Exhibit 13.1
CATAWBA VALLEY BANCSHARES, INC.
AND SUBSIDIARY
2000 ANNUAL REPORT
CATAWBA VALLEY BANCSHARES, INC.
- --------------------------------------------------------------------------------
Profile Catawba Valley Bancshares, Inc. is the parent holding company
of Catawba Valley Bank. Catawba Valley Bank is chartered under
the laws of the state of North Carolina to engage in general
banking business. Catawba Valley Bank offers a wide range of
retail and commercial banking services including numerous
deposit services, banking cards and alternative investment
products. These funds are used for the extension of credit
through home loans, commercial loans, consumer loans and other
installment credit such as home equity, auto, boat loans and
Check Reserve. Chartered in 1995, Catawba Valley Bank's
headquarters are located in Hickory, North Carolina. Catawba
Valley Bank operates 3 full service offices and a mortgage
center in Catawba County. The common stock of Catawba Valley
Bancshares, Inc. is traded under the symbol "CTVB." Catawba
Valley Bancshares, Inc. and Catawba Valley Bank are
collectively referred to herein as the "Bank."
- --------------------------------------------------------------------------------
Mission Provide the people in the markets served by Catawba Valley
Statement Bank with the finest in banking services and to do so with a
highly trained, motivated, friendly and properly rewarded
staff of professionals in a financially conservative manner,
at a fair profit to the Bank with appropriate rewards to its
shareholders.
- --------------------------------------------------------------------------------
Table of Letter from the President.......................... 1
Contents
Selected Financial and Other Data.................. 2
Management's Discussion............................ 3
Report of Independent Accountants.................. 9
Financial Statements............................... 10
Notes to Financial Statements...................... 14
Directors.......................................... 29
General Corporate Information...................... 30
Dear Shareholders, Customers and Friends:
The Board of Directors and management of Catawba Valley Bancshares take great
pleasure in presenting to you the results of operations during 2000. The Bank
enjoyed an outstanding year in many areas. After reviewing this report, we feel
everyone will understand why we continue to be excited and amazed at the level
of success Catawba Valley Bancshares has enjoyed.
The Company continued to build on the solid year it had in 1999 during 2000.
Assets grew thirty two percent during the year. Profits increased from $1.0
million in 1999 to $1.5 million in 2000. Loan loss provisions were increased to
$1.7 million. The overall effective tax rate for the Bank was reduced from 37
percent to 34 percent by investing in tax-free investments.
Much of management's and the Bank staff's time during the year was spent
developing and improving various support areas of the Bank. Rapid growth and the
addition of new products and services have required many areas previously
handled by a single person to be departmentalized and new staff hired. The Bank
now has fifty employees. This group of employees has many years of banking
experience that allows Catawba Valley Bank to continue to offer outstanding
service to our customers.
The process of introducing and providing more e-commerce products for our
customers' use continued during 2000. Internet banking was made available in
August 2000. The final piece of this package, bill paying, will be available in
late March 2001. This complete internet banking package will allow any customer
who wishes, to conduct most of their banking from their own home or office.
On March 15, 2001, the Bank will open its fourth full service office in the
Springs Road section of Hickory. The addition of this branch should give the
Bank the locations and resources to achieve its goal of reaching $250 million in
assets by the end of 2003.
Our staff is dedicated; we truly do want to be the best bank in the Catawba
Valley, and I invite you to give us any comments that can make us better at what
we do. Thank you for your support as a customer and stockholder of the Bank.
R. Steve Aaron,
President and CEO
_________
Page 1
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
The following table sets forth certain financial data for the years ended
December 31, 2000 and 1999.
2000 1999
---------------- ----------------
INCOME STATEMENT
Net interest income $ 5,327,269 $ 3,943,471
Provision for loan losses 681,972 393,981
Non-interest income 1,019,453 876,034
Non-interest expenses 3,332,938 2,812,186
Net income 1,539,536 1,020,973
PER SHARE DATA/(1)/
Basic income $ 1.03 $ .68
Diluted income .99 .64
Book value 11.36 10.04
BALANCE SHEET
Total assets $ 155,652,084 $ 118,238,365
Total deposits 30,142,668 97,980,884
Total loans 112,719,740 86,081,962
Allowance for loan losses 1,653,831 1,341,340
Investment securities 32,010,857 17,406,489
Total earning assets 148,410,350 109,760,310
Stockholders' equity 16,980,055 15,020,771
SELECTED OTHER DATA
Return on average assets 1.12% .98%
Return on average equity 9.62% 6.96%
Average equity to average assets 11.68% 14.11%
Interest rate spread 4.52% 4.08%
Net yield on average interest-earning
assets 3.63% 3.97%
Average interest-earning assets to
average interest-bearing liabilities 113.19% 116.21%
Ratio of non-interest expense to
average total assets 2.43% 2.71%
Nonperforming loans to total loans .18% .56%
Allowance for loan losses to total loans 1.47% 1.56%
/(1)/ Adjusted to reflect the dilutive effect of a 10% stock dividend in 1999.
- --------------------------------------------------------------------------------
Page 2
Management's Discussion and Analysis of Financial Condition
And Results of Operations (MD&A)
Overview
Catawba Valley Bancshares, Inc. (the parent holding company for Catawba Valley
Bank) is a North Carolina corporation whose only activity is its ownership of
Catawba Valley Bank, a state-chartered bank organized under the laws of North
Carolina in 1995 and headquartered in Hickory. Catawba Valley Bancshares, Inc.
and Catawba Valley Bank are collectively referred to herein as the "Bank." The
Bank provides a full range of banking services from three locations, two located
in Hickory and one in Newton.
