Exhibit 28.4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Home Savings Bank of Albemarle, S.S.B.
Albemarle, North Carolina
We have audited the accompanying consolidated statements of financial
condition of Home Savings Bank of Albemarle, S.S.B. and subsidiary as of
September 30, 1993 and 1992, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1993. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home Savings
Bank of Albemarle, S.S.B. and subsidiary as of September 30, 1993 and 1992, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1993, in conformity with generally accepted
accounting principles.
(SIGNATURE APPEARS HERE)
Charlotte, North Carolina
November 10, 1993
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1993 and 1992
ASSETS 1993 1992
------------ ------------
Cash and cash equivalents:
Noninterest-bearing deposits (Note 2) $ 3,532,000 $ 2,594,000
Interest-bearing deposits 7,038,000 6,303,000
Investment securities, estimated market
value 1993 $20,663,000; 1992
$21,136,000 (Notes 3 and 9) 20,269,000 20,600,000
Mortgage-backed certificates, estimated
market value 1993 $7,554,000;
1992 $8,547,000 (Note 4) 7,076,000 8,175,000
Loans receivable, net (Note 5) 117,055,000 113,116,000
Real estate acquired in
settlement of loans 119,000 81,000
Accrued interest receivable
(Note 6) 1,138,000 1,239,000
Office properties and
equipment, net (Note 7) 1,029,000 781,000
Prepaid expenses and other
assets (Note 8) 653,000 481,000
------------ ------------
$157,909,000 $153,370,000
============ ============
LIABILITIES AND RETAINED
EARNINGS
Liabilities:
Deposits (Note 9) $139,685,000 $138,753,000
Advance payments by borrowers for taxes
and insurance 485,000 448,000
Accounts payable and other liabilities 706,000 477,000
Checks outstanding on disbursement
account 530,000 493,000
------------ ------------
Total liabilities $141,406,000 $140,171,000
Commitments (Notes 10 and 17)
Retained earnings,
substantially restricted
(Notes 11 and 12) 16,503,000 13,199,000
------------ ------------
$157,909,000 $153,370,000
============ ============
See Notes to Consolidated Financial Statements.
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1993, 1992 and 1991
1993 1992 1991
----------- ----------- -----------
Interest income:
Loans $10,805,000 $11,663,000 $11,690,000
Mortgage-backed certificates 636,000 606,000 514,000
Investment securities 1,334,000 1,122,000 813,000
Other interest-bearing deposits 197,000 334,000 272,000
----------- ----------- -----------
$12,972,000 $13,725,000 $13,289,000
----------- ----------- -----------
Interest expense:
Deposits (Note 9) $ 6,037,000 $ 8,042,000 $ 9,084,000
Advances from FHLB - - 26,000
----------- ----------- -----------
$ 6,037,000 $ 8,042,000 $ 9,110,000
----------- ----------- -----------
Net interest income $ 6,935,000 $ 5,683,000 $ 4,179,000
Provision for loan losses
(Note 5) - - 100,000
----------- ----------- -----------
Net interest income after
provision for loan losses $ 6,935,000 $ 5,683,000 $ 4,079,000
----------- ----------- -----------
Noninterest income $ 278,000 $ 300,000 $ 249,000
----------- ----------- -----------
Noninterest expenses:
Compensation (Notes 8 and 10) $ 1,051,000 $ 1,059,000 $ 989,000
Net occupancy 202,000 189,000 174,000
Federal insurance premium
expense 290,000 337,000 292,000
Data processing 188,000 134,000 130,000
Other (Note 14) 413,000 636,000 571,000
----------- ----------- -----------
$ 2,144,000 $ 2,355,000 $ 2,156,000
----------- ----------- -----------
Income before income taxes $ 5,069,000 $ 3,628,000 $ 2,172,000
Income taxes (Note 11) 1,765,000 1,215,000 798,000
----------- ----------- -----------
Net income $ 3,304,000 $ 2,413,000 $ 1,374,000
=========== =========== ===========
See Notes to Consolidated Financial Statements.
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years Ended September 30, 1993, 1992 and 1991
1993 1992 1991
----------- ----------- -----------
Balance, beginning $13,199,000 $10,786,000 $ 9,412,000
Net income 3,304,000 2,413,000 1,374,000
----------- ----------- -----------
Balance, ending $16,503,000 $13,199,000 $10,786,000
=========== =========== ===========
See Notes to Consolidated Financial Statements.
