. Each warrant was convertible into one share of the Bank's common
stock at an exercise price of $11.00 per share. The warrants were exercisable
one year from issuance and expired five years from issuance. During 1999, 25,741
stock purchase warrants were exercised and the remaining stock purchase warrants
were cancelled by the Bank.
On March 1, 2001, 157,397 shares of the Company's $1.00 par value common stock
were issued in connection with a secondary stock offering. At December 31, 2000,
$328,396 in subscriptions had been received. Proceeds generated from the sale of
these shares were used to enhance capital and liquidity positions, fund
expansion plans, and for general corporate purposes.
On October 16, 2001, the Company's Board of Directors approved a 10% stock
dividend of the Company's common stock. As a result, shareholders received one
additional share of common stock on November 13, 2001 for each ten shares held
as of the record date of October 30, 2001.
10. STOCK OPTIONS
In 2001, the Company's shareholders approved the Weststar Financial Services
Corporation 2001 Nonstatutory Stock Option Plan ("Nonstatutory Plan") and the
Weststar Financial Services Corporation 2001 Incentive Stock Option Plan
("Incentive Plan"). Under these plans, non-employee directors and employees were
granted stock options on June 20, 2001. The maximum number of shares available
for grant under the Nonstatutory Plan and Incentive Plan is 69,300 and 70,070,
respectively. Of the maximum number of shares available for grant, 69,300 were
outstanding under the Nonstatutory Plan and 69,839 were outstanding under the
Incentive Plan at December 31, 2001. Option prices for both plans are
established at market value, which was $7.77, on the dates granted by the Board
of Directors.
Options granted become exercisable in accordance with the vesting schedule
specified by the Board of Directors in the Plan agreements. Nonstatutory stock
options vest over a three-year period with 46% vested at the date of grant and
27% per year beginning one year from the date of grant. Incentive stock options
vest over a five-year period with 20% vested at the date of grant and 20% per
year beginning one year from the date of grant. No vested option may be
exercised more than ten years after the date of grant.
F-14
Stock option information related to the plans for the year ended December 31,
2001 follows:
Exercise
Price
Shares Per Share
Nonstatutory Plan
Outstanding, December 31, 2000 -- $ --
Granted 69,300 7.77
------
Outstanding, December 31, 2001 69,300 $ 7.77
======
Incentive Plan
Outstanding, December 31, 2000 -- $ --
Granted 70,070 7.77
Canceled (231) 7.77
------
Outstanding, December 31, 2001 69,839 $ 7.77
======
Exercisable
Oustanding Options Options
----------------------------------- ------------------------
Remaining Weighted Weighted
Life Average Average
Exercise Price Shares (Years) Price Shares Price
Nonstatutory Plan
$ 7.77 69,300 9.5 $ 7.77 31,872 $ 7.77
Incentive Plan
$ 7.77 69,839 9.5 $ 7.77 14,003 $ 7.77
The Company accounts for compensation costs related to the Company's stock
option plans using the intrinsic value method. Therefore, no compensation costs
has been recognized for stock option awards because the options are granted at
exercise prices based on the market value of the Company's stock on the date of
grant. Had compensation costs for the Company's stock option plans been
determined using the fair value method, the Company's 2001 pro forma net income
would have been as follows:
Net income:
As reported $ 600,600
Pro forma $ 133,362
Net income per share:
As reported:
Basic $ 0.71
Diluted $ 0.71
Pro forma:
Basic $ 0.15
Diluted $ 0.15
F-15
In estimating the compensation expense associated with the fair value method,
using The Black Scholes Option Pricing Model, the following assumptions were
used:
Option value, aggregate $ 7.38
Risk-free rate 5.12%
Average expected term (years) 9.06
Expected volatility 123.06%
Expected dividend yield --
11. EMPLOYEE BENEFIT PLANS
The Company 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 Company makes discretionary matching contributions in an
amount determined each plan year to each participant who makes 401(k) savings
contributions during the year. The Company may also make a discretionary
profit-sharing contribution for a plan year to those participants employed
during the year. The Company's contribution to the plan was $33,482 and $34,192
for the years ended December 31, 2001 and 2000, respectively. During 2001, a key
employee entered into a salary continuation agreement with the Company providing
for periodic payments at the retirement or death of the employee. The present
value of the estimated liability is being accrued over the vesting period
defined in the agreement. The related expense for 2001 was $27,810. The Company
is the owner and beneficiary of a life insurance policy on this key employee
which will be used to fund the Company's liability under the salary continuation
agreement. The total net cash surrender value of this policy at December 31,
2001 was $19,898.