The Bank's market area consists of the area within a 10-mile radius of the City
of Hickory, North Carolina, and includes parts of Catawba County, Burke County,
Caldwell County and Alexander County, North Carolina. The market area is located
in a region known as the Unifour Area of North Carolina. The Unifour Area serves
as the commercial hub for several prosperous towns. The Unifour Area is a very
strong and diversified economic area. This local economic strength, along with
the market's quick acceptance of the Bank, accounts for the rapid growth the
Bank has enjoyed.
Catawba Valley Bank earned $1.5 million or $1.03 basic net income per share in
2000, compared to $1.0 million or $.68 per share reported in 1999. The earnings
equate to a return on average assets of 1.12 percent for 2000 compared to .98
percent for 1999 and a return on average equity of 9.62 percent in 2000 versus
6.96 percent in 1999. The Bank's improved earnings were primarily due to an
increased loan portfolio, improved non-interest income and operating efficiency.
Expanded discussion of the Bank's operating results and financial condition are
presented in the following narrative and tables. The objective of this
discussion is to provide the reader with a clear, concise and complete
understanding of the financial condition and results of operations of Catawba
Valley Bank for 2000. The discussion should be read in conjunction with the
consolidated financial statements and related notes included herein on pages 10
through 28.
YEAR END BALANCES ($ MILLIONS)
[GRAPHIC]
1996 1997 1998 1999 2000
NET LOANS 25 42 60 85 111
DEPOSITS 30 57 75 98 130
ASSETS 37 65 90 118 156
- --------------------------------------------------------------------------------
Page 3
NET INTEREST INCOME
The major component of the Bank's revenue is net interest income. The amount of
net interest income is based on a number of factors including the volumes of
interest-earning assets and interest-bearing liabilities and the interest rates
earned and paid. Net interest income equals the amount by which interest and
fees generated by earning assets exceed the interest costs of the funds used to
carry them.
For 2000 net interest income represented 84 percent of net revenues as compared
with 82 percent in 1999. Net interest income rose $1.4 million or 35 percent in
2000 and totaled $5.3 million as compared with $3.9 million in 2000. Strong
growth in earning assets, primarily loans and investments, accounted for the
earnings gain. The Bank experienced an increase in its average rate on earning
assets from 8.27 to 9.14 percent. The 87 basis point increase can be attributed
to the Bank being asset sensitive and the rate increases the Federal Reserve
implemented in the fall of 1999. Many of the Bank's loans use the prime rate as
an index. Consequently, loans will normally reprice more quickly than the Bank's
liabilities.
NON-INTEREST INCOME
Non-interest income rose $143,000 or 16 percent for the year. The increase is
attributed to gains in deposit account service charges (more accounts), other
fee income such as non-sufficient funds (NSF) charges, loan origination fees,
and income earned on residential mortgage loans that the Bank brokered.
Service charges on deposit accounts increased $189,000 or 66 percent as a result
of more deposit accounts. Higher revenues from NSF charges accounted for a
$133,000 increase in 2000 non-interest income. During 2000, the Bank brokered
$22 million in residential mortgage loans and received $264,000 in fee income.
This was a 12 percent increase from 1999.
NON-INTEREST EXPENSE
Total non-interest expense increased $521,000 for the year. This increase can be
attributed to growth and the need for more employees to handle that growth.
$276,000 of the increase was related to salaries and benefits. The balance of
the increase was related to equipment costs, professional fees, advertising,
data processing and other expenses. The Bank's directors approved an incentive
plan for the employees that paid out $94,000 in bonuses in 2000 based on the
performance of the Bank. Catawba Valley Bank continues to operate with an
efficiency ratio that compares very favorably with its peer banks.
INCOME TAXES
Having used all of its NOL (net operating losses) as credits against earnings in
1997, Catawba Valley Bank was fully taxed by state and federal governments in
2000 and 1999. The Bank's effective tax rate for 2000 was 34 percent and the
combined tax expense was $792,000. Efforts will be made to reduce the effective
tax rate as much as possible. Investments in securities will be in state tax
exempt bonds or tax exempt municipal bonds. Investments in other bonds must have
yield spreads that compensate for the tax effect.
- --------------------------------------------------------------------------------
Page 4
EARNING ASSETS
Average earning assets in 2000 were $128.3 million, a 31 percent increase over
1999. A 36 percent increase in average loans, and a 56 percent increase in
average investment securities and average time deposits with other financial
institutions generated this change. Average earning assets represented 93
percent of average total assets during 2000, a 1 percent decrease from 1999.
AVERAGE ASSETS ($ MILLIONS)
[GRAPHIC]
1996 1997 1998 1999 2000
AVERAGE ASSETS 25 51 77 104 137
AVERAGE EARNINGS ASSETS 24 49 74 98 128
AVERAGE LOANS, GROSS 14 34 52 72 99
Loan growth continued to be the strength of the Bank's rapid growth. Net loans
increased $26.3 million or 31 percent in 2000 as compared to an increase of
$22.8 million or 38 percent in 1999. Both the commercial and consumer portfolios
increased, with commercial activity continuing to account for the majority of
the increase. Catawba Valley Bank's primary lending focus is to individuals and
small to medium size businesses. Residential construction lending is also a
significant part of the Bank's lending activity. The gross loans to deposit
ratio was 87 percent as of December 31, 2000 and 88 percent as of December 31,
1999.
Investment securities and time deposits are the second largest category of
earning assets. The total at year-end 2000 was $32.6 million, increasing $12.9
million from 1999.
Federal funds sold and interest-bearing balances with other banks totaled $4.2
million on December 31, 2000 which represented a 16 percent decrease from $5.1
million in 1999. These funds were transferred into investment securities to
obtain increased yields. Federal funds sold and bank deposits represent the most
liquid portion of assets and are used to fund loan demand and other cash needs
of the Bank.