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1993, 1992 and 1991
1993 1992 1991
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,304,000 $ 2,413,000 $ 1,374,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses - - 100,000
Write down of real estate owned to
net realizable value - - 48,000
Donation of real estate owned - 68,000 -
Accretion of premiums and discounts
on investment and mortgaged-backed
certificates, net (3,000) (3,000) (53,000)
Amortization of deferred loan fees (247,000) (362,000) (38,000)
FHLB stock dividends (75,000) (62,000) (86,000)
Gain on recalled securities (33,000) - -
Loss (gain) on sale of real estate
acquired in settlement of loans (41,000) (21,000) 1,000
Provision for depreciation 59,000 58,000 49,000
Change in operating assets
and liabilities:
Increase (decrease) in accrued
interest receivable 101,000 (124,000) (149,000)
Increase in prepaid and other
assets (195,000) (111,000) (59,000)
Increase (decrease) in accounts
payable and other liabilities 229,000 (230,000) 100,000
(Increase) decrease in interest
payable (4,000) (152,000) 37,000
Increase (decrease) in checks
outstanding on disbursement
account 37,000 (38,000) (30,000)
Increase (decrease) in deferred
income tax charges 23,000 54,000 (62,000)
----------- ------------ -----------
Net cash provided by operating
activities $ 3,155,000 $ 1,490,000 $ 1,232,000
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and recalls of
investment securities $10,400,000 $ 7,522,000 $ 1,920,000
Purchases of investment securities (9,952,000) (15,444,000) (5,498,000)
Purchases of mortgage-backed
certificates (1,020,000) (3,785,000) -
Principal payments on mortgage- backed
certificates 2,113,000 1,357,000 624,000
Loan originations and principal
payments on loans, net (3,786,000) 4,313,000 (9,433,000)
Purchases of loans - (405,000) -
Purchase of office properties and
equipment (307,000) (103,000) (197,000)
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1993, 1992 and 1991
1993 1992 1991
------------ ------------- -------------
Proceeds from sale of real estate
owned $ 112,000 $ 75,000 $ 6,000
Investment reduction in foreclosed
real estate (15,000) - -
----------- ----------- ------------
Net cash used in investing
activities $(2,455,000) $(6,470,000) $(12,578,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in certificates of
deposit, demand deposits,
NOW accounts and passbook savings
accounts $ 936,000 $ 5,381,000 $ 19,025,000
Net decrease in short-term
borrowings - - (955,000)
Net increase (decrease) in advance
payments by borrowers for taxes
and insurance 37,000 (7,000) 36,000
Repayment of FHLB advances - - (1,000,000)
----------- ----------- ------------
Net cash provided by financing
activities $ 973,000 $ 5,374,000 $ 17,106,000
----------- ----------- ------------
Increase in cash and cash
equivalents $ 1,673,000 $ 394,000 $ 5,760,000
Cash and cash equivalents:
Beginning 8,897,000 8,503,000 2,743,000
----------- ----------- ------------
Ending $10,570,000 $ 8,897,000 $ 8,503,000
=========== =========== ============
SUPPLEMENTAL SCHEDULE OF CASH AND
CASH EQUIVALENTS
Cash:
Interest-bearing deposits $ 7,038,000 $ 6,303,000 $ 5,915,000
Noninterest-bearing deposits 3,532,000 2,594,000 2,588,000
----------- ----------- ------------
$10,570,000 $ 8,897,000 $ 8,503,000
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 6,042,000 $ 8,194,000 $ 9,073,000
=========== =========== ============
Income taxes $ 1,520,000 $ 1,253,000 $ 855,000
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS
Transfer of loans to real estate
owned $ 376,000 $ 113,000 $ 339,000
=========== =========== ============
Loans originated to finance the
sale of foreclosed real estate $ 282,000 $ 106,000 $ 181,000
=========== =========== ============
See Notes to Consolidated Financial Statements.
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Summary of Significant Accounting
Policies
Nature of business:
Home Savings Bank of Albemarle, S.S.B. (the "Bank"), formerly Home
Savings and Loan Association as discussed in Note 16, is primarily
engaged in the business of obtaining savings deposits and originating
single-family residential loans within its primary lending area, the
Stanly County, North Carolina area. The Bank's underwriting policies
require such loans to be made 80% loan-to-value based upon appraised
values unless private mortgage insurance is obtained. These loans are
secured by the underlying properties.
The following is a description of the significant accounting policies
used in the preparation of the accompanying consolidated financial
statements:
Principles of consolidation:
These financial statements include the accounts of the Bank and its
wholly-owned subsidiary, Stanly County Service Corp. The service
corporation is inactive except for income received from its
investment in the Investors Title Agency partnership. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and cash equivalents:
For purposes of reporting the consolidated statements of cash flows,
the Bank includes cash on hand and demand deposits at other
financial institutions as cash equivalents. The Bank may have
deposits with financial institutions which are in excess of the
federally-insured amounts.
Investment securities:
Bonds and notes are carried at cost, adjusted for premiums and
discounts that are recognized in interest income using a method
which approximates the interest method over the period to maturity.
Management has the ability and intends to hold such investments to
maturity. In determining whether securities can be held to maturity,
management considers whether there are conditions, such as liquidity
or regulatory requirements which would impair its ability to hold
such securities.
Equity securities that are nonmarketable are carried at cost. All
other equity securities are carried at the lower of cost or
estimated market value in the aggregate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gains and losses on the sale of investment securities are determined
using the specific-identification method.