12. OVERNIGHT BORROWINGS
Federal funds purchased generally represent overnight borrowing by the Company
for temporary funding requirements. The average daily balance outstanding and
the average annual interest rate paid during the year was $31,003 and 3.49%,
respectively. The Company had no borrowings outstanding at year end or at any
month end during the year.
13. REGULATION AND REGULATORY RESTRICTIONS
The Company is regulated by the Board of Governors of the Federal Reserve System
("FRB") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina State
Banking Commission.
The Company 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
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
F-16
Quantitative measures established by regulation to ensure capital adequacy
require the Company 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, 2001, the most recent regulatory
notifications categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. Management believes, as of December 31,
2001, 2000 and 1999, that the Company 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 Company must monitor the
minimum capital ratios as set forth in the table below.
The Company's actual capital amounts and ratios are also presented in the table
(dollar amounts in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2001:
Total Capital (to Risk Weighted Assets) $8,735 13.79% $5,068 8.00% $6,335 10.00%
Tier I Capital (to Risk Weighted Assets) 7,941 12.53 2,534 4.00 3,801 6.00
Tier I Capital (to Average Assets) 7,941 9.77 3,252 4.00 4,064 5.00
As of December 31, 2000:
Total Capital (to Risk Weighted Assets) $6,661 12.01% $4,436 8.00% $5,545 10.00%
Tier I Capital (to Risk Weighted Assets) 5,966 10.76 2,218 4.00 3,327 6.00
Tier I Capital (to Average Assets) 5,966 8.77 2,720 4.00 3,400 5.00
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
14. COMMITMENTS AND CONTINGENCIES
The Company 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 Company to assure the performance of a customer to a third party. The
unused portion of commitments to extend credit at December 31, 2001 and 2000 was
$19,280,406 and $16,143,800, respectively.
The Company's exposure to credit loss for commitments to extend credit and
standby letters of credit is the contractual amount of those financial
instruments. The Company 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.
F-17
In the normal course of its operations, the Company 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
Company's business, financial position or results of operations.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2001. 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,
-----------------------------------------------------------
2001 2000
--------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands) (In Thousands)
Assets:
Cash and cash equivalents $ 5,427 $ 5,427 $ 5,044 $ 5,044
Marketable securities 6,860 6,860 2,023 2,023
Federal Home Loan Bank stock 230 230 225 225
Loans 65,231 66,184 60,293 60,422
Liabilities:
Demand deposits, NOW accounts, money
market accounts, savings 40,134 40,134 31,357 31,357
Time deposits 31,999 32,377 31,846 31,851
Off-balance-sheet - commitments to
extend credit -- 19,280 -- 16,144
The carrying amount of cash and cash equivalents is considered a reasonable
estimate of fair value.
The fair value of securities, excluding the Federal Home Loan Bank stock, is
based on quoted market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions of the Federal
Home Loan Bank.
The fair value for loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for similar remaining maturities.
The carrying amount of demand deposit approximates fair value as such deposits
are payable upon demand. The fair value of time deposits is estimated using the
present value of the projected cash flows using rates currently being offered on
certificates with similar maturities.