- --------------------------------------------------------------------------------
Page 5
INTEREST-BEARING LIABILITIES
Management has built most of the deposit base of the Bank from its local
customers' consumer and commercial deposits. The Bank does solicit deposits from
outside its primary market area when local deposits cannot keep up with loan
demand. Total deposits at December 31, 2000 were $130 million, an increase of 33
percent over year-end 1999. Catawba Valley Bank has $4 million of deposits from
outside its market area. The category showing the largest dollar growth was
certificates of deposit, which increased $22 million or 38 percent. Good growth
also occurred in money market deposits which increased 19 percent during the
year.
2000 DEPOSIT MIX
[GRAPHIC]
DEMAND 7%
NOW 11%
MONEY MARKET 19%
SAVINGS 2%
LARGE CD'S 22%
SMALL CD'S 39%
Demand deposits, NOW accounts and savings increased 31 percent to $24.7 million
in 2000. Increasing demand deposit and savings account growth is a major goal of
management. Deposits in these accounts either earn no interest or earn at a
lower rate than do certificates of deposit. We are very pleased with the
progress the Bank has made in attracting these types of accounts.
Catawba Valley Bank established a line of credit with the Federal Home Loan Bank
of Atlanta during 1999. At December 31, 2000, the Bank had a balance of $8
million on this line.
CAPITAL ADEQUACY
The Bank maintains a strong level of capital as a margin of safety for its
depositors and shareholders. The original stock offering raised $7.7 million in
capital. A secondary stock offering completed in October 1998 raised an
additional $5.9 million in capital. As of December 31, 2000, stockholders'
equity was $17 million. At year-end 2000, the book value per share was $11.36.
The ratio of stockholders' equity to assets was 10.9 percent. In addition to an
overall equity to assets ratio requirement, regulators subject banks to risk-
based capital measures. The risk-based capital ratios measure the relationship
of capital to a combination of balance sheet and off-balance sheet credit risk.
The values of both balance sheet and off-balance sheet items are adjusted to
reflect credit risk.
- --------------------------------------------------------------------------------
Page 6
Tier 1 Capital (consisting of stockholders' equity less ineligible intangible
assets) is required to be at least 8.0 percent of risk-weighted assets. The Tier
1 Capital Ratio for Catawba Valley Bank at the end of 2000 was 14.5 percent and
the total capital ratio was 15.7 percent. At the end of 1999, those ratios were
17.3 percent and 18.9 percent, respectively. These ratios will continue to
decrease as the Bank's capital is leveraged through asset growth.
The ability to grow is directly related to capital. The internal capital
generation rate of the Bank is expected to be adequate to meet the growth needs
for the next several years. Management will look for every opportunity to grow
the Bank through branch acquisitions or establishing new branches when it is
economically feasible.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the expense of providing an allowance or
reserve for anticipated losses on loans. The amount charged to expense each year
is dependent on many factors including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
the loan portfolio, past loan loss experience, and economic factors.
The provision for loan loss expense was $682,000 in 2000. The Bank experienced
$369,000 in net charge-offs during 2000. The allowance for loan losses continues
to grow and totaled $1.7 million at December 31, 2000, representing 1.5 percent
of the year-end loan balance. This percentage level equals the average for state
banks in North Carolina.
ASSET AND LIABILITY MANAGEMENT INTEREST RATE RISK
One of the primary objectives of asset and liability management is to maximize
net interest income while minimizing the earnings risk associated with changes
in interest rates. Management seeks to manage its assets and liabilities in a
manner that will limit interest rate risk and thus stabilize long-term earnings.
Fluctuations in market interest rates do not necessarily have a significant
impact on net interest income, depending on the rate sensitivity position of the
Bank. A rate sensitive asset is a loan or investment that can be repriced within
a certain time interval. When a proper balance between rate sensitive assets and
rate sensitive liabilities exists, market interest rate fluctuations should not
have a significant impact on earnings.
Management uses an earnings simulation model to estimate the amount of earnings
at risk due to changes in interest rates. This model is updated quarterly and is
based on three different rate scenarios. The results of the December 31, 2000
model indicate the Bank's earnings would be impacted an average of 16 percent if
interest rates went up or down 200 basis points. Management believes that any
downward change in interest rates, will be offset by income generated from
anticipated growth in assets.
- --------------------------------------------------------------------------------
Page 7
MARKET FOR COMMON STOCK
As of December 31, 2000, there were 1,779 shareholders of record of Catawba
Valley Bancshares, Inc. stock. The stock is listed on the National Daily
Quotation Service "Bulletin Board" with Scott and Stringfellow, Inc. as the
market maker. The table below lists the high and low prices that the market
maker quoted and at which trades were completed during each quarter. Catawba
Valley Bancshares, Inc. stock is considered to be a thinly traded stock with
only a few thousand shares traded each quarter.