Mortgage-backed certificates:
Mortgage-backed certificates are stated at cost, adjusted for
amortization of premiums and accretion of fees and discounts using a
method that approximates level yield. The Bank has adequate
liquidity and capital, and it is generally management's intention,
and it has the ability to hold such assets to maturity. Should any
be sold, gains and losses will be recognized based on the
specific-identification method. All sales are made without
recourse.
At September 30, 1993, the Bank had no outstanding commitments to
sell loans or mortgage-backed certificates.
Loans receivable:
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, the undisbursed portion of construction
loans, participations sold and net deferred loan origination fees.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and
current economic conditions.
Loan origination fees:
Loan fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the
loans, adjusted for actual prepayments.
Real estate acquired in settlement of loans:
Real estate acquired in settlement of loans ("REO") is initially
recorded at the lower of cost (loan value of real estate acquired in
settlement of loans plus incidental expenses) or estimated fair
value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to September 30, 1992, the carrying values were reduced when
they exceeded net realizable value. Subsequent to September 30,
1992, the Bank complied with SOP 92-3, Accounting for Foreclosed
-------------------------
Assets. Subsequent to September 30, 1992, the carrying values of
------
REO are reduced when they exceed fair value minus the estimated
costs to sell. Costs relating to the development and improvement of
the property are capitalized, while holding costs of the property
are charged to expense in the period incurred.
Office properties and equipment:
Office properties and equipment are stated at cost less accumulated
depreciation which is computed principally by the straight-line
method.
Off-balance-sheet risk:
The Bank is a party to financial instruments with off-balance-sheet
risk such as commitments to extend credit and lines of credit.
Management assesses the risk related to these instruments for
potential losses on an ongoing basis.
Pension plan:
The Bank has a noncontributory defined benefit pension plan covering
all employees who meet the eligibility requirements. To be
eligible, an employee must be 21 years of age and have completed 1
year of continuous service. The plan provides benefits based on a
final average salary and service and is integrated with Social
Security. The employee's benefits are subject to certain reductions
if the employee retires before 35 years of service or before
reaching the age of 65. The Bank's funding policy is to make the
maximum annual contribution that is deductible for income tax
purposes.
Income taxes:
The Bank and its subsidiary file a consolidated tax return.
Deferred income taxes result from timing differences in the
recognition of certain items of income and expense for tax and
financial statement purposes as explained more fully in Note 11.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value of financial instruments:
The estimated fair values required under SFAS No. 107, Disclosures
-----------
About Fair Value of Financial Instruments, have been determined by
-----------------------------------------
the Bank using available market information and appropriate
valuation methodologies; however, considerable judgment is required
to develop the estimates of fair value. Accordingly, the estimates
presented for the fair value of the Bank's financial instruments are
not necessarily indicative of the amounts the Bank could realize in
a current market exchange. The use of different market assumptions
or estimation methodologies may have a material effect on the
estimated fair market value amounts.
The fair value of the Bank's cash and cash equivalents is estimated
to be equal to their recorded amounts. Investment securities' and
mortgage-backed certificates' fair value is estimated using quoted
market values obtained from independent pricing services. The fair
value of loans is estimated by the use of discounted cash flows
adjusted by a credit risk factor equal to the Bank's recorded loss
allowances. Borrowings and savings deposits, other than deposits
with no stated maturities, are estimated to have a fair value
determined on the discounted value of contractual cash flows. The
fair value of deposits with no stated maturities, primarily checking
and statement savings accounts, is estimated to be equal to the
amount payable on demand.
The fair value estimates presented are based on pertinent
information available to management as of September 30, 1993.
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 here.
Note 2. Cash
Noninterest-bearing cash amounting to approximately $47,000, and
$59,000 was held by a trustee at September 30, 1993 and 1992,
respectively, and was required to be used to repay loan principal and
interest due to the Federal National Mortgage Association and taxes and
insurance for the related loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Investment Securities
The amortized cost and estimated market value of investment securities
are summarized as follows:
September 30, 1993
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------------- ---------- -----------
U. S. Government
and Federal
agency
obligations $18,941,000 $ 394,000 $ - $19,335,000
Federal Home Loan
Bank stock 1,313,000 - - 1,313,000
Other securities 15,000 - - 15,000
----------- ---------------- ---------- -----------
$20,269,000 $ 394,000 $ - $20,663,000
=========== ================ ========== ===========
September 30, 1992
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------------- ---------- -----------
U. S. Government and
Federal agency
obligations $18,946,000 $ 552,000 $ - $19,498,000
Corporate bonds 400,000 - 16,000 384,000
Federal Home Loan
Bank stock 1,238,000 - - 1,238,000
Other securities 16,000 - - 16,000
----------- ---------------- ---------- -----------
$20,600,000 $552,000 $16,000 $21,136,000
=========== ================ ========== ===========
The amortized cost and estimated market value of debt securities by
contractual maturity 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.