********
F-18
[ X ] PLEASE MARK VOTES
AS IN THIS EXAMPLE
REVOCABLE PROXY
WESTSTAR FINANCIAL SERVICES CORPORATION
79 Woodfin Place, Asheville, North Carolina 28801
APPOINTMENT OF PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby appoints W. Edward Anderson, Randall C. Hall, and
Carol L. King (the Proxies), or any of them, as attorneys and proxies, with full
power of substitution, to vote all shares of the common stock of Weststar
Financial Services Corporation (the Company) held of record by the undersigned
on February 15, 2002, at the Annual Meeting of Shareholders of the Company to be
held at Renaissance Asheville Hotel, Asheville, North Carolina, at 3:00 p.m. on
April 16, 2002, and at any adjournments thereof. The undersigned hereby directs
that the shares represented by this Appointment of Proxy be voted as follows on
the proposals listed below:
For hold Except
1. ELECTION OF DIRECTORS:
Proposal to elect three (3) directors of the Company for three-year terms
or until their successors are duly elected and qualified.
Nominees:
Max O. Cogburn, Sr. Carol L. King David N. Wilcox
FOR WITHHOLD FOR ALL EXCEPT
[_] [_] [_]
INSTRUCTION: To withhold authority to vote for any individual nominee, mark
For All Except and write that nominees name in the space provided below.
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For Against Abstain
2. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS: Proposal to ratify the
appointment of Deloitte & Touche LLP as the Companys independent
accountants for 2002.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. OTHER BUSINESS: On such other matters as may properly come before the
Annual Meeting, the proxies are authorized to vote the shares represented
by this Appointment of Proxy in accordance with their best judgment.
FOR AGAINST ABSTAIN
[_] [_] [_]
THE SHARES REPRESENTED BY THIS APPOINTMENT OF PROXY WILL BE VOTED AS
DIRECTED ABOVE. IN THE ABSENCE OF ANY DIRECTION, SUCH SHARES WILL BE VOTED FOR
THE ELECTION OF EACH OF THE NOMINEES LISTED IN PROPOSAL 1 BY CASTING AN EQUAL
NUMBER OF VOTES FOR EACH SUCH NOMINEE, AND FOR PROPOSAL 2. IF, AT OR BEFORE THE
TIME OF THE MEETING, ANY NOMINEE LISTED IN PROPOSAL 1 HAS BECOME UNAVAILABLE FOR
ANY REASON, THE PROXIES ARE AUTHORIZED TO VOTE FOR A SUBSTITUTE NOMINEE. THIS
APPOINTMENT OF PROXY MAY BE REVOKED BY THE HOLDER OF THE SHARES TO WHICH IT
RELATES AT ANY TIME BEFORE IT IS EXERCISED BY FILING WITH THE SECRETARY OF THE
COMPANY A WRITTEN INSTRUMENT REVOKING IT OR A DULY EXECUTED APPOINTMENT OF PROXY
BEARING A LATER DATE OR BY ATTENDING THE ANNUAL MEETING AND ANNOUNCING HIS OR
HER INTENTION TO VOTE IN PERSON.
________________________________________
Please be sure to sign and date Date
this Proxy in the box below.
________________________________________________________________________________
________________________________________________________________________________
Stockholder sign above Co-holder (if any) sign above
Detach above card, sign, date and mail in postage paid envelope provided.
WESTSTAR FINANCIAL SERVICES CORPORATION
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PLEASE DATE AND SIGN THIS APPOINTMENT OF PROXY AND RETURN TO WESTSTAR FINANCIAL
SERVICES CORPORATION.
Instruction: Please sign above exactly as your name appears on this
appointment of proxy. Joint owners of shares should both sign. Fiduciaries other
persons signing in a representative capacity should indicate the capacity in
which they are signing.
IMPORTANT: TO INSURE THAT A QUORUM IS PRESENT, PLEASE SEND IN YOUR
APPOINTMENT OF PROXY WHETHER OR NOT YOU PLAN ATTEND THE ANNUAL MEETING. EVEN IF
YOU SEND IN YOUR APPOINTMENT OF PROXY YOU WILL BE ABLE TO VOTE IN PERSON AT THE
MEETING YOU SO DESIRE.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN
THIS PROXY CARD IN THE ENCLOSED ENVELOPE
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
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