2000 1999
--------------------- ---------------------
Period High Low High Low
------ ------ ------- -------- -------
First Quarter $ 16.25 $ 14.00 $ 22.96 $ 20.00
Second Quarter 17.00 14.00 23.18 21.02
Third Quarter 16.00 14.13 21.36 15.46
Fourth Quarter 15.00 9.25 17.50 15.00
- --------------------------------------------------------------------------------
Page 8
[LOGO]
DIXON ODOM PLLC
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Catawba Valley Bancshares, Inc. and Subsidiary
Hickory, North Carolina
We have audited the accompanying consolidated balance sheets of Catawba Valley
Bancshares, Inc. and Subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2000 and 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Catawba Valley Bancshares, Inc. and Subsidiary as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Sanford, North Carolina
January 26, 2001
________
Page 9
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
---------------- ----------------
Assets
Cash and due from banks $ 1,464,535 $ 4,673,364
Interest-bearing deposits in banks 2,527,781 3,566,688
Federal funds sold 1,711,825 1,497,543
Time deposits in banks 593,978 2,277,968
Investment securities available for sale (Note C) 32,010,857 15,755,543
Investment securities held to maturity (fair value of
$1,607,909 at December 31, 1999) (Note C) - 1,650,946
Loans (Note D) 112,719,740 86,081,962
Less allowance for loan losses (1,653,831) (1,341,340)
---------------- ----------------
Net loans 111,065,909 84,740,622
Stock in the Federal Home Loan Bank, at cost 500,000 271,000
Bank premises and equipment (Note E) 3,393,934 2,801,766
Other assets 2,383,265 1,002,925
---------------- ----------------
Total assets $ 155,652,084 $ 118,238,365
================ ================
Liabilities and Stockholders' Equity
Deposits:
Non-interest-bearing demand $ 8,928,234 $ 7,021,108
Money market and NOW accounts 38,365,504 30,665,088
Savings 2,030,698 1,821,626
Time, $100,000 and over 28,678,481 17,648,470
Other time 52,139,751 40,824,592
---------------- ----------------
Total deposits 130,142,668 97,980,884
Borrowings (Note G) 8,000,000 5,000,000
Accrued expenses and other liabilities 529,361 236,710
---------------- ----------------
Total liabilities 138,672,029 103,217,594
---------------- ----------------
Stockholders' equity: (Notes I and L)
Preferred stock, no par value, 1,000,000 shares
authorized; none issued
- -
Common stock, $1 par value, 9,000,000 shares
authorized, 1,495,351 shares issued and outstanding 1,495,351 1,495,351
Additional paid-capital 13,602,333 13,602,333
Retained earnings 1,661,234 301,140
Accumulated other comprehensive income (loss) 221,137 (378,053)
---------------- ----------------
Total stockholders' equity 16,980,055 15,020,771
---------------- ----------------
Total liabilities and stockholders' equity $ 155,652,084 $ 118,238,365
================ ================
Commitments (Notes H and J)
- --------------------------------------------------------------------------------
The accompany notes are an integral part of the financial statements. Page 10
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
---------------- ----------------
Interest and fee income
Loans $ 9,665,994 $ 6,716,691
Investment securities 1,683,890 873,199
Federal funds sold 82,046 114,820
Time deposits with banks 75,421 134,811
Interest-bearing deposits with banks 204,440 182,732
---------------- ----------------
Total interest income 11,711,791 8,022,253
---------------- ----------------
Interest expense
Time deposits, $100,000 and over 1,479,312 902,002
Other deposits 4,440,515 3,122,024
Borrowings 464,695 54,756
---------------- ----------------
Total interest expense 6,384,522 4,078,782
---------------- ----------------
Net interest income 5,327,269 3,943,471
Provision for loan losses 681,972 393,981
---------------- ----------------
Net interest income after provision for
loan losses 4,645,297 3,549,490
---------------- ----------------
Non-interest income
Service charges on deposit accounts 475,569 286,932
Other 543,884 589,102
---------------- ----------------
Total non-interest income 1,019,453 876,034
---------------- ----------------
Non-interest expenses
Compensation and employee benefits 1,670,175 1,393,973
Occupancy and equipment 484,209 401,855
Professional fees 114,205 167,715
Stationery, printing and supplies 91,979 86,395
Advertising and business promotion 165,165 146,775
Data processing 338,752 252,199
Other 468,453 363,274
---------------- ----------------
Total non-interest expenses 3,332,938 2,812,186
---------------- ----------------
Income before income taxes 2,331,812 1,613,338
Income taxes (Note K) 792,276 592,365
---------------- ----------------
Net income $ 1,539,536 $ 1,020,973
================ ================
Net income per common share
Basic $ 1.03 $ .68
================ ================
Diluted $ .99 $ .64
=============== ================
The accompany notes are an integral part of the financial statements. Page 11
- --------------------------------------------------------------------------------
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000 and 1999
- --------------------------------------------------------------------------------
Accumulated
Common stock Additional other
--------------------------- paid-in Retained comprehensive Total
Shares Amount capital earnings income (loss) equity
------------ ------------ ------------ ------------ ------------- ------------
Balance at December 31,
1998 1,351,910 $ 6,759,550 $ 6,979,408 $ 573,868 $ 4,598 $ 14,317,424
------------
Comprehensive income:
Net income - - - 1,020,973 - 1,020,973
Unrealized holding losses
on available-for-sale
securities - - - - (382,651) (382,651)
------------
Total comprehensive income 638,322
------------
Stock options exercised 7,500 37,500 27,525 65,025
Formation of Catawba Valley
Bancshares, Inc. (Note A) - (5,437,640) 5,437,640 - - -
10% stock dividend 135,941 135,941 1,157,760 (1,293,701) - -
------------ ------------ ------------ ------------ ------------- ------------
Balance at December 31,
1999 1,495,351 1,495,351 13,602,333 301,140 (378,053) 15,020,771
------------
Comprehensive income:
Net income - - - 1,539,536 - 1,539,536
Unrealized holding gains
on available-for-sale
securities - - - - 599,190 599,190
------------
Total comprehensive income 2,138,726
------------
Cash dividends paid - - - (179,442) - (179,442)
------------ ------------ ------------ ------------ ------------- ------------
Balance at December 31,
2000 1,495,351 $ 1,495,351 $ 13,602,333 $ 1,661,234 $ 221,137 $ 16,980,055
============ ============ ============ ============ ============= ============
- --------------------------------------------------------------------------------
The accompany notes are an integral part of the financial statements. Page 12
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 and 1999
===============================================================================
2000 1999
--------------- ---------------
Cash flows from operating activities
Net income $ 1,539,536 $ 1,020,973
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 183,303 217,279
Deferred income taxes (104,000) (55,000)
Provision for loan losses 681,972 393,981
(Gain) loss on sale of assets 33,577 (1,014)
Change in assets and liabilities:
Increase in other assets (1,577,362) (291,691)
Increase (decrease) in other liabilities 292,651 (292,819)
-------------- ---------------
Net cash provided by operating activities 1,049,677 991,709
-------------- ---------------
Cash flows from investing activities
Decrease in time deposits in banks 1,683,990 198,988
Purchase of investment securities (17,946,050) (10,209,485)
Purchases of Federal Home Loan Bank stock (229,000) (76,200)