September 30, 1993
----------------------------
Estimated
Amortized Market
Cost Value
-------------- ------------
Due in one year or less $ 500,000 $ 511,000
Due after one year through five years 16,455,000 16,676,000
Due after five years through ten years 1,986,000 2,148,000
----------- -----------
$ 18,941,000 $19,335,000
=============== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Home Loan Bank ("FHLB") stock and other securities, which
consist of stock in the Bank's service center, have been excluded from
the maturity table above because they do not have a contractual maturity
associated with debt securities. The Bank, as a member of the FHLB
system, is required to maintain an investment in capital stock of the
FHLB in an amount equal to the greater of 1% of its outstanding home
loans or 5% of advances from the FHLB. No ready market exists for such
stock, and it has no quoted market value. For presentation purposes,
such stock is assumed to have a market value which is equal to cost.
Results from investment securities are as follows:
Year Ended September 30,
------------------------------
1993 1992 1991
---------- -------- --------
Gross proceeds from maturities
and recalled securities $1,000,000 $ - $ -
========== ======== ========
Gross realized gains $ 33,000 $ - $ -
Gross realized losses - - -
---------- -------- --------
Net realized gains $ 33,000 $ - $ -
========== ======== ========
Net realized gains are included in noninterest income on the
consolidated statements of income.
Note 4. Mortgage-Backed and Related Securities
The carrying values and estimated market values of mortgage-backed and
related securities are summarized as follows:
September 30, 1993
--------------------------------------------------------------------------------------------
Gross Gross Estimated
Principal Unamortized Unearned Carrying Unrealized Unrealized Market
Balance Premiums Discounts Value Gains Losses Value
---------- -------------- ------------- ------------- ---------- ---------- ----------
GNMA certificates $3,702,000 $41,000 $20,000 $3,723,000 $240,000 $ - $3,963,000
FHLMC certificates 1,848,000 17,000 42,000 1,823,000 126,000 - 1,949,000
FNMA certificates 1,381,000 2,000 - 1,383,000 117,000 - 1,500,000
Small Business
Administration 134,000 13,000 - 147,000 - 5,000 142,000
---------- ------- ------- ---------- -------- ---------- ----------
$7,065,000 $73,000 $62,000 $7,076,000 $483,000 $ 5,000 $7,554,000
========== ======= ======= ========== ======== ========== ==========
September 30, 1992
--------------------------------------------------------------------------------------------
Gross Gross Estimated
Principal Unamortized Unearned Carrying Unrealized Unrealized Market
Balance Premiums Discounts Value Gains Losses Value
---------- -------------- ------------- ------------- ---------- ---------- ----------
GNMA certificates $4,940,000 $50,000 $22,000 $4,968,000 $274,000 $ - $5,242,000
FHLMC certificates 2,493,000 19,000 47,000 2,465,000 96,000 - 2,561,000
FNMA certificates 565,000 3,000 - 568,000 14,000 - 582,000
Small Business
Administration 159,000 15,000 - 174,000 - 12,000 162,000
---------- ------- ------- ---------- -------- ---------- ----------
$8,157,000 $87,000 $69,000 $8,175,000 $384,000 $12,000 $8,547,000
========== ======= ======= ========== ======== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Loans Receivable
Loans receivable are summarized as follows:
September 30,
---------------------------
1993 1992
------------ ------------
First mortgage loans (principally
conventional):
Principal balances:
Secured by one-to-four family
residences $ 98,135,000 $ 96,452,000
Secured by other properties 11,648,000 10,557,000
Construction loans 6,644,000 5,919,000
------------ ------------
$116,427,000 $112,928,000
------------ ------------
Other loans:
Principal balances:
Home equity and second mortgage $ 3,715,000 $ 3,358,000
Other 392,000 376,000
------------ ------------
Total other loans $ 4,107,000 $ 3,734,000
------------ ------------
Allowance for loan losses $ (144,000) $ (144,000)
Undisbursed portion of construction
loans (2,895,000) (3,096,000)
Net deferred loan origination fees (440,000) (306,000)
------------ ------------
$ (3,479,000) $ (3,546,000)
------------ ------------
$117,055,000 $113,116,000
============ ============
The following is an analysis of the allowance for loan losses:
Year Ended September 30,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Balance, beginning $144,000 $177,000 $103,000
Provisions charged to
operations - - 100,000
Loans charged off (600) (33,000) (26,000)
Recoveries 600 - -
-------- -------- --------
Balance, ending $144,000 $144,000 $177,000
======== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual loans for which interest has been reduced totaled
approximately $844,000 and $-0- at September 30, 1993 and 1992,
respectively. Interest income that would have been recorded under the
original terms of such loans and the interest income actually
recognized is summarized below:
Year Ended September 30,
------------------------------
1993 1992 1991
---------- -------- --------
Interest income that would
have been recorded $80,000 $ - $ -
Interest income recognized 33,000 - -
------- -------- --------
Interest income foregone $47,000 $ - $ -
======= ======== ========
The Bank is not committed to lend additional funds to debtors whose
loans have been modified.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans are summarized as follows:
September 30,
----------------------
1993 1992
---------- ----------
Mortgage loan portfolios
serviced for FNMA $1,776,000 $2,853,000
========== ==========
Custodial escrow balances maintained in connection with the foregoing
loan servicing was approximately $50,000 and $40,000 at September 30,
1993 and 1992, respectively.
Note 6. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
September 30,
----------------------
1993 1992
---------- ----------
Investment securities $ 303,000 $ 325,000
Mortgage-backed certificates 74,000 86,000
Loans receivable 761,000 828,000
---------- ----------
$1,138,000 $1,239,000
========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Office Properties and Equipment
Office properties and equipment consist of the following:
September 30,
----------------------
1993 1992
---------- ----------
Land $ 138,000 $ 138,000
Buildings and improvements 1,244,000 1,006,000
Furniture and equipment 426,000 392,000
---------- ----------
$1,808,000 $1,536,000
Accumulated depreciation 779,000 755,000
---------- ----------
$1,029,000 $ 781,000
========== ==========
Note 8. Employee Pension Plan
The Bank has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the
employee's compensation during the last five years of employment. The
Bank's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes.
The following table sets forth the plan's funded status and amounts
recognized in the Bank's consolidated statements of financial condition:
September 30,
--------------------------
1993 1992
------------ ------------
Actuarial present value of benefit
obligations:
Accumulated benefit obligation:
Vested $ (953,000) $ (819,000)
Nonvested (1,000) (3,000)
----------- -----------
$ (954,000) $ (822,000)
Effect of projected future
compensation (242,000) (237,000)
----------- -----------
Projected benefit obligation for
service rendered to date $(1,196,000) $(1,059,000)
Plan assets at fair value; primarily
cash and short-term investments 1,344,000 1,146,000
----------- -----------
Plan assets in excess of projected
benefit obligation $ 148,000 $ 87,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
------------------------
1993 1992
----------- -----------
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions $131,000 $ 95,000
Unrecognized net transition obligation
from adoption of FASB Statement No.
87 being amortized over 17 years 5,000 6,000
-------- -----------
Prepaid pension cost (included in prepaid
and other assets) $284,000 $188,000
======== ===========
The components of net pension expense are as follows:
Year Ended September 30,
------------------------------
1993 1992 1991
--------- --------- --------
Service cost-benefits earned
during the period $ 44,000 $ 42,000 $ 39,000
Interest cost on projected
benefit obligation 85,000 75,000 64,000
Actual return on plan assets (97,000) (79,000) (67,000)
Net amortization and deferral 1,000 - 2,000
-------- -------- --------
Net pension expense $ 33,000 $ 38,000 $ 38,000
======== ======== ========
Assumptions used to develop the
net periodic pension cost were:
Discount rate 8.0% 8.0% 8.0%
Expected long-term rate of return
on assets 8.0 8.0 8.0
Rate of increase in compensation
levels 4.0 4.0 4.0
The pension plan has all plan assets deposited with the bank.
On September 14, 1993, the Bank's Board of Directors voted to terminate
the employee pension plan. The effective date of the plan's termination
is November 10, 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Deposits
Deposits are summarized as follows:
Weighted September 30,
Average -------------------------------------------------
Rate at 1993 1992
September 30, -------------------------------------------------
1993 Amount Percent Amount Percent
------------- -------------- -------- ------------- --------
Demand and NOW accounts, including
noninterest-bearing deposits of
$507,000 at September 30, 1993 and
$481,000 at September 30, 1992 3.00% $ 6,372,000 4.56% $ 5,162,000 3.72%
Money market 3.25 11,219,000 8.03 9,632,000 6.94
Passbook savings 3.00 17,984,000 12.87 16,142,000 11.64
------------ ------ ------------ -------
$ 35,575,000 25.46% $ 30,936,000 22.30%
------------ ------ ------------ -------
Certificates of deposit:
2.00% to 3.99% $ 53,554,000 38.34% $ 38,000 .03%
4.00% to 5.99% 46,725,000 33.45 76,768,000 55.33
6.00% to 7.99% 3,684,000 2.64 19,295,000 13.90
8.00% to 9.99% 39,000 .03 11,603,000 8.36
------------ ------ ------------ -------
4.08 $104,002,000 74.46% $107,704,000 77.62%
------------ ------ ------------ -------
Accrued interest payable $ 108,000 .08% $ 113,000 .08%
------------ ------ ------------ -------
$139,685,000 100.00% $138,753,000 100.00%
============ ====== ============ =======
Weighted average cost of savings deposits 3.82% 4.93%
============ ======
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $6,819,000 and
$6,892,000 at September 30, 1993 and 1992, respectively.