Proceeds from maturities and calls of
investment securities 1,906,667 3,601,873
Proceeds from sales of investment securities 2,347,783 -
Net increase in loans (27,005,466) (23,540,713)
Purchases of premises and equipment (823,397) (1,087,821)
Proceeds from sales of premises and equipment - 38,598
-------------- ---------------
Net cash used by investing activities (40,065,473) (31,074,760)
-------------- ---------------
Cash flows from financing activities
Net increase in deposit accounts 32,161,784 23,159,835
Proceeds from borrowings 3,000,000 5,000,000
Payment of dividends (179,442) -
Proceeds from issuance of common stock - 65,025
-------------- ---------------
Net cash provided by financing activities 34,982,342 28,224,860
-------------- ---------------
Net decrease in cash and cash equivalents (4,033,454) (1,858,191)
Cash and cash equivalents, beginning of year 9,737,595 11,595,786
-------------- ---------------
Cash and cash equivalents, end of year $ 5,704,141 $ 9,737,595
============== ===============
Supplemental cash flow information
Interest paid $ 6,351,812 $ 4,075,787
============== ===============
Income taxes paid $ 750,000 $ 794,500
============== ===============
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
Page 13
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
================================================================================
NOTE A - ORGANIZATION AND OPERATIONS
On June 30, 1999, Catawba Valley Bancshares, Inc. (the "Holding Company") was
formed as a holding company for Catawba Valley Bank. Upon formation, one share
of the Holding Company's $1 par value common stock was exchanged for each of the
then outstanding 1,359,410 shares of Catawba Valley Bank's $5 par value common
stock. The Holding Company currently has no operations and conducts no business
on its own other than owning Catawba Valley Bank.
Catawba Valley Bank was incorporated October 3, 1995 and began banking
operations on November 1, 1995. Catawba Valley currently has three locations in
Catawba County, North Carolina, and is engaged in commercial and retail banking,
operating under the banking laws of North Carolina and the rules and regulations
of the Federal Deposit Insurance Corporation and the North Carolina Commissioner
of Banks. Catawba Valley Bank undergoes periodic examinations by those
regulatory authorities.
Valley Financial Services, Inc. is a wholly-owned subsidiary of Catawba Valley
Bank whose principal business activity is that of an agent for various insurance
products and non-bank investment products and services.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Catawba Valley Bancshares, Inc., Catawba Valley Bank and Valley Financial
Services, Inc., together referred to as the "Bank." All significant intercompany
transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for losses on loans.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and amounts due from banks, federal funds sold and
interest-bearing deposits in other banks.
- --------------------------------------------------------------------------------
Page 14
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Held to Maturity
Bonds and notes for which the Bank has the positive intent and ability to hold
to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
Securities Available for Sale
Available-for-sale securities are reported at fair value and consist of bonds
and notes not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses on available-for-sale securities
are reported as a net amount in other comprehensive income. Gains and losses on
the sale of available-for-sale securities are determined using 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
would result in write-downs of the individual securities to their fair value.
Such write-downs would be included in earnings as realized losses. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, net of unamortized deferred
loan fees and costs on original loans, reduced by an allowance for loan losses.
Interest on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loan origination fees and costs
are deferred and included in income and expense using a method that approximates
the level yield method.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collection of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
losses on existing loans, based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect the
borrowers' ability to pay. In addition, regulatory examiners may require the
Bank to recognize changes to the allowance for loan losses based on their
judgments about information available to them at the time of their examination.
Loans are considered impaired when it is probable that all amounts due under the
contractual terms of the loan will not be collected. The measurement of impaired
loans that are collateral dependent is based on the fair value of the
collateral. The measurement of other impaired loans is generally based on the
present value of expected future cash flows discounted at the historical
effective interest rate. If a recorded investment in the loan exceeds the
measure of fair value, a valuation allowance is established as a component of
the allowance for loan losses. The Bank had no impaired loans during the years
ended December 31, 2000 and 1999.
- --------------------------------------------------------------------------------
Page 15
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Allowance for Loan Losses (Continued)
The Bank uses several factors in determining if a loan is impaired. The internal
asset classification procedures include a thorough review of significant loans
and lending relationships and include the accumulation of related data. This
data includes loan payment status, borrowers' financial data and borrowers'
operating factors such as cash flows, operating income or loss, etc.
Nonaccrual Loans
Loans that are past due ninety (90) days or more as to principal or interest, or
where reasonable doubt exists as to timely collection, are generally classified
as nonaccrual loans unless they are well collateralized and in process of
collection. The Bank had approximately $54,832 and $207,000 of loans classified
as nonaccrual at December 31, 2000 and 1999, respectively.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Repairs and maintenance costs are charged to operations as incurred,
and additions and improvements to premises and equipment are capitalized. Upon
sale or retirement, the cost and related accumulated depreciation are removed
from the accounts and any gains or losses are reflected in current operations.
Stock in Federal Home Loan Bank of Atlanta
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Deferred
tax assets are reduced by a valuation allowance if it is more likely than not
that the tax benefits will not be realized.
- --------------------------------------------------------------------------------
Page 16
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation Plans
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the Bank's
stock option plans have no intrinsic value at the grant date and, under Opinion
No. 25, no compensation cost is recognized for them. The Bank has elected to
continue with the accounting methodology in Opinion No. 25 and, as a result, has
provided pro forma disclosures of net income and earnings per share and other
disclosures as if the fair value based method of accounting had been applied.
Per Share Data
Basic and diluted net income per share is computed based on the weighted average
number of shares outstanding during each period after retroactively adjusting
for the stock dividends. Diluted net income per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the net income of the Bank.