At September 30, 1993, scheduled maturities of certificates of deposit
are as follows:
Years Ended September 30,
-------------------------------------------------------
1994 1995 1996 Total
------------ ----------- -------------- ------------
2.00% to 3.99% $53,554,000 $ - $ - $ 53,554,000
4.00% to 5.99% 29,290,000 13,913,000 3,522,000 46,725,000
6.00% to 7.99% 3,684,000 - - 3,684,000
8.00% to 9.99% - 39,000 - 39,000
----------- ----------- ---------- ------------
$86,528,000 $13,952,000 $3,522,000 $104,002,000
=========== =========== ========== ============
Interest expense on deposits is summarized as follows:
Year Ended September 30,
--------------------------------------
1993 1992 1991
----------- ----------- ----------
Passbook savings $ 553,000 $ 643,000 $ 736,000
NOW and money market 545,000 535,000 591,000
Certificates of deposit 4,939,000 6,864,000 7,757,000
----------- ----------- ----------
$ 6,037,000 $ 8,042,000 $9,084,000
=========== =========== ==========
The Bank has pledged investment securities with a book value of
$1,000,000 at September 30, 1993 as collateral for public deposits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Deferred Compensation Agreements
The Bank has entered into unfunded deferred compensation agreements
providing retirement and death benefits for six directors and
supplemental retirement and death benefits income agreements for two
executive officers. Vested benefits under the deferred compensation
agreements are payable in monthly installments over a 10-year period
upon death or retirement and over a 15-year and 18-year period for the
supplemental income agreements. The present value of the liability for
the benefits is being accrued over the vesting period per the
underlying agreements. The total of the deferred compensation expense
and supplemental income amounted to approximately $-0-, $55,000 and
$72,000 for the years ended September 30, 1993, 1992 and 1991,
respectively.
Note 11. Income Taxes
Under the Internal Revenue Code and North Carolina Income Tax Law, the
Bank is allowed a special bad debt deduction related to additions to
tax bad debt reserves established for the purpose of absorbing losses.
The applicable provisions of the law permit the Bank to deduct from
taxable income an allowance for bad debts based on the greater of 8% of
taxable income before such deduction or actual loss experience.
Because the Bank does not intend to use the reserve for purposes other
than to absorb losses, deferred income taxes have not been provided.
Retained earnings include approximately $3,957,000 and $3,576,000 at
September 30, 1993 and 1992, respectively, for which no provision for
federal income taxes has been made. This amount represents allocations
of income to bad debt deductions for tax purposes only. If the amounts
that qualify as deductions for federal income tax purposes are later
used for purposes other than bad debt losses, or adjustments arising
from carryback of net operating losses, they will be subject to federal
income tax at the then current corporate rate. As discussed in Note
16, the Bank has reached an agreement to provide for the acquisition of
the Bank by BB&T Financial Corporation. In the event of a successful
merger, the retained earnings discussed above will be subject to
federal income taxes.
Income tax consists of the following:
Year Ended September 30,
----------------------------------
1993 1992 1991
---------- ---------- --------
Current $1,742,000 $1,161,000 $860,000
Deferred (reduction) 23,000 54,000 (62,000)
---------- ---------- --------
$1,765,000 $1,215,000 $798,000
========== ========== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes result from timing differences in the recognition of
income and expense for tax and financial reporting purposes, primarily
from deferred loan fees, FHLB stock dividends, pension expense,
deferred compensation and supplemental income expense.
The following is a reconciliation of the federal income tax rate of 34%
to the effective tax rate:
Year Ended September 30,
------------------------
1993 1992 1991
-------- ------ -------
Statutory federal income tax
rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes
resulting from:
Tax bad debt deduction (2.9) (2.5) (1.0)
State income taxes 4.2 4.6 3.2
Other (.5) (2.6) .5
------- ----- -----
34.8% 33.5% 36.7%
======= ===== =====
In August 1993, the United States' Congress passed the Omnibus Budget
Reconciliation Act of 1993. Although the effects of this new tax
legislation have not yet been determined, management does not expect
the impact to be material to the consolidated financial statements
viewed on an overall basis.
Note 12. Capital Requirements
Prior to its conversion to a North Carolina-chartered savings bank on
October 1, 1992, Home Savings Bank of Albemarle, S.S.B. was subject to
capital requirements of the Office of Thrift Supervision (OTS). Upon
its conversion to a state savings bank, (as discussed in Note 16) the
Bank ceased to be subject to the OTS capital requirements and became
subject to the capital requirements of the FDIC and the Administrator
of the North Carolina Savings Institutions Division ("the
Administrator").
The FDIC requires Home Savings Bank of Albemarle, S.S.B. to have a
minimum leverage ratio of Tier I Capital (principally consisting of
retained earnings and any future common stockholders' equity, less any
intangible assets) to total assets of at least 3%, provided that it
receives the highest rating during the examination process. For
institutions that receive less than the highest rating, the Tier I
capital requirement is 1% to 2% above the stated minimum. The FDIC
also requires the Bank to have a ratio of total capital to
risk-weighted assets of 8%, of which at least 4% must be in the form of
Tier I capital. The FDIC capital requirements are very similar to the
OTS's core capital and risk-based capital requirements, but the FDIC
does not impose tangible capital requirement. The Administrator
requires a net worth equal to at least 5% of total assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1993, Home Savings Bank of Albemarle, S.S.B.
complied with all the capital requirements described above as shown
below:
September 30, 1993
-----------------------------------------
Leverage Tier I N. C.