Basic and diluted net income per share have been computed based upon net income
as presented in the accompanying consolidated statements of operations divided
by the weighted average number of common shares outstanding or assumed to be
outstanding as summarized below:
2000 1999
---------------- ----------------
Weighted average number of common
shares used in computing basic net
income per share 1,495,351 1,492,887
Effect of dilutive stock options 60,206 94,075
---------------- ----------------
Weighted average number of common shares
and dilutive potential common
shares used in computing diluted net
income per share 1,555,557 1,586,962
================ ================
- --------------------------------------------------------------------------------
Page 17
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
================================================================================
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
Recent Accounting Pronouncements
In July 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards requiring balance sheet recognition of all derivative instruments at
fair value. SFAS No. 133 was subsequently amended by SFAS No. 137 in June 1999
and by SFAS No. 138 in June 2000. The Company adopted this statement on January
1, 2001. The statement, as amended, specifies that changes in the fair value of
derivative instruments be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows
derivative gains and losses to offset related results on hedged items in the
income statement. The statement is effective for fiscal years beginning after
June 15, 2000. The adoption of this statement did not materially affect the
Company's financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140
is a replacement of SFAS No. 125, although SFAS No. 140 carried forward most of
the provisions of SFAS No. 125 without change. SFAS No. 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitizations, retained interests, and collateral received and pledged in
reverse repurchase agreements for fiscal years ending after December 15, 2000.
The new statement eliminates the prior requirement to record collateral received
under certain securities financing transactions and requires reclassification in
the balance sheet of assets pledged under certain conditions. The adoption of
SFAS No. 140 is not expected to have a significant impact on the Company's
financial statements.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation. The reclassifications had no effect on net
income or stockholders' equity as previously reported.
- --------------------------------------------------------------------------------
Page 18
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
================================================================================
NOTE C - INVESTMENT SECURITIES
The amortized cost and estimated market values of securities available for sale
at December 31 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------- --------------- --------------- ----------------
2000
U.S. Government agencies $ 27,072,532 $ 332,608 $ 94,927 $ 27,310,213
Municipal agencies 4,603,269 101,878 4,503 4,700,644
---------------- ------------- -------------- ----------------
$ 31,675,801 $ 434,486 $ 99,430 $ 32,010,857
================ ============== ============== ================
1999
U.S. Government agencies $ 13,463,229 $ - $ 523,004 $ 12,940,225
Mortgage-backed securities 2,865,121 2,426 52,229 2,815,318
---------------- -------------- -------------- ----------------
$ 16,328,350 $ 2,426 $ 575,233 $ 15,755,543
================ ============== ============== ================
The amortized cost and estimated market values of securities held to maturity at
December 31, 1999 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------- --------------- --------------- ---------------
U.S. Government agencies $ 257,638 $ - $ 10,200 $ 247,438
Municipal agencies 1,085,000 - 31,293 1,053,707
Mortgage-backed securities 308,308 1,424 2,968 306,764
---------------- -------------- -------------- ---------------
$ 1,650,946 $ 1,424 $ 44,461 $ 1,607,909
================ ============== ============== ===============
- --------------------------------------------------------------------------------
Page 19
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair values of securities available for sale at
December 31, 2000 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available for sale
-------------------------------
Amortized Estimated
cost fair value
-------------- --------------
Due in one year or less $ 175,412 $ 174,954
Due after one year through
five years (5) 14,708,108 14,703,098
Due after five years through ten years (10) 13,714,868 14,015,945
Due after ten years 3,077,413 3,116,860
-------------- --------------
$ 31,675,801 $ 32,010,857
============== ==============
NOTE D - LOANS AND ALLOWANCES FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
2000 1999
-------------- --------------
Commercial $ 53,867,710 $ 39,337,626
Real estate:
Construction and land development 14,687,835 12,019,744
Residential, 1-4 families 20,343,201 14,452,776
Residential, home equity 9,189,938 7,788,222
Installment 12,932,364 11,308,886
Other 1,698,692 1,174,708
-------------- --------------
$ 112,719,740 $ 86,081,962
============== ==============
The Bank has granted loans to certain directors and executive officers of the
Bank and to their associates. During 2000 and 1999, $1,364,000 and $2,131,000,
respectively, in new loans were made and repayments of $1,986,000 and $757,000,
respectively, were collected, resulting in a balance of $3,335,000 and
$3,133,000 at December 31, 2000 and 1999, respectively.
- --------------------------------------------------------------------------------
Page 20
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE D - LOANS AND ALLOWANCES FOR LOAN LOSSES (Continued)
A summary of the activity in the allowance for loan losses for the years ended
December 31 is as follows:
2000 1999
-------------- --------------
Balance, beginning of the year $ 1,341,340 $ 1,050,360
Provision for loan losses 681,972 393,981
Charge offs (377,780) (198,610)
Recoveries 8,299 95,609
-------------- --------------
Balance, end of year $ 1,653,831 $ 1,341,340
============== ==============
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
2000 1999
-------------- --------------
Land $ 707,978 $ 497,704
Leasehold improvements 104,177 102,215
Equipment and fixtures 1,233,874 1,115,864
Buildings 1,638,533 1,533,539
-------------- --------------
3,684,562 3,249,322
Less accumulated depreciation and amortization 696,461 465,234
-------------- --------------
2,988,101 2,784,088
Construction in progress 405,833 17,678
-------------- --------------
$ 3,393,934 $ 2,801,766
============== ==============
Depreciation and amortization expense for the years ended December 31, 2000 and
1999 amounted to $229,631 and $198,558, respectively.
NOTE F - DEPOSITS
The scheduled maturities of time deposits at December 31, 2000 are as follows:
2001 $ 50,101,290
2002 23,091,748
2003 7,625,194
------------
$ 80,818,232
============
- --------------------------------------------------------------------------------
Page 21
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE G - BORROWINGS
At December 31, 2000, the Bank had outstanding advances of $8,000,000 under its
$22,500,000 line of credit with the Federal Home Loan Bank of Atlanta. These
advances had a weighted average interest rate of 6.83% at December 31, 2000. All
advances are secured by a blanket floating lien on the Bank's one-to-four family
residential mortgage loans.