Ratio of Risk- Risk- Savings
Tier I Adjusted Based Bank
Capital Capital Capital Capital
-----------------------------------------
(Dollars in Thousands)
Retained earnings (GAAP) $ 16,503 $16,503 $16,503 $ 16,503
Intangible assets - - - -
Supplemental capital items:
General valuation allowance - - 144 144
-------- ------- ------- --------
Regulatory capital $ 16,503 $16,503 $16,647 $ 16,647
Minimum capital requirement 6,316 2,953 5,906 7,895
-------- ------- ------- --------
Excess regulatory capital $ 10,187 $13,550 $10,741 $ 8,752
======== ======= ======= ========
Total assets at
September 30, 1993 $157,909 $ - $ - $157,909
Risk-weighted assets at
September 30, 1993 - 73,825 73,825 -
Capital as a percentage
of assets:
Actual 10.45% 22.35% 22.55% 10.54%
Required 4.00 4.00 8.00 5.00
-------- ------- ------- --------
Excess 6.45% 18.35% 14.55% 5.54%
-------- ------- ======= ========
The Bank has not received a rating from the FDIC. For purposes of
computing the leverage ratio of Tier I Capital, the midpoint of the
required capital range is presented.
Note 13. Related Party Matters
Officers and directors of the Bank were indebted to the Bank for loans
made in the ordinary course of business. The balance of such loans
was $886,000 and $702,000 at September 30, 1993 and 1992, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Other Noninterest Expense
Other noninterest expenses are summarized as follows:
Year Ended September 30,
--------------------------------
1993 1992 1991
-------- -------- --------
Contributions $ - $253,000 $ 43,000
Other 413,000 383,000 528,000
-------- -------- --------
$413,000 $636,000 $571,000
======== ======== ========
Note 15. FASB Statements and Proposed Regulations
The Financial Accounting Standards Board has issued FASB Statement No.
106, Employer's Accounting for Postretirement Benefits Other Than
------------------------------------------------------------
Pensions, which the Bank has not adopted as of September 30, 1993,
--------
relative to postretirement health care, life insurance and other
welfare benefits. The Bank's current accounting policy is in
compliance with paragraph 13 of FASB Statement No. 106 (see Note 10) at
September 30, 1993.
The Statement, which will be in effect for the Bank's fiscal year
beginning October 1, 1993 will revise the financial accounting and
reporting for an employer that offers certain postretirement benefits
to its employees. This statement is not expected to have a material
effect on the Bank's financial statements.
The FASB has issued Statement No. 109 which has not been adopted by
the Bank as of September 30, 1993. FASB Statement No. 109 is effective
for the Bank's fiscal year ending September 30, 1994.
FASB Statement No. 109, Accounting for Income Taxes, establishes
---------------------------
financial accounting and reporting standards for the effects of income
taxes that result from an enterprise's activities during the current
and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes. The future effect
on retained earnings of adopting this statement is estimated to be
approximately $485,000 which represents a net deferred tax liability.
In June 1993, the FASB issued SFAS No. 114, Accounting by Creditors for
---------------------------
Impairment of Loans, relating to the accounting for impaired loans.
-------------------
SFAS No. 114 requires that specified impaired loans be measured based
on the present value of expected future cash flows discounted at the
loan's effective interest rate. The effective rate of a loan is
defined as the contractual interest rate adjusted for any deferred loan
fees or costs, premiums or discounts existing at the inception or
acquisition of the loan. Implementation of SFAS No. 114 is required for
fiscal years beginning after December 15, 1994. SFAS No. 114 is not
expected to have a material effect on the Bank's results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1993, the FASB issued SFAS No. 115, Accounting for Certain
----------------------
Investments in Debt and Equity Securities, relating to the accounting
-----------------------------------------
for investments such as debt securities and equity securities which
have a readily determined fair value. Implementation of SFAS No. 115 is
required for fiscal years beginning after December 15, 1993. This
statement classifies securities as either securities that the holder
has the positive intent and ability to hold to maturity, securities
that were bought with the intention to sell in the near future which
are defined as trading securities, or securities that are available for
sale. Securities that will be held until maturity will be reported at
amortized cost. Securities that are classified as trading securities
will be reported at fair value, with unrealized gains and losses
included in the statement of operations. Securities that are not
classified as held to maturity or trading will be recorded at fair
value with unrealized gains and losses excluded from earnings and shown
as a component of stockholders' equity. The impact of SFAS No. 115
upon the results of operations of the Bank has not been determined.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
enacted on December 19, 1991, and requires the implementation of
uniform accounting standards for all financial institutions that are no
less stringent than generally accepted accounting principles, the
development of a risk-based insurance assessment system (implemented
and effective January 1, 1993), gives the federal banking agencies
broad corrective action powers, additional restrictions on brokered
deposits, and new disclosure requirements for savings accounts, among
many other aspects of the Act.
Note 16. Charter and Stock Conversion
On October 29, 1992, Home Savings and Loan Association of Albemarle
converted from a state-chartered savings and loan association operating
under Chapter 54B to a state-chartered savings bank under Chapter 54C
of the North Carolina General Statutes. In connection therewith, it
adopted the name of Home Savings Bank of Albemarle, S.S.B.