NOTE H - LEASE
The Bank has a noncancelable operating lease for a branch location that expires
in 2005. The lease has two five-year renewal options based on market rates. The
Bank has another noncancelable operating lease for a location for its mortgage
banking operations that expires in 2004. Future minimum lease payments under
these leases for years subsequent to December 31, 2000 are as follows:
2001 $ 52,040
2002 52,040
2003 52,040
2004 35,540
2005 17,020
----------
$ 208,680
==========
Total rental expense related to the operating lease was $52,711 and $48,107 for
the years ended December 31, 2000 and 1999, respectively.
NOTE I - STOCK OPTION PLANS
During 1996 the Bank adopted an incentive stock option plan (the "Employee
Plan") which is intended to attract and induce continued employment of key
employees and to provide them an opportunity to acquire a proprietary interest
in the Bank and to align their long-term interests with that of the
stockholders. The Employee Plan was ratified by the stockholders prior to
implementation. Non-employee directors do not participate in the Employee Plan.
The exercise price of each share of common stock covered by an option is equal
to the fair market value per share of the Bank's common stock on the date the
option is granted. Employees vest in the options at 20% each year of continuous
employment. Options under the Employee Plan expire ten years after the grant
date.
During 1997 the Bank created a nonqualified stock option plan for directors (the
"Director Plan") which is intended to attract capable individuals to serve on
the Board of Directors of the Bank. The Director Plan was ratified by the
shareholders prior to implementation. Employee directors do not participate in
the Director Plan. The exercise price of each share of common stock covered by
an option is equal to the fair market value per share of the Bank's common stock
on the date the option is granted. Options under the Director Plan fully vest at
the date of grant and expire ten years after the grant date.
- --------------------------------------------------------------------------------
Page 22
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE I - STOCK OPTION PLANS (Continued)
A summary of the Bank's option plans as of and for the years ended December 31,
2000 and 1999, which reflects all stock dividends paid to date, is as follows:
Outstanding Options
--------------------------------
Shares Weighted
Available Average
for Future Number Exercise
Grants Outstanding Price
------------- ------------- --------------
At December 31, 1998 9,252 221,004 $ 9.20
Options granted (1,650) 1,650 21.60
Options exercised - (8,250) 7.80
Options expired and forfeited 1,994 (1,994) 9.06
------------- -------------- --------------
At December 31, 1999 9,596 212,410 9.35
Options granted (1,000) 1,000 15.00
Options exercised - - -
Options expired and forfeited 1,994 (1,994) 9.15
------------- -------------- --------------
At December 31, 2000 10,590 211,416 $ 9.38
============= ============== ==============
There were 180,056 and 162,305 exercisable options outstanding at December 31,
2000 and 1999, respectively, with weighted average exercise prices of $8.86 and
$8.74, respectively.
Had compensation costs for the Bank's stock option plans been determined based
on the fair value at the grant date for awards in 2000 and 1999, the Bank's net
income and net income per share would have changed to the pro forma amounts
indicated as follows:
2000 1999
-------------- --------------
Net income as reported $ 1,539,536 $ 1,020,973
Net income pro forma 1,427,269 910,156
Basic net income per common share
As reported 1.03 .68
Pro forma .95 .61
Diluted net income per common share
As reported .99 .64
Pro forma .92 .57
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 2000 and 1999, respectively: dividend yield of 0.0%; expected
volatility of 16% and 29%; risk free interest rate of 6.00% and 5.50%; and
weighted average expected lives of seven years.
- --------------------------------------------------------------------------------
Page 23
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE J - OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk 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. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank, upon extension of credit is based on management's
credit evaluation of the borrower. Collateral obtained varies but may include
real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of December 31, 2000 is as follows:
Financial instruments whose contract amounts represent credit risk:
Undisbursed lines of credit $ 23,297,000
Commitments to extend credit 398,000
NOTE K - INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31
were as follows:
2000 1999
------------ ------------
Current $ 896,276 $ 647,365
Deferred (104,000) (55,000)
------------ ------------
$ 792,276 $ 592,365
============ ============
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate of 34% was primarily a result of
state income taxes for the years ended December 31, 2000 and 1999.
- --------------------------------------------------------------------------------
Page 24
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE K - INCOME TAXES (Continued)
Significant components of deferred tax assets and liabilities, included in other
assets, at December 31 are as follows:
2000 1999
-------------- -------------
Deferred tax assets:
Allowance for loan losses $ 574,000 $ 453,000
Pre-opening costs - 13,000
Unrealized investment loss - 195,000
-------------- -------------
Total deferred tax assets 574,000 661,000
-------------- -------------
Deferred tax liabilities:
Depreciation 29,000 25,000
Unrealized investment gain 114,000 -
Deferred loan fees 4,000 4,000
-------------- -------------
Total deferred tax liabilities 147,000 29,000
-------------- -------------
Net deferred tax asset $ 427,000 $ 632,000
============== =============
NOTE L - REGULATORY RESTRICTIONS
The Bank, as a North Carolina banking corporation, may pay dividends only out of
undivided profits as determined pursuant to North Carolina General Statutes
Section 53-87. However, regulatory authorities may limit payment of dividends by
any bank when it is determined that such a limitation is in the public interest
and is necessary to ensure financial soundness of the Bank.
The Bank is subject to various regulatory capital requirements administered by
the banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes that as of December 31, 2000, the Bank meets all
capital adequacy requirements to which it is subject.
- --------------------------------------------------------------------------------
Page 25
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE L - REGULATORY RESTRICTIONS (Continued)
As of December 31, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier 1
leverage ratios as set forth in the table below. There are no conditions or
events since the notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are also presented in the
following table.