On May 27, 1993, BB&T Financial Corporation ("BB&T") and the Bank
reached a definitive agreement providing for BB&T's acquisition of the
Bank contemporaneously with the Bank's conversion from a state mutual
savings bank to a state capital stock savings bank. The acquisition
will be accomplished by the offering of BB&T's common stock. Priority
will be given to eligible members of the Bank in a Subscription
Offering and in a simultaneous Community Offering to residents of
Stanly County, North Carolina. It is currently anticipated that any
shares remaining unsold after the Subscription and Community Offerings
will not be sold in a public offering or otherwise. The net proceeds
from the issuance and sale of BB&T's common stock will be infused as
additional capital for the Bank and as consideration of BB&T's
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquisition of the Bank as a wholly-owned subsidiary. Acquisition and
merger costs of approximately $64,000 are included in prepaids and
other assets and will be netted out of the proceeds. In the event the
acquisition is unsuccessful, these costs will be charged to operations.
The acquisition and conversion are subject to the approval of the
Federal Reserve, the FDIC and the Administrator and the deposit base.
The acquisition will be accounted for under the purchase method of
accounting which requires that all assets and liabilities of the Bank
be adjusted to their estimated fair value as of the date of the
acquisition. As of September 30, 1993, no significant transactions
between BB&T and the Bank have occurred, nor are any anticipated by
management.
The Plan of Conversion requires that the converted institution
establish a "Liquidation Account" for the benefit of eligible account
holders. This liquidation account will be assumed by BB&T upon
consummation of the Merger. In the unlikely event of liquidation of
the Bank or BB&T, assets would be first applied against the claims of
all creditors, including claims of all depositors. Any remaining
assets would then be distributed pro rata to eligible account holders
who continue to hold deposits at the Bank and following merger, BB&T.
Note 17. Financial Instruments With 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. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in
the statement of financial position. The contract or notional amounts
of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual or notional amount of these
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Fixed Variable
Rate Rate
---------- ---------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit,
mortgage loans $5,349,000 $ -
Undisbursed lines of credit - 2,434,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments to extend credit are 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 and many require payment of a fee. The total
commitment amounts do not necessarily represent future requirements,
since some may expire without being drawn upon. The Bank evaluates
each customer's credit worthiness on a case-by-case basis.
Note 18. Reclassification of Financial Statements
Certain amounts in the consolidated financial statements for 1992 have
been reclassified to conform with classifications used in the September
30, 1993 consolidated financial statements. These reclassifications
had no effect on 1992 or 1991 net income or retained earnings.
Note 19. Disclosures About Fair Value of Financial Instruments
The fair value of the Bank's cash and cash equivalents, is estimated
to be equal to its recorded amount. For investment securities and
mortgage-backed certificates, the fair value is estimated using quoted
market values obtained from independent pricing services.
The fair value of loans has been estimated by discounting projected
cash flows at September 30, 1993, using nationally published rates
including those published by the Federal Reserve Bank and the Federal
Home Loan Bank of Atlanta. These rates have been adjusted as necessary
to conform with the attributes of the specific loan types in the
portfolio. The valuation has also been adjusted for prepayment risk
using prepayment percentages published by the Federal Home Loan Bank of
Atlanta, which approximate the Bank's estimates of actual prepayment
activity experienced in the portfolio. Nonperforming loans are valued
at their recorded book values, because it is not practicable to
reasonably assess the credit adjustment that would be applied in the
marketplace for such loans. Management believes that the Bank's
general valuation allowances at September 30, 1993 are an appropriate
indication of the applicable credit risk associated with determining
the fair value of its loan portfolio and such allowances have been
deducted from the estimated fair value of loans.
The fair value of deposits with no stated maturities, including
checking accounts and statement savings accounts, is estimated to be
equal to the amount payable on demand as of September 30, 1993. The
fair value of certificates of deposit is based upon the discounted
value of the contractual cash flows. The discount rates used in these
calculations approximate the current rates offered for deposits of
similar remaining maturities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of checks outstanding on disbursement account is
presumed to be its recorded book value.
The estimated fair value of commitments to extend credit is estimated
using fees currently charged for similar arrangements adjusted for
changes in interest rates and credit risk that has occurred subsequent
to origination. Because the Bank believes that the credit risk
associated with available but undisbursed commitments would essentially
offset fees that could be recognized under similar arrangements, and
because the commitments are either short term in nature or subject to
immediate repricing, no fair value has been assigned to these
off-balance-sheet commitments.
Recorded Estimated
Book Value Fair Value
------------ ------------
Financial Assets:
Cash and cash equivalents $ 10,570,000 $ 10,570,000
Investment securities 20,269,000 21,136,000
Mortgage-backed securities 7,076,000 7,554,000
Loans receivable, net 117,055,000 122,298,000
Financial Liabilities:
Savings deposits with no stated
maturities 35,575,000 35,575,000
Savings deposits with stated
maturities 104,002,000 104,647,000
Checks outstanding on disbursement
account 530,000 530,000