Actual For capital adequacy Well capitalized
---------------------------- --------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------- ------------ ------------- ------------- ------------
(dollars in thousands)
2000
Total Capital (to Risk
Weighted Assets) $ 18,445 15.74% $ 9,375 8.00% $ 11,719 10.00%
Tier 1 Capital (to Risk
Weighted Assets) 16,980 14.49% 4,688 4.00% 7,032 6.00%
Tier I Capital (to Average
Assets) 16,980 11.02% 6,161 4.00% 7,701 5.00%
1999
Total Capital (to Risk
Weighted Assets) 16,362 18.89% 6,931 8.00% 8,664 10.00%
Tier 1 Capital (to Risk
Weighted Assets) 15,021 17.33% 3,465 4.00% 5,198 6.00%
Tier I Capital (to Average
Assets) 15,021 12.92% 4,649 4.00% 5,811 5.00%
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
- --------------------------------------------------------------------------------
Page 26
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents and Time Deposits with Other Financial Institutions
The carrying amounts reported in the balance sheet for cash, short-term
instruments and time deposits approximate those assets' fair value.
Investment Securities
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock approximates fair value based
on the redemption provisions of the Federal Home Loan Bank.
Loans Receivable
The fair values for loans are estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms. The
carrying amount of accrued interest approximates its fair value.
Deposits
The fair values disclosed for deposits with no stated maturity (e.g., interest
and non-Interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for deposits with a
stated maturity date (time deposits) are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on these
accounts to a schedule of aggregated expected monthly maturities on time
deposits.
Borrowings
The fair values are based on discounting expected cash flows at the interest
rate for debt with the same or similar remaining maturities and collected
requirements.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk discussed in
Note J, it is not practicable to estimate the fair value of future financing
commitments.
- --------------------------------------------------------------------------------
Page 27
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table reflects the estimated fair values and carrying values at
December 31:
2000 1999
------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
-------------- -------------- --------------- ----------------
Cash and cash equivalents $ 5,704,141 $ 5,704,141 $ 9,737,595 $ 9,737,595
Time deposits with other
financial institutions 593,978 593,978 2,277,968 2,277,968
Securities available for sale 32,010,857 32,010,857 15,755,543 15,755,543
Securities held to maturity - - 1,650,946 1,607,909
Federal Home Loan Bank stock 500,000 500,000 271,000 271,000
Loans receivable, net 111,065,909 10,818,000 84,740,622 84,215,000
Deposits with no stated maturity 49,324,436 49,324,436 39,507,822 39,507,822
Deposits with stated maturity 80,818,232 80,897,000 58,473,062 58,456,000
Advances from the Federal
Home Loan Bank of Atlanta 8,000,000 8,032,000 5,000,000 5,000,000
- --------------------------------------------------------------------------------
Page 28
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
DIRECTORS
- --------------------------------------------------------------------------------
W. Steve Ikerd - Chairman
President - Ikerd Enterprises
Robert T. King - Vice Chairman
Retired Textile Executive - Investor
Robert P. Huntley
Certified Public Accountant
Real-estate Developer
Cloyd H. Propst Jr.
Co-owner Hickory Sand Co.
(Utility Contractor)
Howard L. Pruitt
Southwood Furniture Co. - Secretary
Real-estate Developer
R. Steve Aaron
President/CEO - Catawba Valley Bancshares, Inc.
Hal F. Huffman, Jr.
Owner and President - ACE Hardware, Inc.
Pat M. Moss
Alderwoman, City of Hickory
President - Trehan Corp. (farming operation)
William R. Sigmon, Jr.
Physician and President - Sigmon Radiation Oncology, PA
- --------------------------------------------------------------------------------
Page 29
CATAWBA VALLEY BANCSHARES, INC. AND SUBSIDIARY
GENERAL CORPORATE INFORMATION
================================================================================
CATAWBA VALLEY BANCSHARES, INC.
CATAWBA VALLEY BANK
Main Office: 1039 Second Street, NE
Hickory, North Carolina 28601
(828) 431-2300
Branches:
1445 Second Avenue, NW 3244 Springs Road NE 2675 NW Boulevard
Hickory, North Carolina 28601 Hickory, North Carolina 28602 Newton, North Carolina 28658
(828) 431-2333 (828) 441-1600 (828) 464-9911
BANK OFFICERS
R. Steve Aaron Joe S. Tripp Carole F. Teague
President, Chief Executive Officer Senior Vice President/ Senior Vice President/
Lending Retail Services
N. Jack Rector G. Marvin Lowder David A. Kozak
Vice President/Lending Vice President/Accounting Vice President/Branch Manager
S. Warren Wilson Rebecca Houck
Vice President/ Branch Manager Vice President/Mortgage Lending
Independent Auditors
Dixon Odom PLLC
408 Summit Drive
Sanford, North Carolina 27330
Special Counsel
Gaeta & Glesener, P.A.
808 Salem Woods Drive
Suite 201
Raleigh, North Carolina 27615
Stock Transfer Agent
First-Citizens Bank & Trust Company
100 East Tryon Street
Raleigh, North Carolina 27603
Notice of Annual Meeting
The annual Meeting of the shareholders of Catawba Valley Bancshares, Inc. will
be held on April 24, 2001, at 2:00 p.m. in the conference Room at Paine Webber,
400 Second Avenue, N.W. Hickory, North Carolina.
A copy of the Catawba Valley Bancshares, Inc. Annual Report on Form 10-KSB as
filed with the Securities Exchange Commission will be furnished without charge
to the stockholders as of the record date, upon written request to G. Marvin
Lowder, Vice President and Treasurer, Catawba Valley Bank, Post Office Box 2328,
Hickory, North Carolina 28603
This annual report serves as the annual financial disclosure statement furnished
pursuant to the Federal Deposit Insurance Corporation's rules and regulations.
This statement has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation.
- --------------------------------------------------------------------------------
Page 30